Audit Risk Alert 2018/19 | Government Auditing Standards and Single Audit Developments Strengthening Audit Integrity Safeguarding Financial Reporting Audit Risk Alert 2018/19 | Government Auditing Standards and Single Audit Developments Strengthening Audit Integrity Safeguarding Financial Reporting 23574-349 Copyright © 2018 Association of International Certified Professional Accountants. All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please email [email protected] with your request. Otherwise, requests should be written and mailed to Permissions Department, 220 Leigh Farm Road, Durham, NC 27707-8110. 1 2 3 4 5 6 7 8 9 0 AAP 1 9 8 ISBN 978-1-94830-627-0 (cid:9)(cid:81)(cid:83)(cid:74)(cid:79)(cid:85)(cid:10)(cid:1) (cid:42)(cid:52)(cid:35)(cid:47)(cid:1)(cid:26)(cid:24)(cid:25)(cid:14)(cid:18)(cid:14)(cid:26)(cid:21)(cid:25)(cid:20)(cid:17)(cid:14)(cid:23)(cid:19)(cid:25)(cid:14)(cid:24)(cid:1)(cid:9)(cid:70)(cid:49)(cid:86)(cid:67)(cid:10) GovernmentAuditingStandardsandSingleAuditDevelopments—2018/19 iii Notice to Readers This Audit Risk Alert (alert) replaces Government Auditing Standards and SingleAuditDevelopments—2017/2018. This alert provides auditors who perform audits under Government Auditing StandardsandTitle2U.S.CodeofFederalRegulationsPart200,UniformAd- ministrativeRequirements,CostPrinciples,andAuditRequirementsforFederal Awards (Uniform Guidance), with an overview of recent industry, technical, regulatory,andprofessionaldevelopmentsthatmayaffecttheauditsandother engagementstheyperform.Aswell,anentity'sinternalmanagementcanuse thisalerttoaddressareasofauditconcern. This publication is an other auditing publication,as defined in AU-C section 200,OverallObjectivesoftheIndependentAuditorandtheConductofanAudit in Accordance With Generally Accepted Auditing Standards.1 Other auditing publicationshavenoauthoritativestatus;however,theymayhelptheauditor understandandapplygenerallyacceptedauditingstandards. In applying the auditing guidance included in an other auditing publication, theauditorshould,usingprofessionaljudgment,assesstherelevanceandap- propriatenessofsuchguidancetothecircumstancesoftheaudit.Theauditing guidanceinthisdocumenthasbeenreviewedbytheAICPAAuditandAttest StandardsstaffandpublishedbytheAICPAandispresumedtobeappropri- ate.Thisdocumenthasnotbeenapproved,disapproved,orotherwiseactedon byaseniortechnicalcommitteeoftheAICPA. Recognition Reviewers GovernmentalAuditQualityCenterExecutiveCommitteeMembers EricaForhan,Chairperson RonConrad MichaelFritz JohnGood BrittneyWilliams JeffWinter OtherReviewers RalphDeAcetis TerryRamsey GeorgeRippey AICPAStaff SusanM.Reed Manager ProductManagement&Development—PublicAccounting TeresaBordeaux LeadManager GovernmentalAuditingandAccounting The AICPA gratefully acknowledges those members of the Auditing Stan- dards Board and Governmental Audit Quality Center Executive Committee whohelpedidentifytheinterestareasforinclusioninthisalert. 1 AllAU-CsectionscanbefoundinAICPAProfessionalStandards. ©2018,AssociationofInternationalCertifiedProfessionalAccountants ARA-GAS iv AuditRiskAlert Feedback Audit Risk Alert Government Auditing Standards and Single Audit Develop- mentsispublishedannually.Asyouencounterauditorindustryissuesthatyou believewarrantdiscussioninnextyear'salert,pleasefeelfreetosharethem withus.Anyothercommentsyouhaveaboutthealertalsowouldbeappreci- ated.Youmayemailthesecommentstoa&[email protected]. ARA-GAS ©2018,AssociationofInternationalCertifiedProfessionalAccountants TableofContents v TABLE OF CONTENTS Paragraph GovernmentAuditingStandardsandSingleAuditDevelopments— 2018/19 .01-.149 HowThisAlertHelpsYou ................................... .01-.07 RevisiontoGovernmentAuditingStandards ................. .08-.31 Introduction .............................................. .08-.09 FormatandOrganization ................................. .10-.11 Independence ............................................ .12-.15 Competence ............................................. .16 ContinuingProfessionalEducation ........................ .17-.19 QualityControl ........................................... .20-.21 PeerReview .............................................. .22-.24 StandardsforFinancialAudits ............................ .25-.28 AttestationEngagementsandReviewsofFinancial Statements ............................................ .29 PerformanceAudits ....................................... .30 OtherRevisions ........................................... .31 OfficeofManagementandBudget ......................... .32-.42 OMBComplianceSupplement ............................ .32-.36 UniformGuidanceProcurementRequirements ............. .37-.42 FederalAgencyandOtherActivities ........................ .43-.60 President’sManagementAgenda ......................... .43-.45 FederalAuditClearinghouse .............................. .46-.48 DepartmentofEducationUpdate .......................... .49 HousingandUrbanDevelopmentUpdate ................ .50-.53 USDARuralDevelopmentUpdate ......................... .54-.58 CatalogofFederalDomesticAssistance .................. .59-.60 UniformGuidanceConsiderations .......................... .61-.71 UniformGuidanceFrequentlyAskedQuestions ............ .61 CorrectiveActionPlanandSummaryScheduleofPrior AuditFindings ......................................... .62 Government-WideAuditQualityStudy .................... .63-.71 AuditandAttestDevelopments .............................. .72-.75 StatementonAuditingStandardsNo.133 ................ .72-.75 EnhancingAuditQualityInitiative ........................... .76-.78 EnhancingAuditQuality—SingleAuditAnalysis ........... .79-.86 PlanningtheSingleAudit ................................. .83 ControlsTestinginaSingleAudit ......................... .84 ComplianceTestinginaSingleAudit ...................... .85-.86 EthicsUpdate ............................................... .87-.91 Ethics—FrequentlyAskedQuestion,March2018 ........ .87-.89 EthicsInterpretation—DataHosting ...................... .90-.91 PeerReviewUpdate ........................................ .92-.103 ©2018,AssociationofInternationalCertifiedProfessionalAccountants Contents vi TableofContents Paragraph GovernmentAuditingStandardsandSingleAuditDevelopments— 2018/19—continued YellowBookIndependence ............................... .94-.97 ComplianceAuditsBelowtheSingleAuditThreshold ...... .98-.100 SingleAuditDocumentation ............................... .101 IdentifyingHigh-RiskTypeBPrograms ..................... .102-.103 PracticeAid—YellowBookIndependence .................. .104 OntheHorizon ............................................. .105-.106 AICPAGAQC .............................................. .107-.118 GAQCExecutiveCommittee .............................. .113 AICPAGAQCAuditeeResourceCenter ................... .114-.118 AICPASingleAuditCertificatePrograms .................... .119-.120 AICPANot-for-ProfitInitiatives .............................. .121-.126 NFPMemberSection ..................................... .122 NFPCertificatePrograms ................................. .123-.126 ResourceCentral ........................................... .127-.149 Publications .............................................. .128 ContinuingProfessionalEducation ........................ .129-.130 Webcasts ................................................ .131-.132 IndustryConferences ..................................... .133-.137 MemberServiceCenter ................................... .138-.141 TheCenterforPlainEnglishAccounting ................... .142 AICPAOnlineProfessionalLibrary:Accountingand AuditingLiterature ..................................... .143 FinancialReportingCenterofAICPA.org .................. .144-.145 AICPAIndustryExpertPanels ............................. .146-.147 IndustryWebsites ......................................... .148-.149 Contents ©2018,AssociationofInternationalCertifiedProfessionalAccountants GovernmentAuditingStandardsandSingleAuditDevelopments—2018/19 1 How This Alert Helps You .01 ThisAuditRiskAlert(alert)helpsyouplanandperformauditscon- ductedinaccordancewithgenerallyacceptedgovernmentauditingstandards (GAGAS) as set forth in Government Auditing Standards (also known as the YellowBook)andTitle2U.S.CodeofFederalRegulationsPart200,UniformAd- ministrativeRequirements,CostPrinciples,andAuditRequirementsforFederal Awards (Uniform Guidance). Additionally, an entity's internal management canusethisalerttoaddressareasofauditconcern.Thisalertprovidesinforma- tiontoassistyouinachievingamorerobustunderstandingoftherequirements forperformingasingleaudit,includingissuesthatmaybeencounteredaspart ofperformingthecomplianceauditundertheUniformGuidance.Thisalertis animportanttooltohelpyouidentifythesignificantrisksthatmayaffectthe audit,anditdeliversinformationaboutemergingpracticeissuesandcurrent auditingandregulatorydevelopmentsastheyrelatetoauditsperformedun- derGovernmentAuditingStandardsandUniformGuidancerequirements.For developing issues that may have a significant impact on single audits in the future,the"OntheHorizon"sectionprovidesinformationonthesetopics. .02 Singleauditsareacomplexandevolvingpracticearea.Itisanarea that requires you, the auditor, to keep up to date throughout the year with developments that affect the single audits performed.This includes not only the audit requirements related to single audits,but also agency policies and requirementsrelatedtofederalawardsandotherrelateddevelopments.This alertisagoodresourceforthefollowing: (cid:2) TohelpyouassesswhetheryouareappropriatelyapplyingGov- ernmentAuditingStandardsandtheUniformGuidancerequire- (cid:2) mentsinyoursingleaudits (cid:2) Toassistyouinproperimplementationoftheguidance To assist you in keeping up with developments related to single audits .03 UsethisalertinconjunctionwithAuditRiskAlertGeneralAccounting andAuditingDevelopments—2018/19,whichexplainsimportantissuesthat affectallentitiesinallindustriesinthecurrenteconomicclimate.Inaddition, you may want to use this alert in conjunction with Audit Risk Alert Not-for- ProfitEntitiesIndustryDevelopments—2018.Youshouldrefertothefulltext ofaccountingandauditingpronouncementsaswellasthefulltextofanyrules orpublicationsthatthisalertdiscusses. .04 In an audit performed under generally accepted auditing standards (GAAS) and Government Auditing Standards,it is essential that you under- standthemeaningofauditriskandtheinteractionofauditriskwiththeob- jectiveofobtainingsufficientappropriateauditevidence.Auditorsobtainaudit evidencetodrawreasonableconclusionsonwhichtobasetheiropiniononcom- pliancebyperformingthefollowing: (cid:2) (cid:2) Riskassessmentprocedures Furtherauditproceduresthatcomprise — tests of controls, when required by GAAS, Government Auditing Standards, regulation (such as the Uniform Guidance),orwhentheauditorhaschosentodoso;and ©2018,AssociationofInternationalCertifiedProfessionalAccountants ARA-GAS .04 2 AuditRiskAlert — substantive audit procedures performed to gather evi- dence related to the opinion on compliance that include testsofdetailsandanalyticalprocedures .05 Youshoulddevelopanauditplanthatincludes,amongotherthings, the nature and extent of planned risk assessment procedures as determined under AU-C section 315,Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement.2 AU-C section 315 defines risk assessmentproceduresas"theauditproceduresperformedtoobtainanunder- standingoftheentityanditsenvironment,includingtheentity'sinternalcon- trol, to identify and assess the risks of material misstatement, whether due tofraudorerror,atthefinancialstatementandrelevantassertionlevels."As partofobtainingtherequiredunderstandingoftheentityanditsenvironment, paragraph.12ofAU-Csection315statesthattheauditorshouldobtainanun- derstanding of the industry, regulatory, and other external factors, including theapplicablefinancialreportingframework,relevanttotheentity.Thisalert assiststheauditorwiththisaspectoftheriskassessmentproceduresandfur- ther expands the auditor's understanding of other important considerations relevanttotheaudit. .06 InanauditperformedunderGAASandGovernmentAuditingStan- dards,risk assessment procedures should be performed for all aspects of the audit.Theyareperformedaspartoftheauditofthefinancialstatementsand toaddresstheadditionalreportingrequiredunderGovernmentAuditingStan- dards.Furthermore,AU-Csection935,ComplianceAudits,providesguidance andrequirementsregardingriskassessmentincomplianceaudits.Inapplying AU-Csection935toaUniformGuidancecomplianceaudit,theauditorshould performriskassessmentproceduresforeachofthemajorprogramstoobtain asufficientunderstandingofthedirectandmaterialcompliancerequirements andtheentity'sinternalcontrolovercompliancewiththosedirectandmaterial compliancerequirements.Thisunderstandingestablishesaframeofreference withinwhichtheauditorplansthecomplianceauditandexercisesprofessional judgmentaboutassessingrisksofmaterialnoncomplianceandrespondingto thoserisksthroughoutthecomplianceaudit. .07 Thisalertdoesnotincludeallinformationthatmaybeimportantor relevanttoasingleauditandisnotintendedtobeacompletelistingofauditor considerations regarding the requirements when planning and performing a compliance audit under the Uniform Guidance.Instead,this alert highlights somekeypointsorareasofsignificantchangefortheauditortoconsider. Revision to Government Auditing Standards Introduction .08 TheGovernmentAccountabilityOffice(GAO)issuedGovernmentAu- diting Standards,2018 Revision on July 17,2018.It is effective for financial audits,attestationengagements,andreviewsoffinancialstatementsforfiscal periodsendingonorafterJune30,2020.Itiseffectiveforperformanceaudits beginningonorafterJuly1,2019.Earlyimplementationisnotpermitted.Al- though the 2018 Yellow Book is not effective for single audits until June 30, 2020 fiscal year-ends and later,auditors need to keep in mind that the 2018 2 AllAU-CsectionscanbefoundinAICPAProfessionalStandards. ARA-GAS .05 ©2018,AssociationofInternationalCertifiedProfessionalAccountants