The Increasing Importance and Scrutiny of Single Audits 

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By David J. Gannon, CPA, Wiss & Company, LLP

Over the past two years, there has been immense scrutiny regarding the quality of CPA firms’ single audits on state and local governments and nonprofits. The debate intensified in June 2007 following the Report on National Single Audit Sampling Project from the President’s Council on Integrity and Efficiency (PCIE). Following the PCIE report, the American Institute of CPAs developed several measures to improve single audit quality.

The Results

The National Single Audit Sampling Project had two goals: provide a baseline to measure audit quality over single audits and provide recommendations to improve audit quality issues. The PCIE results were staggering: 208 audits were reviewed from a universe of more than 38,000, and only 48.6 percent of them were deemed acceptable; 51.4 percent were judged to have limited reliability or be unacceptable. Serious concerns were raised by the Office of Management and Budget, General Accountability Office and U.S. Senate. These agencies rely heavily on single audits performed by CPA firms as the key accountability mechanism to ensure that billions of dollars in federal awards are spent appropriately. The PCIE report recommended the following measures to improve single audit quality:

• Revise and improve single audit standards, criteria and guidance.
• Establish minimum requirements for training on performing single audits.
• Review and enhance processes to address unacceptable single audits.

The Response

AICPA task forces were created to address the deficiencies noted in the PCIE report according to these areas:

• Sampling and materiality
• Schedule of expenditures of federal awards
• Internal control and compliance
• Findings
• Training and continuing professional education
• Peer review
• Compliance audits standard

Thus far, these task forces have yielded significant results. The AICPA also made several revisions to the 2008 Government Auditing Standards and Circular A-133 Audit Guides, and many more changes are anticipated going forward. A new chapter on audit sampling in the 2009 Audit Guide will include suggested minimum sample sizes for internal control and compliance testing that links the significance of the control and inherent risk of the compliance requirement with a minimum number of items to be tested. The AICPA has also developed several practice aids and sample workpapers to enhance audit quality and documentation, which can be obtained at http://gaqc.aicpa.org.

In December 2008, the AICPA issued an exposure draft for a proposed Statement on Auditing Standards (SAS), Compliance Audits, which is an amendment to SAS No. 74, Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance. It addresses some of the PCIE report recommendations relating to generally accepted auditing standards for auditors performing compliance audits. The exposure draft clarifies its applicability, provides updates to reflect the changes in the compliance audit environment, establishes a requirement for the auditor to apply the risk assessment and fraud standards to a compliance audit, identifies auditor requirements that are unique to a compliance audit and provides auditor guidance in evaluating whether an auditee has materially complied with an applicable compliance requirement.

Economy’s Impact

In February 2009, Congress enacted a massive $787 billion stimulus package to address the severe economic downturn. Over the next few years, the federal government will be sending billions of dollars to state and local governments, much of which will be subject to single audits. President Obama has demanded unprecedented oversight and transparency over the distribution of these funds, not only from state and local governments regarding how the funds are spent, but also transparency over the audit profession performing single audits. The federal government anticipates a significant increase in scrutiny over the single audit process through its quality control review process in 2010 and 2011. 

The audit profession is thrust into a key role to ensure that the stimulus funds are spent appropriately. As such, emphasis on improving single audit quality over the past two years could not have come at a more critical time for our government and our profession.

David J. Gannon, CPA, RMA, PSA, is a partner at Wiss & Company, LLP.  He is a member of the New Jersey Society of CPAs Governmental Accounting and Auditing Interest Group. Gannon can be reached at dgannon@wiss.com or 732-283-9300.