All Posts by Charles Hall

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About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty-five years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention, The Why and How of Auditing, Audit Risk Assessment Made Easy, and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles consults with other CPA firms, assisting them with auditing and accounting issues.

Single Audit Applicability
Jun 07

Single Audit Applicability and Objectives

By Charles Hall | Auditing , Local Governments

In this article, I provide information about Single Audits for local governments and nonprofits.

Your organization received federal funds but you're not sure about Single Audit applicability. Should you engage an audit firm to perform a Single Audit or not? 

In this article, I'll help you determine whether a Single Audit is needed. I'll also explain the objectives of such an audit. Why? So you can understand what auditors are looking for.

Single Audit Applicability

Single Audit: What is it?

Many nonprofits and local governments receive federal funds from the United States government. And some of those entities are required to have a Single Audit.

But what is a Single Audit? It's just what it says: a single audit. Of what? A single audit of all federal awards received by a nonprofit or a government. 

For example, a local government might receive disaster funds from FEMA and a block grant from HUD. But rather than contracting for two separate audits, a Single Audit of both programs is performed. This audit requirement is usually triggered when total federal awards exceed $750,000 in one year.

The Uniform Guidance

So what guidance does the auditor and the nonfederal organization (government or nonprofit) follow? The Office of Management and Budget's (OMB) Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, commonly referred to as the Uniform Guidance.

Subpart F, Audit Requirements, provides guidance for auditors.

Next, let's dig a little deeper regarding Single Audit applicability.

Single Audit Applicability

When is a Single Audit required? The Uniform Guidance states: A non-Federal entity that expends $750,000 or more during the non-Federal entity's fiscal year in Federal awards must have a single audit. This is a Single Audit Requirement. (There is an exception. That's when the entity elects to have a program specific audit.)

But what does expend mean? Typically the word means that an entity spends money. But the word expend has a broader meaning in Single Audits. For example, the word includes:

  • receipt of federal property or goods (e.g., surplus property or commodities)
  • receipt and use of federal loans 
  • loan balances with the federal government (when there are continuing compliance requirements)
  • interest subsidies from the federal government

So if the government or nonprofit expends at least $750,000 in federal funds during its fiscal year, a Single Audit is necessary. If it expends less than $750,000, then a Single Audit is normally not required. States may, however, require a Single Audit even though amounts expended are less than $750,000.

Does the entity look solely at funds received directly from the federal government? No. Federal awards may come directly from a federal agency. But they may also come indirectly through a pass-through entity such as a state. The nature of the federal funds does not change as it passes through an entity (e.g., a state). It's still federal money.

In light of these facts, how does the Uniform Guidance define federal financial assistance? Let's take a look.

What is Federal Financial Assistance?

The Uniform Guidance defines federal assistance in the following manner:

§ 200.40 Federal financial assistance.

(a) Federal financial assistance means assistance that non-Federal entities receive or administer in the form of:

  (1) Grants;

  (2) Cooperative agreements;

  (3) Non-cash contributions or donations of property (including                 donated surplus property);

  (4) Direct appropriations;

  (5) Food commodities; and

  (6) Other financial assistance (except assistance listed in paragraph       (b) of this section).

(b) For § 200.202 Requirement to provide public notice of Federal financial assistance programs and Subpart F - Audit Requirements of this part, Federal financial assistance also includes assistance that non-Federal entities receive or administer in the form of:

  (1) Loans;

  (2) Loan Guarantees;

  (3) Interest subsidies; and

  (4) Insurance.

Total of Federal Assistance

The non-federal entity adds all federal financial assistance together to see if they exceed the $750,000 threshold. If, for example, a county government expends $500,000 in block grant funds and $450,000 in disaster funds during its fiscal year, then a Single Audit is necessary. 

Now that you understand Single Audit applicability, you may be wondering what the objectives are. 

Objectives of a Single Audit

The easiest way to understand the objectives of a Single Audit is to look at a Single Audit report. See example 13-1 from the AICPA. There are two main objectives. 

1. Opinion on Compliance with Federal Program Requirements

First, understand that the auditor provides an opinion regarding the entity's compliance with major federal program requirements.

A portion of that wording reads as follows:

Opinion on Each Major Federal Program
In our opinion, Example Entity complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30,20X1.
2. Reporting on Internal Control Testing

Second, understand that the auditor reports on internal control testing. While no audit opinion is rendered by the auditor, the controls are tested nonetheless.  

A portion of that wording reads as follows:

Report on Internal Control Over Compliance
Management of Example Entity is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Example Entity's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Example Entity's internal control over compliance.

Single Audit Applicability and Objectives

In summary, Single Audits are necessary when a local government or nonprofit expends $750,000 or more. And the objectives of the audit are to provide an opinion on compliance with federal requirements and to report on the internal control testing. 

Higher price audit
Jun 06

Higher Audit Prices Due to Higher Risk

By Charles Hall | Auditing

Audit risk increases uncertainty—and price. At least, it should.

In this post, I provide examples increased audit risk and reasons why audit prices should increase accordingly.

Higher audit price

First, let’s look at examples of increased audit risk.

Factors that Increase Audit Risk

Factors that increase audit risk include:

  • Entity is about to be sold
  • Records not reconciled on a timely basis (including bank accounts, inventory, accounts receivable, and accounts payable)
  • Business with a high debt load and covenant violations
  • Known existence of fraud
  • Inexperienced management in a complicated business
  • Known legal proceedings against the company
  • Unusual estimates (e.g., environmental liabilities)
  • Complex transaction cycles with varied accounting systems (systems differ at each location)
  • Group audit situations with subsidiaries audited by other audit firms (especially if the components are foreign entities)
  • Entities with severe cash flow deficiencies

Now, let’s think about why we might increase our audit prices based on such risks.

Your Insurance Carrier’s Perspective

Pretend, for a moment, that you are a representative of a professional liability insurance carrier, and you’ve been assigned the duty of reviewing an audit firm’s book of business. How would you rate–from an insurance perspective–audits of the following entities?

  1. The City of Perfect has a CPA as its finance director. For the last twenty years, they have received the financial reporting Government Finance Officer’s Certificate of Achievement. They have never had a significant fraud. The city’s net position is strong, and it has no debt.
  2. Shazaam, Incorporated, is a high-tech company funded with venture capital. Operations began two years ago. Shazaam has weak cash flow, but the company has successfully created one new whiz-bang product, making it a highly desirable acquisition target. Potential suitors have already made visits to the company’s headquarters inquiring about a purchase.
  3. Sterling Parts, Incorporated, sells auto parts mainly in the United States, but it also has manufacturing operations in Germany. The company has eight subsidiaries, one of which is the German production component. This entity has been cited for contaminating the Rhine river. The cost of cleanup and damages are not known. The foreign entity uses an accounting system that is entirely different from the other companies. A German accounting firm audits the manufacturing component.

Would you price the insurance for all three engagements the same? Certainly not. The City of Perfect is…well perfect. The second and third audits have risk elements.

So if we as auditors examine prospective audit clients purely with an eye on risk, there should be a premium (higher fee) for those with increased risk. Why? There is a higher probability that the audit firm will suffer loss. The inherent risks in examples 2 and 3 increase the chance of faulty financial reporting, which increases the possibility a suit against the audit firm.

From a project management perspective, will all three engagements take the same amount of time? Obviously no. The higher risk engagements will require more resources, effort, and time. (Higher risk audits can also increase your insurance rates.)

Client Risk Requires More Time

You might think of the additional time element in this way:

Risk = Additional Time = Higher Price

Too often, CPA firms fish for audits without giving appropriate consideration to risk. Then, the flat fee creates pressure to ignore risks, because, after all, the audit firm wants to make a profit. It is critical that auditors incorporate a pricing premium for identified client risk. So consider  the audit risk model even in the beginning of an audit.

Unidentified Audit Risk

But what about unknown risk (that which exists before starting the engagement)?

Well, that’s another story. Discovering fraud, for example, may require an expansion of the engagement scope. As with any project, when the scope increases, price increases. But the price increase is dependent upon the size and complexity of the theft. If the fraud is nominal and requires little additional time, then no price increase is necessary. But if the theft is broad and complex, a contract amendment may be in order.

Audit Client Acceptance And Continuance

Does your firm use any type of risk score in client acceptance or in your annual continuance decision? If no, consider scoring your clients in terms of price and risk. And while you’re at it, think about rating your entire book of business. Here’s how.

An Exercise to Evaluate Your Pricing in Light of Risk

In an Excel spreadsheet, list the following for all A&A clients:

  • Name of the client
  • The A&A service (e.g., audit, compilation)
  • Years you’ve provided the A&A service
  • Price
  • Time estimate
  • Average hourly rate
  • Describe any client risks
  • Score the client risk from 1 to 5 (with 5 being highest)

Once the list is complete, ask yourself if the pricing is appropriate. If the hourly rate is low but the risk is high, consider a price increase.

fences
May 31

Organize Your Computer Desktop with Fences

By Charles Hall | Technology

In this post, I explain how you can use Fences software to organize your computer desktop.

Most accountants like organization, yet I often see total chaos on computer monitors.

A typical CPA’s screen looks like this.

Organize desktop

We’d be much better off if our desktops looked like this.

fences

Creating Order on Your Desktop

So how can you bring order to your desktop?

Use Fences. The cost is $9.99, but well worth the iconic bliss.

Once the Fences software is downloaded, you simply right-click and drag on your screen to create a new fence (see below). Above you see a fence titled “Programs.” You can arrange the icons in whatever order you wish. To add an icon to a fence, you simply drag it to the desired location.

Create Fence

Once you arrange your icons, they stay that way. When you reboot your computer the next morning, you’ll find your icons in the same order. 

Fences Software YouTube Video

Here’s a video that provides additional information about the Fences software:

YouTube player

My Experience with Fences Software

I’ve used Fences for about ten years and have found it useful. I recommend it.

Other Office Suggestions

For helpful ideas in setting up your physical office, click here.

May 28

The Why and How of Auditing: Amazon

By Charles Hall | Auditing

The Why and How of Auditing

Do you ever feel trapped by an audit? Like you can’t finish. It started so well, but somewhere along the way, something went wrong. The wheels came off.

Maybe it started with your acceptance of a new client that you didn’t feel good about from the beginning.

Or possibly your new staff members don’t understand risk assessment. So they blindly followed last year’s work papers. However, the auditee has new risks, and the audit team failed to address them.

Wow, the audit budget is busted. But you still need to finish the substantive and wrap-up work. Just creating financial statements will take a week.

Additionally, you’re in a peer review year.

The clock is ticking. And how do you feel? Trapped!

Want less stress? Then check out The Why and How of Auditing.

My new book explains the full audit process, from beginning to end, from client acceptance to audit opinion issuance. Also, you’ll find helpful guidance for the audit of transaction cycles such as receivables and revenue, payables and expenses, debt, payroll, and more—all in one easy-to-understand book.

Discover helpful ways to plan, execute, and complete your audit engagements.

Imagine: quality audits finished on time.

Praise for The Why and How of Auditing

Need a quick-reference audit guide? This is it. Charles walks you from the beginning of the audit process all the way to the end, an excellent plain-english guide.

Mark Wiseman, CPA, CMA, Partner
Brown, Edwards & Company, L.L.P. Roanoke, Virginia

This is a great how-to, hands-on guide that will help you conduct a quality audit and provide value to your clients. Go over a chapter a week with your audit team. The book provides the why and how behind your audit programs and workpapers.

James H. Bennett, CPA, Managing Member
Bennett & Associates, CPAs PLLC Ann Arbor, Michigan

Thanks Charles for clarifying what’s important in an audit. Recommended reading for any auditor level.

Jay Miyaki, CPA, Partner
Jay Miyaki, LLC Honolulu, Hawaii

The author steps through each audit area in a simple manner and clearly explains topics that are often complex by providing numerous examples and personal anecdotes. I highly recommended this text to anyone in the financial statement audit profession.

Jacob Gatlin, CPA, PhD
CDPA, PC Athens, Alabama

Charles Hall’s “The Why and How of Auditing” is comprehensive, yet easy to implement. This guide will enhance the effectiveness of your audit engagements.

Armando Balbin, CPA, Partner
Downey, California

I highly recommended Charles Hall’s latest book, “The Why and How of Auditing.” Charles takes a complicated subject and makes it simple. Our team found it particularly useful in the areas of questions to ask, procedures to follow, and work paper examples.

Bill Burke, CPA, Partner
Burke, Worsham and Harrell, LLC Bainbridge, Georgia

A must-read for auditors! The Why and How of Auditing is insightful, practical, and rich with ideas. Charles takes a complex topic and breaks it down into an easy to read, well-defined road map.

Kathryn Fletcher, CPA, MBA, Partner
Draffin Tucker Atlanta, Georgia

Get Your Copy Now!

Click here to see the book on Amazon.

receipt fraud test for auditors
May 08

Three Receipt Fraud Tests

By Charles Hall | Asset Misappropriation

Today I provide three receipt-fraud tests for auditors. 

The audit standards require that we introduce elements of unpredictability. Additionally, it’s wise to perform fraud tests. But I find that auditors struggle with brainstorming (required by AU-C 240, Consideration of Fraud in a Financial Statement Audit) and developing fraud tests. That’s why I wrote Five Disbursement Fraud Tests. It’s also why I am providing this post.

So, let’s jump in. Here are three receipt-fraud tests.

receipt-fraud tests for auditors

Three Receipt-Fraud Tests

1. Test adjustments made to receivables

Why test?

Receipt clerks sometimes steal collected monies and write off (or write down) the related receivable. Why does the clerk adjust the receivable? So the customer doesn’t receive a second bill for the funds stolen. 

How to test?

Obtain a download of receivable adjustments for a period (e.g., two weeks) and see if they were duly authorized. Review the activity with someone outside the receivables area (e.g., CFO) who is familiar with procedures but who has no access to cash collections.

If there are multiple persons with the ability to adjust receivable accounts (quite common in hospitals), compare weekly or monthly adjustments made by each employee.

Agree receipts with bank deposits.

2. Confirm rebate (or similar type) checks

Why test?

When rebate checks are not sent to a central location (e.g., receipting department), the risk of theft increases. Rebate checks are often not recorded as a receivable, so the company may not be aware of the amounts to be received. Stealing unaccrued receivable checks is easy.

How to test?

Determine which vendors provide rebate checks (or similar non-sales payments). Send confirmations to the vendors and compare the confirmed amounts with activity in the general ledger.

Theft of rebate checks is more common in larger organizations (e.g., hospitals) where checks are sometimes received by various executives. The executive receives a check in the mail and keeps it for a while (in his desk drawer – in case someone asks for it). Once he sees that no one is paying attention, he steals and converts the check to cash.

3. Search for off-the-book thefts of receipts

Why test?

The fraudster may bill for services through the company accounting system or an alternative set of accounting records and personally collect the payments.

How to test?

Compare revenues with prior years and investigate significant variances. Alternatively, start with source documents and walk a sample of transactions to revenue recognition, billing, and collection.

Here are a few examples of actual off-the-book thefts:

Police Chief Steals Cash

An auditor detected a decrease in police-fine revenue in a small city while performing audit planning analytics. Upon digging deeper, he discovered the police chief had two receipt books, one for checks that were appropriately deposited and a second for cash going into his pocket. Sometimes, even Andy Griffith steals.

Hospital CFO Steals Cash

A hospital CFO, while performing reorganization procedures, set up a new bank account specifically for deposit of electronic Medicaid remittances. He established himself as the authorized bank account check-signer.

The CFO never set up the bank account in the general ledger. As the Medicaid money was electronically deposited, the CFO transferred the funds to himself.  What was the money used for? A beautiful home on Mobile Bay, new cars, and gambling trips.

Another Receipt Fraud to Consider

Sometimes it’s not the front-desk receipt clerk that steals. Surprisingly, your receipt supervisor can be on the take. So, consider that receipt theft takes place up-front and in the back-office.

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