Understanding Program-Specific Audits
Most practitioners with state and local government and not-for-profit clients know about the program-specific audit option available to certain--but not all--recipients of federal financial assistance. Many agree that guidance on this option is not fully developed and difficult to understand. The result: program-specific audits do not always provide their intended relief from audit effort and cost. This article offers guidance by discussing both the concept and the practical application of program-specific audit requirements under Office of Management and Budget Circulars A-128, Audits of State and Local Governments, and A-133, Audits of Institutions of Higher Education and Other Not-for-profit Organizations. It also explains how applying American Institute of CPAs Statement on Standards for Attestation Engagement no. 3, Compliance Attestation, can better serve the needs of federal program managers. WHAT IS A PROGRAM-SPECIFIC AUDIT? The best way to understand program-specific audits is to compare them with organizationwide audits usually required by OMB. An organizationwide audit starts with the audit of the entity's financial statements--all additional grant-related audit requirements of the OMB circulars build on this audit. In an organizationwide audit auditors can issue up to eight reports on the organizationwide work required by the OMB circulars. On the other hand, a program-specific audit starts with an audit of only the program financial statements. Generally, these statements consist of a single statement of revenues, expenditures and changes in fund balance of federal program activities administered by the recipient, including notes. The audit is conducted in accordance with Government Auditing Standards (the yellow book). All additional grant-related program-specific requirements of the OMB circulars build on the program financial statement audit. In addition to the report on the financial statements, two additional reports are issued--one on the internal control structure over the federal program and one on the entity's compliance with federal program requirements. The auditor prepares the report on the internal control structure in accordance with the requirements of government auditing standards and based on the audit of the program's financial statements. (A sample internal control structure report for a program-specific audit prepared in accordance with government auditing standards is illustrated in exhibit 1.) The auditor prepares the report on compliance also in accordance with government auditing standards (see exhibit 2). This report does not include an opinion on compliance unless one is required by a federal program-specific audit guide (see exhibit 3). SAVING TIME AND COST Performing a program-specific rather than an organizationwide audit results in obvious savings due to reduced reporting requirements and the current absence of a requirement for an auditor "opinion" on compliance. The more significant savings are intmgible and difficult to measure. Experienced auditors suggest they find audit planning easier, compliance testing more focused and reporting more manageable. Also, dealing with the client and the funding agency can be more productive when the auditor does not have to be concerned about combining the program's compliance audit and reporting requirements with those of the broader organizationwide audit. PRACTICAL APPLICATION The biggest area of practitioner concern is determining when clients should elect the program-specific audit. It is not always the best choice. Recipients of funds under several programs may actually find that electing it calls for more reports than required by an organizationwide audit. Further, the work necessary to issue a compliance report for the program under the yellow book and program-specific audit guides issued by federal agencies is not significantly different from the work necessary to express an opinion on compliance for major programs in an organizationwide audit. …