TC Single Audit Update 2020 - sog.unc.edu...Single Audit Update James Burke, Senior Accounting and Financial Management Advisor, Fiscal Management Section June 18, 2020 1 State and

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Single Audit Update

James Burke, Senior Accounting and Financial Management Advisor, Fiscal Management Section

June 18, 2020

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State and Local Government Finance Division

Single Audit Update• CARES Act funding: Coronavirus Relief Fund and impact on Single Audits

• 2020 State Compliance Supplements

• 2018 revised Yellow Book

• AICPA’s Interpretations on Independence

• Recently issued SASs

• SEFSA reporting issues

• Proposed revisions to the Uniform Guidance

• GREAT Act

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Coronavirus Aid, Relief, and Economic Security (CARES) Act• Establishes the Coronavirus Relief Fund (CRF)

• Signed into law March 27, 2020

• US Dept. of Treasury (Treasury) website: https://home.treasury.gov/policy-issues/cares/state-and-local-governments

• Two important documents on Treasury website:• Coronavirus Relief Fund, Guidance for State, Territorial, Local, and Tribal

Governments (April 22, 2020)• Coronavirus Relief Fund, Frequently Asked Questions (updated May 28,

2020)

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State’s fiscal response to the COVID-19• 2020 COVID-19 Recovery Act (S.L. 2020-4) appropriates CRF aid • NC Pandemic Recovery Office (NC PRO) is directly responsible for:

• Coronavirus Relief Funds (21.019)• Education Stabilization Funds (84.425)

• Important: FAQ for Funding distributed to County Governments (updated June 12, 2020)

• Resources include:• Guide to Federal COVID-19 Funding for Local Governments• Fraud Hotline – report misuse of CRF

• Website: https://www.nc.gov/agencies/ncpro• Contact: [email protected]

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US Dept. of Treasury: Coronavirus Relief Fund• Type of federal financial assistance – “Other financial assistance” under Uniform

Guidance § 200.40• CFDA: 21.019 (listed under https://beta.sam.gov/)• Subject to federal single audit requirements in Uniform Guidance, Subpart F.

Subparts B, C, D w/exceptions, E are not applicable. Exceptions: Internal controls (§200.303) and subrecipient monitoring and management (§§200.330 to 332)

• Procurement standards (Subpart D, §§200.317 to 326) are NOT applicable.• Local governments that receive payments from State or other local governments

are considered subrecipients of the State or local government transferring the funds.

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Payments from Coronavirus Relief Fund • CARES Act provides that payments from the Fund may only be

used to cover costs that are:• necessary due to the COVID-19 pandemic

• based on reasonable judgment

• not accounted for in the enacted budget as adopted for the fiscal year• incurred during the period March 1, 2020 to December 30, 2020

• money spent, checks issued, payments made

• Local Governments must return CRF funds received but not used to cover costs incurred by December 30, 2020.

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Other 2020 COVID-19 Recovery Act Appropriations• Allocated to NC Dept. of Public Instruction for expenses incurred for

school nutrition services, cybersecurity infrastructure, supplemental summer learning programs, and the facilitation of distance learning due to school closings.

• https://www.dpi.nc.gov/districts-schools/district-operations/financial-and-business-services

• Allocated to NC Dept. of Health and Human Services for expenses related to COVID-19 public health measures.

• Additional funding, estimated at $1,235,859,000, expected to be received or already received for COVID-19 relief in existing federal programs (refer to S.L. 2020-4 sect. 4.1(b)).

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Federal Programs funding with CARES Act fundingOSMB (DPI?) Education Stabilization Funds - Governor’s

Emergency Education Relief Fund 84.425 $95,600,000

Education Stabilization Funds - Elementary and secondary School Emergency Relief Fund

84.425 $396,300,000

NC Dept of Commerce Community Development Block Grant 14.228 $28,500,000

Dislocated Workers Grant Various $6,000,000

NC Dept of Public Safety, Governors Crime Commission

Coronavirus Emergency Supplemental Funding Program (NEW)

16.034 ???

Byrne JAG Program 16.758 $15,400,000

NC Dept. of Transportation Formula Grants for Rural Area Program 20.507 $38,473,000

Urbanized Area Formula Program 20.509 $94,941,000

Airport Grants Various $2,765,000

NC Dept. of Agriculture and Consumer Services

Emergency Food Assistance Program (TEFAP)-Commodities

93.568 $19,700,000

TEFAP-Administration 93.569 $8,200,000

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Federal Programs funding with CARES Act funding (cont.)NC Health and Human Services Child Care and Development Block Grant 93.575 $118,100,000

Low Income Home Energy Assistance Block Grant 93.568 $49,900,000

Community Services Block Grant 93.569 $25,900,000

Congregate and Home-Delivered Meals Various $22,200,000

Home Assistance/ESG State Various $18,400,000

WIC 10.557 $13,900,000

Supportive Services Various $6,200,000

Family Caregivers Various $3,100,000

Centers for Independent Living Various $2,200,000

Child Welfare Services 93.645 $1,600,000

Home Opportunities for Persons with AIDs 14.241 $1,200,000

Ryan White 93.917 $1,100,000

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Audit Deadline Extension• Staff of the LGC has extended the deadline for submitting audit reports

with June 30, 2020 year end to January 31, 2021 (refer to LGC Staff blog, May 15, 2020).

• OMB has allowed recipients and subrecipients who have not submitted their audit reports to the federal audit clearinghouse as of March 19, 2020 and that have fiscal years through June 30, 2020 an additional six months beyond the normal due date.

• Recipients and subrecipients should maintain documentation for the reason for the delay in filing.

• Delay in filing due to COVID-19 would still qualify for “low-risk auditee” under Uniform Guidance § 200.520(a).

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DHS Administrative Letter No. 01-20• Medicaid/NC Health Choice procedures due to COVID-19, April 1, 2020.• Presidential issued proclamation due to COVID-19 outbreak.• Among the change in procedures:

• Certification period extension• Recertifications – counties will not be responsible for conducting

recertifications until further notice.• Case terminations not allowed, unless individual moves out of state,

voluntary termination, or death• Counties are to focus on processing applications as quickly as possible. • https://policies.ncdhhs.gov/divisional/health-benefits-nc-medicaid/adult-

medicaid/administrative-letters/2020

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2020 State Compliance Supplement• State Compliance Supplements have been updated for 2020, sections B

through E.

• OMB 2020 Compliance Supplement (Section A) schedule to be released late June. There may be an addendum in the fall.

• COVID-19 relief and the 2020 State Compliance Supplements document

• NC DHHS DHB’s Administrative Letter No. 01-20 Addendum 1, Medicaid/NCAC Procedures for COVID-19, dated April 1, 2020

• Local CPA Firms-COVID-19 memo – May 4, 2020• Status of population data for samples for Medicaid

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COVID-19 and 2020 State Compliance Supplement• State agencies have not incorporated guidance on testing programs with

COVID-19 relief funds, but auditors are encouraged to wait for guidance from granting agencies in the 2020 OMB Compliance Supplement.

• Guidance for Coronavirus Relief Fund (21.019) at US Treasury and NC PRO or https://beta.sam.gov/.

• State agencies may issue new State supplements or revised current supplements (dates on individual supplements to change).

• If no Federal or State program exists, auditor may refer to OMB Compliance Supplement Part 7, “Guidance for Auditing Programs not Included in this Compliance Supplement.”

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Challenges in preparing State Compliance Supplement• Incorporating the “Pick 6” initiative in the State Matrix for Federal

Programs• Aligning the accounting of state funding with the State programs

• Federal programs are identified with CFDA numbers.

• Activities are often identified as State programs and do not tie to State Compliance Supplement.

• Certain type of compliance requirements identified should not be tested at local level

• Guidance on testing internal control over compliance• Auditors should use a framework, such as Part 5 of the OMB Compliance

Supplement

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2018 Yellow Book Standards• Effective for periods ending June 30, 2020 (no extension)

• Three categories of nonaudit services• Services that impair independence if performed by auditor (¶3.87)

(no changes from the 2011 Yellow Book standards)

• New: A service that is a significant threat to independence (¶3.88)

Preparing financial statements in their entirety (elevated from a threat in the 2011 YB standards)

• Threats to independence (¶3.89)

Added: preparing certain line items or sections of the financial statementsRemoved: proposing standard, adjusting, correcting JEs accepted by management

• Important: Auditor’s professional judgement and documentation

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2018 Yellow Book Standards (cont.)• Auditors should apply the conceptual framework to mitigate threats to

independence (¶3.26)• Identify and evaluate threats, apply safeguards

• Examples of actions that could be safeguards, in certain circumstances (¶3.69)a) Do not include individuals who provided services as audit team memberb) Have another auditor, not associated with the engagement, to review the

engagementc) Engage another audit organization to evaluate the resultsd) Have another audit organization re-perform the nonaudit services to the

extent necessary

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Management Responsibilities• Designate an individual with SKE that understands the nonaudit services to be

provided sufficiently to oversee them (¶3.73). The individual is able to:• Determine the reasonableness of the services provided• To recognize a material error, omission, or misstatement (¶3.79)

• Auditor should obtain an agreement from audit entity management that the audit entity (¶3.76):

a) assumes all management responsibilitiesb) designates an individual with SKE, preferably with senior management

c) evaluates the adequacy and results of the service providedd) accepts responsibility for the results of the service

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Preparing Draft Financial Statements Options • Outsource the year-end preparation of financial statements or the review of the

auditor prepared draft financial statements• Contract the year-end bookkeeper to prepare or review the draft financial

statements.• Contact another local government (especially if an affiliate). • Board member(s) may have the SKE.• Management could get sufficient training to raise its SKE to an acceptable level.

• Auditors allowed to educate the audited entity about matters within their expertise as a routine activity (¶3.71(c))

• Schedule of Expenditures of Federal and State Awards is unit’s responsibility.• Supplemental Information – Amounts reported should tie to financial.

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Standards for Financial Audits: Findings• NEW Requirement: Auditor should consider internal control deficiencies

in their evaluation of identified findings when developing the cause element of the identified findings (¶ 6.18).

• Application: Considering the internal control in the context of a comprehensive internal control framework such as COSO’s Internal Control - Integrated Framework or GAO’s Greenbook, Internal Control in the Federal Government, can help auditors determine whether the internal control deficiencies exist as the root cause of the findings. Identifying these can help provide the basis of developing meaningful recommendations for a corrective action (¶ 6.30).

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Standards for Financial Audits: Waste• New: Evaluation internal control may also include considering internal control

deficiencies that result in waste or abuse (¶ 6.21).• Waste is the act of using or expending resources carelessly, extravagantly, or to

no purpose. Does not necessarily involve a violation of law. Rather, waste relates primarily to mismanagement, inappropriate actions, and inadequate oversight (¶ 6.21).

• The following are examples of waste, depending on the facts and circumstances:

a) Making travel choices that are contrary to existing travel policies or are unnecessarily extravagant or expensive

b) Making procurement or vendor selections that are contrary to existing policies or are unnecessarily extravagant or expensive

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Hosting Services (ET §1.295.143)• When a CPA takes responsibility for maintaining internal control over an attest client’s

records or data, this could create an impairment to independence.• Be the sole host of a client’s financial or nonfinancial information system

• Be the custodian for the client’s data such that the client’s data are incomplete and accessible only through the CPA

• Provide business continuity or disaster recovery services to the client

• Management participation threat: CPA cannot take responsibility for designing, implementing, or maintaining internal control for an attest client

• Use of a portal: Client must remove the data in a reasonable time period.

• CPA may retain a copy of documentation in support of services

• Refer to AICPA’s Nonattest Services, Plain English Guide to Independence

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State and Local Government Client Affiliates (ET §1.224.020)• Financial interest in, and other relationships with, affiliates of a financial

statement attest client (State and local government entity) may create threats to a CPA’s compliance with “Independence Rule.”

• CPAs should apply the “Independence Rule” and related interpretations applicable to a financial statement attest client (State and local government entity) to their affiliates except if it is reasonable to conclude that the services do not create a self review threat with respect to the financial statement attest client because the results of the nonattest services will not be subject to the CPAs financial attest procedures.

• If CPA encounters circumstances or relationships that may create threats, the conceptual framework for independence should be applied.

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New Statement on Auditing Standards• SAS No. 134, Auditor Reporting and Amendments, Including

Amendments Addressing Disclosures in the Audit of Financial Statements, as amended

• SAS No. 135, Omnibus Statement on Auditing Standards — 2019

• SAS No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, as amended

• SAS No. 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports

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New Statement on Auditing Standards (cont.)

• SAS No. 138, Amendments to the Description of the Concept of Materiality

• SAS No. 139, Amendments to AU-C Sections 800, 805, and 810 to Incorporate Auditor Reporting Changes From SAS No. 134

• SAS No. 140, Amendments to AU-C Sections 725, 730, 930, 935, and 940 to Incorporate Auditor Reporting Changes From SAS Nos. 134 and 137

• SAS No. 141, Amendment to the Effective Dates of SAS Nos. 134 -140

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New Auditor Reporting Standards: SAS No. 134• SAS No. 134 supersedes AU-C sections that are part of the

Independent Auditor’s Report.• 700 titled Forming an Opinion and Reporting on Financial Statements

• 705 titled, Modification to the Opinion in the Independent Auditors Report

• 706 titled Emphasis-of-Matter Paragraphs and other Matters Paragraphs

• New Section 701 titled Communicating Key Audit Matters (KAM) in the Independent Auditor’s Report

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New Independent Auditor’s Report• Report Sections are Re-Ordered.

• Opinion paragraph precedes other sections and includes introductory paragraph

• Terminology and Content Changes• Basis of Opinion paragraph• Management and Auditor’s responsibilities header• Auditor’s responsibility is expanded

• Key Audit Matters (KAM)• KAM – those matters that, in the auditor’s professional judgment, are most

significant• Auditor reports KAM in the audit report when they are engaged to do so.

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New Independent Auditor’s Report (Cont.)• Emphasis of Matters (EOM) and Other Matters Paragraph

• Placement in the report depends on nature of what is being communicated and auditor’s professional judgment of the significance.

• Going Concern guidance• Should not use an EOM paragraph (refer to AU-C 570, recently

amended)• “Substantial Doubt About the Entity’s Ability to Continue as a Going

Concern”• Modified Opinions

• No changes in type of guidance when a modified opinion is appropriate

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Comparison of pre-SAS No. 134 with post-SAS No. 134

Order Pre-SAS 134 Sections SAS 134 Sections

1st Introductory paragraph Opinion

2nd Management’s Responsibility for the Financial Statements

Basis of Opinion

3rd Auditor’s Responsibility Responsibilities of Management for the Financial Statements

4th Opinion Auditor’s Responsibility for the Audit of the Financial Statements

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SAS No. 140• SAS No. 140, Amendments to AU-C Sections 725, 730, 930, 935, and 940

to Incorporate Auditor Reporting Changes From SAS Nos. 134 and 137

• Amendment to:• AU-C Section 725, Supplementary Information in Relation to the

Financial Statements as a Whole• AU-C Section 730, Required Supplementary Information• AU-C Section 930, Interim Financial Information• AU-C Section 935, Compliance Audits• AU-C Section 940, An Audit of Internal Control Over Financial Reporting

That Is Integrated With an Audit of Financial Statements.

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SAS No. 140 and Compliance Audits• AU-C § 935 is revised for consistency with the Uniform Guidance, OMB

Compliance Supplement, and the GAO 2018 Yellow Book.• The requirements for a combined report on compliance and internal

control are presented as the default form of report, followed by the requirements for separate reports, if an auditor chooses to issue separate reports.

• The definition of materiality noncompliance is revised to align with SAS No. 138.

• The appendix for AU-C Sections not applicable to Compliance Audits is updated for SAS No. 131 to 137.

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SAS No. 140 and Supplementary Information and Required Supplementary Information

• AU-C §725 Supplementary Information and AU-C §730 Required Supplementary Information are amended to require reporting in separate sections of the auditor’s report, as opposed to in an Other-matter paragraph.

• New Sections - “Supplemental Information” and “Required Supplementary Information”

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SAS No. 137: Auditor’s Responsibility Relatedto Other Information

• SAS # 137 enhances transparency relating to the auditor’s responsibilities for “other

information” – financial and nonfinancial information, included in the annual audit report,

and reduces the diversity in practice,

• The opinion does not cover “Other Information.” Auditor must discuss with management to determine and obtain management’s written acknowledgment of which documents

comprise the annual audit report and subject to audit procedures.

• There must be an understanding of context of the overall objectives of the auditor as set forth in AU-C §200.

• Auditor needs to read and consider other information to determine if there is a material inconsistency with information in the audit report.

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SAS No. 138: New Description of Materiality• New definition of materiality is an attempt to eliminate

inconsistencies with US judicial system and other US Standard setters and regulators. New definition is more aligned with FASB.

• Misstatements, including omissions, are considered to be material if they there is a substantial likelihood that, individually or in the aggregate, they would could influence the economic decisions of users judgment made by a reasonable user based on the basis the financial statements.

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SAS No. 135: Omnibus Statement

• Increased communications with those charged with governance (AU-C 260)• More audit inquires and audit evidence concerning related party transactions• Communications with predecessor auditor about related party transactions• “Significant unusual transactions” replaces “transactions that are outside the

normal course of transactions for the entity or that otherwise appear as unusual.”• The relationship between significant unusual transactions and fraud• Additional subsequent event inquiries about related parties and unusual

transactions• Increased representations concerning related parties

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SAS No. 141. Amendment to the Effective Dates of SAS Nos. 134 — 140

• SAS No. 141 changes the effective dates of SAS Nos. 134 - 140 from periods ending on or after December 15, 2020, to December 15, 2021, in order to provide more time for firms to implement these SASs in light of the effect of the coronavirus pandemic.

• SAS No. 141 also lifts the prohibition against early implementation.

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USDA Loan Programs

• Water and Waste Disposal Systems for Rural Communities (10.760) - loans and grant funds for water and waste projects.

• Expenditures from interim loans that will be repaid from the proceeds of the USDA’s Rural Utility Services loan should be considered Federal awards expended in determining Type A programs, and reporting the expenditures on the SEFSA.

• After program funds are expended and construction is completed, only the payment of principal and interest is required; the prior loan balances are not considered to have continuing compliance requirements under 2 CFR 200.502(d).

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USDA Loan Programs (cont.)

• Community Facilities Loans and Grants (10.766) – Funds may be used to construct, enlarge, extend, or otherwise improve essential community facilities providing essential services primarily to rural residents and rural businesses.

• Expenditures from interim financing loans that will be repaid from the proceeds of the USDA’s Rural Utility Services loan should be considered Federal awards expended, included in determining Type A programs, and reported in the SEFSA.

• For direct loans, USDA requires a promissory note or bond and security. The balance on the note or bond should be considered Federal awards expended, included in determining Type A programs, and reported in the SEFSA.

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CWSRF (66.458) and DWSRF (66.468)

• Capitalization Grants for Clean Water State Revolving Funds (66.458) and Capitalization Grants for Drinking Water State Revolving Funds (66.468) are awarded by EPA as grants to the States.

• When considering basis for determining federal awards expended, loans and loan guarantees (§ 200.502(b)) and prior loan and loan guarantees (§200.502(d)) do not apply.

• Only report on the SEFSA the project expenditures incurred.

• Notes to the SEFSA for balance of outstanding loans (§ 200.510(5)) are not required.

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Public Assistance (97.036) expenditures reporting on SEFSA

• Non-Federal entities must record expenditures on the SEFSA when:• (1) FEMA has approved the nonfederal entity’s Project worksheet

(PW), and • (2) the nonfederal entity has incurred the eligible expenditures.

• Federal awards expended in years subsequent to the fiscal year in which the PW is approved are to be recorded on the nonfederal entity’s SEFSA in those subsequent years.

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Public Assistance (97.036) expenditures Reporting on SEFSA (cont.)

• If FEMA approves the PW in the nonfederal entity’s fiscal year 2019 and eligible expenditures are incurred in the nonfederal entity’s fiscal year 2020, the nonfederal entity records the eligible expenditures in its fiscal year 2020 SEFSA.

• If the nonfederal entity incurs eligible expenditures in its fiscal year 2019 and FEMA approves the nonfederal entity’s PW in the nonfederal entity’s fiscal year 2020, the nonfederal entity records the eligible expenditures in its fiscal year 2020 SEFSA with a footnote that discloses the amount included on the SEFSA that was incurred in a prior year.

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OMB Proposed Changes to Uniform Guidance (2 CFR 200)

• Subpart F – Audit Requirements • §200.515 (a) Audit Reporting: An opinion (disclaimer) whether financial statements

are presented in accordance to GAAP or a special purpose framework

• Aligns 2 CFR 200 with GAAP, specifically the GASB statements 68 and 45 related to pension costs (§200.431(g)) and depreciation (§200.436(c)(5))

• Definitions no longer have separate section. New definition section §200.1

• Revisions and clarifications to various definitions

• Revised CFDA number to “assistance listing number”

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Proposed Changes to Uniform Guidance (cont.) • Subrecipient findings - Proposed changes under (§200.331). Pass-through-entity

(PTE) is only responsible for audit findings specifically related to their subaward.• The PTE may rely on the subrecipient’s auditors and cognizant’s oversight for routine

audit follow-up and management decisions.

• Provides a clarity on budget periods that relates to period of performance and expands the authority of federal awarding agencies to terminate awards for noncompliance (§200.211)

• Extend the final report submission and obligation liquidation periods from 90 calendar days to 120 calendar days for direct recipients and add measures that must be taken if the reports are not submitted on time. The submission period for subawards would remain at 90 days (§200.343).

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Proposed Changes to Uniform Guidance: Procurement

• Two separate categories of procurement: formal and informal• Sealed bids, proposals and non-competitive methods will be considered

formal. • Micro purchases and small purchases will be considered informal.

• A proposed changes to allow nonfederal entities to request higher procurement thresholds from their cognizant agencies for indirect cost

• The requested thresholds must be based on internal controls, evaluation of risk, and documented procurement procedures.

• An additional proposal to 2 CFR 200.321 that requires domestic procurement preferences. Grant recipients should try to purchase goods, materials, and products produced in the U.S. to the greatest extent practical

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Other proposed changes to Uniform Guidance • Proposed revisions to (§200.204) and (§200.203) would require agencies to

extend their merit review process for all grants when the federal agency has the discretion to choose the recipient.

• Aligning (§200.204) with the 2019 NDAA section 889 prohibition on certain telecommunications and video surveillance services or equipment (Ex. Huawei and ZTE Corp.)

• An addition 2 CFR 183 to implement “Never Contract with the Enemy.” Affects grants in excess of $50,000 performed outside of U.S.

• Availability of the de minimis indirect rate to all grant recipients (even if they previously had a formal indirect rate agreement)

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The GREAT ACT• Grant Reporting Efficiency and Agreements Transparency (GREAT) Act.

• Require that reported data elements be defined and standardized in a central, open repository.

• Required reported data to be collected and maintained in a central location.

• Encourage use of IT that can auto-populate data from existing federal sources across governmental programs.

• Have resources available to explain requirements and business processes.

• OMB to designate a single data standard-setting agency – HHS

• By December 30, 2024, OMB must “enable the collection, public display, and maintenance of Federal award information ... on a single, public portal.”

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Single Audit Update• www.nctreasurer.com, [email protected], 919-814-4301• Audit opinion resources:

• Sample opinions on basic financial statements• Compliance Reporting: Sample reports on Yellow Book, Compliance and Internal Control

with Major Federal Programs Compliance and Internal Control with Major State Programs• Internal Control Communications (AU-C §260)

• Single Audit Reporting• Illustrative Schedule of Expenditures of Federal and State Awards• Illustrative Schedule of Findings and Questioned Costs, Corrective Action Plans, Summary

Schedule of Prior Audit Findings

• Discussion of Single Audit in North Carolina

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Documents

TC Single Audit Update 2020 - sog.unc.edu...Single Audit Update James Burke, Senior Accounting and Financial Management Advisor, Fiscal Management Section June 18, 2020 1 State and