The CPA firm that performs a local auditee’s audit or other engagement may prepare or propose adjustments to the local auditee’s financial statements.
The CPA also tests the agency’s internal controls and gives recommendations to improve them.
And, unfortunately, misappropriations and fraud that occur in an agency are often not detected until the CPA finds them during the performance of the audit.
Because of these factors, there is a common misperception that the responsibility for a local auditee’s financial statements, internal controls, and especially the detection of fraud and misappropriations, belongs to the CPA performing the audit or other engagement for the local auditee.
The responsibilities of the local auditee and the CPA firm performing the audit are clearly spelled out in second and third paragraphs of the standard opinion that a CPA firm signs and includes with audited financial statements:
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Our (the CPA firm’s) responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
To summarize, management of the local auditee is responsible for –
- Its financial statements
- Internal control over the preparation of its financial statements
- Detection of fraud and errors
And the CPA firm performing the audit is responsible for auditing the financial statements, determining whether they are free from material misstatement, and reporting on the results of their audit.
The local auditee’s and the CPA’s responsibilities are similarly addressed in the accountant’s review and compilation reports.
The CPA firm cannot take responsibility for the local auditee’s financial statements or internal controls without becoming part of the local auditee’s management. This would impair their independence in such a manner that they could not perform the audit.
The CPA firm performing an audit may prepare the agency’s financial statements, which would appear to give them the responsibility for the financial statements. However, the CPA firm may prepare an agency’s financial statements only if there is a person within the agency who possesses suitable skill, knowledge, and expertise to oversee the work of the CPA. This person is not required to be able to prepare the financial statements, but must be able to accept responsibility for them. Other non-audit services that are performed by a CPA firm that audits the local auditee also have this type of restriction.
The perception that the CPA firm performing the audit is responsible for the financial statements is also derived from the adjustments that the CPA firm proposes to a local auditee’s financial statements, and the consequences to the local auditee if they choose not to make the adjustments. In an audit engagement, the CPA may advise the local auditee that they will not be able to render a clean or unmodified opinion on the financial statements. In a review/attestation or compilation engagement, the CPA may disclose the proposed adjustments management did not make in the accountant’s review or compilation report; or may withdraw from the engagement altogether. The CPA may write a finding or management letter comment if the agency’s refusal to make recommended adjustments causes its financial statements not to be prepared in accordance with generally accepted accounting principles.
This is all within the responsibility of the CPA as stated in the auditor’s opinion; and is not inconsistent with the five parts of the local auditee’s financial statements that the CPA firm “owns:”
- The auditor’s opinion; or the accountant’s review or compilation report
- The Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards (Yellow Book report), which is included with an agency’s audit report If the audit is performed under Government Auditing Standards
- The Independent Auditor’s Report on Compliance for Each Major Program and On Internal Control Over Compliance Required by the Uniform Guidance (Single Audit Report), which is included with an agency’s annual financial report if the agency expended $750,000 or more in federal funds during their fiscal year
- Findings related to the Yellow Book report and Single Audit report
- Management letter and comments related to less material findings that the CPA feels need to be brought to the attention of the agency
If a local auditee has any questions about their responsibilities regarding their financial statements they should speak to their CPA firm, or call the Legislative Auditor’s Local Government Services Engagement Manager.
- What role does a local auditee’s governing board play in agency’s management?