The Scope of the Annual Audit
Governmental Advisor, March 2007  

Auditing standards now require that when we perform a federal grant audit (a single audit), we communicate the auditor’s responsibilities and management’s responsibilities. We think the discussion continues to be valuable enough to share with all of our governmental clients.

What Are the Accounting Responsibilities of the Community’s Management?

Management has the responsibility of adopting sound accounting policies, maintaining an adequate and effective system of accounts, safeguarding assets, and devising an internal control structure that will, among other things, help assure the proper recording of transactions. The transactions that should be reflected in the accounts and in the financial statements are matters within the direct knowledge and control of management. The auditor’s knowledge of such transactions is limited to that acquired through the audit. Accordingly, the fairness of representations made through the financial statements is an implicit and integral part of management’s responsibility. The auditors may make suggestions as to the form or content of the financial statements and typically draft them, based on management’s accounts and records. However, the auditor’s responsibility for the financial statements is confined to the expression of an opinion on them. The financial statements remain the representations of management.

What Are the Responsibilities of Auditors?

An independent auditor’s objective in an audit is to obtain sufficient competent evidential matter to provide a reasonable basis for forming an opinion on the financial statements. In doing so, the auditor must work within economic limits; the opinion, to be economically useful, must be formed on selected tests rather than an attempt to verify all transactions. Since evidence is examined on a test basis only, an audit provides only reasonable assurance, rather than absolute assurance, that financial statements are free of material misstatement. Thus, there is a risk that audited financial statements may contain undiscovered material errors or irregularities. The existence of that risk is implicit in the phrase in the audit report, “in our opinion.”

What Is the Auditor’s Responsibility for Testing and Reporting on Internal Controls and Compliance with Laws and Regulations?

In the process of a financial statement audit, the auditor gains an understanding of internal control of an entity, as well as the laws and regulations having a direct and material effect on the entity, for the purpose of assisting in determining the nature, timing, and extent of audit testing. Tests of controls and compliance with laws and regulations in a financial statement audit contribute to the evidence supporting the audit opinion on the financial statements. However, the limited purpose and scope of these tests are not sufficient to provide a basis for an opinion on the adequacy of internal control or on compliance with laws and regulations.

The limited purpose of these tests in a financial statement audit may not meet the needs of some users of auditor’s reports who require additional information on internal controls and on compliance with laws and regulations.

To meet certain audit report users’ needs, laws and regulations often prescribe testing and reporting on internal controls and compliance to supplement the coverage of these areas in a financial statement audit. When a community receives more than $500,000 of federal grant awards in any given year, a single audit must be performed for that year. The single audit, which audits the community’s compliance with federal regulations, is performed under the rules promulgated by the federal government under OMB Circular A-133. In accordance with OMB Circular A-133 covering federal grant awards, supplemental testing of and reporting on internal controls and compliance will be performed.