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HomeMy WebLinkAbout05/06/2008 03E State Auditor Comprehensive Performance Audit Request; Performance Audit Task Force BUSINESS OF THE CITY COUNCIL YAKIMA, WASHINGTON AGENDA STATEMENT Item No. For Meeting Of May 6, 2008 ITEM TITLE: Consideration of request for comprehensive performance audit by State Auditor and appointment of a Performance Audit Task Force. SUBMITTED BY: Council Member Kathy Coffey, Council Member Neil McClure, Council Member Bill Lover CONTACT PERSON /TELEPHONE: Council Member Kathy Coffey - 575 -6040 Randy Beehfer, Media Contact - 575 -6092 SUMMARY EXPLANATION: Initiative 900, which passed in November 2005 with a 56% favorable vote (61% in Yakima County), requires the Washington State Auditor to conduct performance audits of state and local government • agencies. h1 the two and a half years since Initiative 900 passed, the Auditor's office has completed • several reviews which have generally targeted specific operational areas of the agencies which have been audited. For example, the City of Yakima's compliance with public records requests was the subject of an audit conducted in the fall of 2007. Council Members Coffey, McClure, and Lover are proposing that the Yakima City Council invite the State Auditor to conduct a comprehensive performance audit of the City's operations. The State Auditor's Director of Performance Audits, Linda Long, has responded very favorably to initial inquiries from the City. Yakima would be the first city in the state to receive such a full-scale examination. This proposal is in unison with the City's Mission Statement and the Council's current focus on openness, accountability, and transparency. A comprehensive perfoiniance audit would allow the community to see inside its City government and would provide independent, reliable, objective feedback about how the City is operating. Audit results would be used to both enhance the City's strengths and to identify opportunities for greater efficiencies, cost savings, and other improvements. (continued on next page) Resolution Ordinance Contract Other (specify) Funding Source APPROVED FOR SUBMITTAL: — City Manager STAFF RECOMMENDATION: This is a Council policy issue. BOARD / COMMISSION /COMMITTEE RECOMMENDATION: N/A COUNCIL ACTION: • Initiative 900 requires performance audits to include, but not be limited to, the following 9 objectives: 1) Identification of cost savings; 2) Identification of services that can be reduced or lir eliminated; 3) Identification of programs or services that can be transferred to the private sector; 4) Analysis of gaps or overlaps in programs or services and recommendations to correct them; 5) Feasibility of pooling the entity's information technology systems; 6) Analysis of the roles and functions of the entity and recommendations to change or eliminate roles or functions; 7) Recommendations for statutory or regulatory changes that may be necessary for the entity to properly carry out is functions; 8) Analysis of the entity's performance data, performance measures and self- assessment systems; and, 9) Identification of best practices. Initiative 900 stipulates that performance audits conducted by the State Auditor comply with the federal Generally Accepted Government Auditing Standards ( "GAGAS ") which provides a framework for conducting high quality government audits with competence, integrity, objectivity, . and independence. GAGAS (also known as the "Yellow Book ") establishes credential requirements and provides guidance regarding professional judgment, quality control, perfoiniance of fieldwork, and reporting by government auditors. Initiative 900 also dedicated a portion of the state sales tax to fund the performance audit program. All primary costs for a City of Yakima audit would be covered by that source. City staff time required to comply with an audit, which the State Auditor's office has described as "significant," would be the responsibility of the City. Additional information attached to this agenda statement includes: • 1) A draft letter from the Yakima City Council formally requesting the State Auditor to conduct a comprehensive performance audit of the City 2) "General Performance Audit Information" from the State Auditor's website 3) "Initiative 900 Executive Summary" from the State Auditor's website 10 4) "Frequently Asked Questions about Performance Audits" from the State Auditor's website 5) "Frequently Asked Questions about Performance Audits of Local Government Entities" from the State Auditor's website 6) "Use and Application of GAGAS" from Auditing Standards published by the Comptroller General of the United States At its May 6 regular business meeting, the City Council will be asked to: 1) Direct that a letter be sent to the State Auditor formally requesting that a comprehensive performance audit of the City of Yakima be conducted; and, 2) Appoint a Performance Audit Task Force consisting of Council Member Coffey, Council Member McClure, Council Member Lover, Yakima Valley Business Times and Central Washington Senior Times Publisher Bruce Smith, retired Yakima Valley Regional Library Executive Director Richard Ostrander, local businessman and Yakima/Morelia Sister Cities Association President Juven Garcia, and Pacific Northwest University of Health Sciences President Dr. Stan Flemming. Council Member • Coffey and Bruce Smith would co -chair the task force which would monitor the audit process and evaluate the results. Should the Council approve this proposal, a formal request letter would be transmitted to the State Auditor as soon as possible. A meeting between State Auditor staff, the Performance Audit Task Force, and senior City staff would occur shortly after that. If the State Auditor agrees to conduct the audit, a Request For Proposal ( "RFP ") would be issued soliciting qualified private auditing firms. Auditor's office staff has indicated that the RFP process could take up to 3 months to complete. Therefore, the earliest an audit could begin would be fall of 2008. DRAFT Mr. Brian Sonntag, State Auditor Temporary Location: Sunset Building 3200 Capital Blvd., Olympia, WA 98504 -0021 • Subject: Request for Performance Audit of City of Yakima Operations Dear Mr. Sonntag: The City of Yakima has watched with great interest as the Washington State Auditor's Office has implemented Initiative 900. We applaud your efforts in the area of performance auditing and have been excited to see those efforts now expanding to performance audits of local municipal governmental operations. The State Auditor's Office (SAO) Performance Audit program offers an opportunity for the City to benefit from an independent performance audit of City operations. As you are aware, Yakima City officials have been in contact with Linda Long, Director of Performance Audits, to discuss the SAO's performance audit program, its benefits and the commitment required of the City. We are S convinced that our organization could greatly benefit from a performance audit. To that end, please consider this transmittal as the City of Yakima's formal request for the State Auditor's Office to conduct a comprehensive performance audit of all City operations. At their May 6, 2008 meeting, the Yakima City Council unanimously agreed to make this request of the State Auditor. In preparation of this request, the City Council has appointed a task force consisting of three City Council Members and four community members, which will be co- chaired by Council Member Kathy Coffey and Community Member Bruce Smith. Council Member Coffey and Assistant City Manager Dave Zabell will be the City's primary points of contact in this effort. Thank you for your consideration of this request. We look forward to a positive response and the opportunity to participate in this program. Sincerely, Kathy Coffey Council Member CC: City Council Members of the Performance Audit Task Force S Dick Zais, City Manager Dave Zabell, Assistant City Manger OR n� q! r ' •I st T t �. 1 4 11 N Gi Washington State Auditor Brian Sonntag General Performance Audit Information Mission & Vision Our Mission: • . The State Auditor's Office independently serves the citizens of Washington by promoting accountability, fiscal integrity and openness in state and local government. Working with these governments and with citizens, we strive to ensure the efficient and effective use of public resources. Our Philosophy: Public service is an honor. We take pride in the services we perform for the governments and citizens of Washington State. We'work with the highest standards of integrity, independence, and professionalism. We value a working environment free of bias and characterized by efficiency, open communications, teamwork, mutual respect, and good judgment. • • • • • • V, • Washington State Auditor Brian Sonntag Initiative 900 Executive Summary Effective Date: December 8, 2005 Features of 1 -900: • Requires the State Auditor to conduct independent, comprehensive performance audits of state and local government. • Dedicates 1 /100th of 1 percent of the sales and use tax to pay for the audits. That amount is expected to be $19 million based on estimated tax collections through June 2007. • Urges the State Auditor's Office to start with the largest, costliest • government entities and eventually audit all 2,700 governmental agencies. • Specifies that performance audits be conducted in accordance with Government Auditing Standards, which are issued by the United States Government Accountability Office. Requirements: Initiative 900 requires each performance audit to include, but not be limited to the following nine objectives: 1. Identification of cost savings. 2. Identification of services that can be reduced or eliminated. 3. Identification of programs or services that can be transferred to the private sector. 4. Analysis of gaps or overlaps in programs or services and recommendations to correct them. 5. Feasibility of pooling the entity's information technology systems. 6. Analysis of the role_ s and functions of the entity and recommendations to change or eliminate roles or functions. 7. Recommendations for statutory or regulatory changes that may be necessary for the entity to properly carry out its functions. 8. Analysis of the entity's performance data, performance measures and self- assessment systems. 9. Identification of best practices. • 1111 • 1 Follow- through: • The State Auditor's Office will publish performance audit reports, including findings and recommendations, within 30 days of completing the audit to the agency that was audited; the corresponding legislative body or bodies; and the public, via the State Auditor's Web site. • The State Auditor's Office will present to the appropriate governmental body a step -by -step remedy to inefficiencies discovered in the audit. • Within 30 days of the audit report's release, the corresponding legislative body will hold at least one public hearing to consider the State Auditor's Office findings and recommendations. Public comment will be accepted at the hearing. • For audits of state government entities, the Legislature must consider the State Auditor's report during the appropriations process. The Joint Legislative Audit and Review Committee, the Legislature's performance audit committee, will produce an annual report by July 1 detailing the Legislature's progress in responding to the State Auditor's recommendations. The Committee must justify any recommendations it did not respond to and detail additional corrective measures taken. • For audits of local government entities, the corresponding legislative body, such as a City Council, School Board or County Commission, must consider the State Auditor's reports during the appropriations process and issue an annual report by July 1 detailing its progress in responding to the State Auditor's recommendations. The legislative body must justify any . recommendations it did not respond to and detail additional corrective measures that were taken. • The State Auditor's Office may conduct follow -up performance audits of any state or local government entity it determines necessary. i s. 014 s, 41P Washington State Auditor Brian Sonntag Frequently Asked Questions about Performance Audits 1. What is Brian Sonntag's goal for performance audits? • To be conducted in a fair, independent and constructive manner • To be valued by audited entities and used by entities' management as a tool for improvement • To promote continuous improvement of government quality, transparency, efficiency and effectiveness • To report what is working well and identify opportunities for improvement • To focus on results • To enhance government accountability and the public's trust • In short, performance audits look at the results achieved by any government entity and make recommendations for improvements. 2. What are some examples of what a performance audit would look at? • Did immunizations of school children reduce the number of illnesses and infectious diseases? • Did an increased number of State Patrol troopers on state highways result in fewer accidents and traffic fatalities? 3. What types of entities are audited? Any government entity can be audited. Performance audits take many forms, including: • A single government agency, for example, the State Department of Transportation. • Multiple agencies, such as two state agencies or one state agency and one and local government entity. For example, a performance audit of public schools could look at local schools and the state Office of the Superintendent of Public Instruction. • Audits crossing agency lines may look at an issue area, function or activity. For example, an audit of travel practices includes local governments across the state. • 4. Who conducts the performance audits? Many performance audits are being conducted by contractors and supervised by our staff. Others, especially those that are smaller in scope, are conducted by State Auditor's staff. In accordance with the federal Government Auditing Standards, we ensure that all audits are adequately planned, supervised and conducted by professionals who are qualified. If we embark on a performance audit for which we lack the expertise or experience, we will hire a contractor with that expertise. 5. How do you screen and select contractors? Contractors that are interesting in conducting performance audits on behalf of the Auditor's Office must participate in a competitive bidding process. Contractors who place bids are selected based on knowledge, skills and abilities; experience; references; proven results; and cost. 6. How are performance audits paid for? Initiative 900 dedicates 1/100 of 1 percent of the state sales tax to pay for the performance audit program. 7. Who decides what will be audited? Initiative 900 gives us the authority to conduct performance audits of any government entity in the state, from state agencies to local government entities. Factors that determine performance audits include: • Auditor judgment • Public sentiment • Comments from the Governor, oversight entities, front -line employees and other interested parties • Size and complexity of agency, program or activity • Expected cost benefit • Best practices in performance audit • Initiative 900 intent and requirements 8. How does the State Auditor's Office know what public sentiment is? We started conducting citizen outreach in the spring of 2006. We held four town hall meetings and three focus groups to determine what areas of government citizens felt most strongly needed to be looked at for performance audits. We also conducted telephone and Internet surveys. Our outreach work revealed that the top six priorities of Washington citizens were: • Public schools • Health care • Transportation • Social services • Public safety • The environment • Part of our performance audit research includes soliciting information from the audited entity's employees, management and other interested parties. This outreach helps us determine what areas need to be considered in the course of the performance audit. 9. What is being audited first? Senate Bill 6103, passed by the Legislature in 2005, directed us to conduct thorough performance audits of the state Department of Transportation and some transportation- related agencies. That action was reaffirmed in 2006 with legislative passage of Senate Bill 6839. The legislation appropriated $4 million to fund the performance audits and requires us to contract with private firms to carry out the audit work. The legislation expires in June 30, 2007. Consequently, we are conducting audits of the Washington State Department of Transportation's: • Inventory and Project Management • Administration and Overhead • Washington State Ferries • Highway effectiveness • Performance audits conducted under Initiative 900 are: • Department of General Administration's motor pool, issued Feb. 28, 2007. • Washington Department of Health's Office of Health Professions Quality Assurance • Educational Service Districts • Port of Seattle's third runway construction project management • Sound Transit's construction project management • K -12 administration and overhead • K -12 travel practices • Local governments' take -home vehicle practices • Local governments' overtime practices Updates on audits in progress and the performance audit work plan are available on our Web site. 10. Who does the State Auditor's Office give audit reports to? We give audit reports to the audited entity, the Governor or appropriate local governing body and the appropriate legislative bodies. Reports are posted to the State Auditor's Web site and notification is sent out via a listsery to anyone who signs up. Paper copies are available upon request. 11. What happens once an audit is complete? • • Our responsibility is to conduct the audit, report any findings, make 411 recommendations to improve the performance of the audited entity and release the report to the legislative body that oversees the audited entity. • In accordance with Initiative 900, within 30 days of the performance audit report's issue, the Legislature or appropriate local legislative body is required to hold at least one public hearing to consider the findings of the audit and to receive comments from the public. • The audited entity is responsible for follow -up and corrective action on all performance audit findings. • Entities under the authority of the Governor may be required to provide progress reports to the Governor until resolution has occurred. • For entities under the authority of an elected official other than the Governor, that official may require progress reports from the audited entity until resolution has occurred. • The Joint Legislative Audit and Review Committee will annually issue a report by July 1 detailing the status of the legislative follow- up of the State Auditor's recommendations. These reports will include justification for recommendations not followed and details of other corrective action. • The State Auditor's Office may conduct follow -up performance audits whenever it is necessary or appropriate. 12. Who will do a performance audit of the State Auditor's Office? Under ESHB 1064, the Joint Legislative Audit and Review Committee will conduct a performance audit of the State Auditor's Office every four years. The results of the audit will be reported to citizens, the Governor and the Legislature. 13. Who can I contact for more information? Linda Long, Director of Performance Audits, (360) 902 -0367 Julie Cooper, Constituent Relations, (360) 902 -0377 Kara Klotz, Communications Consultant, (360) 725 -5569 • • 0 • OR' OF • PAS l :, • • Washington State Auditor Brian Sonntag Frequently asked questions about performance audits of local government entities 1. What gives the State Auditor's Office the authority to conduct performance audits of local governments? Initiative 900, passed by voters in November 2005, authorizes the State Auditor's Office to conduct independent, 'comprehensive performance audits of state and local governments. 2. When will the Auditor's Office begin, performance audits of local governments? The first performance audit involving local government is a review of the 10, operations and effectiveness of the nine Educational Service Districts in Washington. Others are K -12 education travel practices and administration; and local governments' practices regarding take -home vehicles, overtime pay, travel and open public records laws. As is the case with our other audits, we operate under the "no surprises" rule. In other words, if your municipality is selected for a performance audit, you will receive ample notification and will have numerous opportunities to communicate with the auditors throughout the process. Along with citizens, we meet with associations, elected and appointed officials, program administrators and others as we plan these audits. 3. How do performance audits affect my entity? th 1 -900 authorized a dedicated funding source 1/100 of 1 percent of the state sales tax — to pay for the audits. Local governments are not billed for this work. As with any audit, some staff time is required to collect and • 0 provide information necessary for the audits. We are committed to minimizing the disruption these audits may cause. 4. How are performance audits conducted? Are they coordinated with other audits to alleviate disruption? The audits must be conducted in accordance with Generally Accepted Government Auditing Standards, which require the State Auditor's Office to develop and follow processes that support quality performance audits. The performance audit program will also undergo an external peer review every three years by the National State Auditor's Association. To the extent possible, we try to coordinate the performance audits with audits conducted by our Office and other organizations. We cannot, however, guarantee this will always be the case. We continually tap into the tremendous knowledge base that has been developed by our local government auditors, including their audit reports and working papers. We coordinate our efforts with local government internal auditors to minimize disruption and to avoid duplication of effort. For example, if an entity has had a recent performance audit on a local level, it could mean that a performance audit by the State Auditor may not make sense, depending on the scope, methodology and results from the audit. 5. How does the Auditor's Office decide which local governments receive performance audits? Factors that determine performance audits include: • Auditor judgment • Public sentiment • Comments from the Governor, oversight entities, front -line employees and other interested parties • Size and complexity of agency, program or activity • Expected cost - benefit • Best practices in performance audit • Initiative 900 intent and requirements Elway Research, a longtime Washington research firm, conducted outreach on behalf of the Auditor's Office to collect information from citizens so their priorities are taken into account during the performance audit process. This work was conducted in the spring of 2006 and revealed education, transportation and health care to be citizens' top priorities. 6. How are results of performance audits used to develop expectations for entities of the same type? For example, are counties such as Garfield, Adams and Lincoln expected to achieve similar results to King County once performance information is available to the Legislature and public? • There is no expectation that entities follow a blanket standard of P erformance. Establishing performance measures, or deciding not to, is the responsibility of each local government. A necessary step in each performance audit is evaluating an entity's performance measures. In some instances, we may recommend additional measures and audit to those measures. 7. What criteria do performance audits follow? Performance auditors have a responsibility to use criteria that are reasonable, attainable and relevant to the objectives of the performance audit. The following are examples of possible criteria • The purpose or goals prescribed by law or regulation or set by officials of the audited entity • Policies and procedures established by officials of the audited entity • Technically developed standards or norms • Expert opinions • Prior periods' performance • Performance of similar entities • Performance in the private sector • Best practices of leading public and private organizations 8. What information do you look at? Performance audits encompass a variety of objectives, including assessing program effectiveness and results, economy and efficiency and internal controls. Performance audits may entail a broad or narrow scope of work. Audits of program effectiveness and results typically measure the extent to which a program is achieving its goals and objectives. Economy and efficiency audits look at whether an entity is acquiring, protecting and using its resources in the most productive manner to achieve program objectives. Examples of these audit objectives include assessing: • The relative cost effectiveness of program performance. • Whether the program produced intended results or produced effects that were not intended by the program's objectives. • The validity and reliability of performance measures concerning program effectiveness and results, or economy and efficiency. • The relative ability of alternative approaches to yield better program • performance or eliminate factors that inhibit program effectiveness. • Performance data, measures and self- assessment systems. Also, 1 -900 requires performance audits consider the following nine elements: 1. Identification of cost savings. 2. Identification of services that can be reduced or eliminated. 3. Identification of programs or services that can be transferred to the private sector. 4. Analysis of gaps or overlaps in programs or services and 0 recommendations to correct them. 5. Feasibility of pooling the entity's information technology systems. 6. Analysis of the roles and functions of the entity and recommendations to change or eliminate roles or functions. 7. Recommendations for statutory or regulatory changes that may be necessary for the entity to properly carry out its functions. 8. Analysis of the entity's performance data, performance measures and self - assessment systems. 9. Identification of best practices. 9. What can local governments do to make the performance audit smoother? The Governor's Office hired consultant Sterling Associates to prepare state agencies for performance audits. Sterling Associates developed the following tips, which also apply to local government entities: • Welcome the audit o Set a constructive tone internally and with auditor o Use the audit to look critically at the program • Educate the auditor o Program mission, goals, objectives and accomplishments o Constraints and obstacles o Efforts to correct previously noted problems • Work with the auditor • o Selecting and setting the criteria o Interpreting evidence o Diagnosing problems • Be an open book o Set a tone of openness and transparency o Assist the auditor with data collection o Provide requested evidence o Make auditors aware of problems — don't make the auditors "find" them • Make the auditor part of the solution o Enable the auditor to become your consultant o Listen to and learn from the auditor o Ask for best practices and proven solutions 10. How are audit results distributed? Performance audit reports are given to the audited entity, the elected official if applicable, and the appropriate legislative bodies. Reports are posted to the State Auditor's Web site and notification of the report's publication is sent via the performance audit listserv. The link to the listsery is available on the State Auditor's Web site. S • • 11. What happens after the performance audit report is released? Initiative 900 requires several steps following the publication of a performance audit report: • The appropriate legislative body must hold at least one public hearing within 30 days of the report's issue to consider the findings of the audit and to receive comments from the public. • The audited entity is responsible for follow -up and corrective action on all recommendations. • For entities under the authority of an elected official, that official may require progress reports from the audited entity until resolution has occurred. • The appropriate legislative body will issue a report by July 1 each year detailing the status of the legislative follow -up of the State Auditor's recommendations. These reports will include justification for recommendations not followed and details of other corrective action. • The State Auditor may conduct follow -up performance audits whenever it is deemed necessary or appropriate. 12. Can we request a performance audit? Any local government can retain the services of a certified public accounting firm for performance audits. Requests can also be made to the State Auditor's Office. We will consider these requests as we develop our ® d local government performance audit plan. 13. Who should I contact for more information? Linda Long, Director of Performance Audit, (360) 902 -0367 Chuck Pfeil, Director of Local Government Audits, (360) 902 -0366 Chris Cortines, Local Government Performance Audit Coordinator, (360) 725 -5570 Kara Klotz, Communications Consultant, (360) 725 -5569 • • Chapter 1 Use and Application of GAGAS • Introduction 1.01 Auditing is essential to government accountability to the public. Audits and attestation engagements provide an independent, objective, nonpartisan assessment of the stewardship, performance, or cost of government policies, programs, or operations, depending upon the type and scope of the audit. 1.02 The concept of accountability for use of public resources and government authority is key to our nation's governing processes. Government officials entrusted with public resources'are responsible for carrying out public functions legally, effectively, efficiently, economically, ethically, and equitably.' • Government managers are responsible for providing ' reliable, useful, and timely information for accountability of govemment programs and their operations. (See appendix I paragraph A1.08 for additional information on management's responsibility.) Legislators, government officials, and the public need to know whether (1) government manages public resources and uses its authority properly and in compliance with laws and regulations; (2) government programs are achieving their objectives and desired outcomes; (3) government services are provided effectively, efficiently, economically, ethically, and equitably; and (4) government managers are held accountable for their use of public resources. Purpose and 1.03 The professional standards and guidance contained Applicability of in this document, commonly referred to as generally GAGAS accepted government auditing standards (GAGAS), provide a framework for conducting high quality • 'The term "equity" in this context refers to the approaches used by a government, nonprofit, or other organizations that manage or carry out government programs to provide services to the public in a fair manner within the context of the statutory boundaries of the specific government programs. Page 5 GAO- 07 -731G Government Auditing Standards • 0 Chapter 1 Use and Application of GAGAS government audits and attestation engagements with competence, integrity, objectivity, and independence. These standards are for use by auditors of government entities and entities that receive government awards and audit organizations performing GAGAS audits and attestation engagements. GAGAS contain requirements and guidance dealing with ethics, independence, auditors' professional competence and judgment, quality control, the performance of field work, and reporting. Audits and attestation engagements performed under GAGAS provide information used for oversight, accountability, and improvements of government programs and operations. GAGAS contain requirements and guidance to assist auditors in objectively acquiring and evaluating sufficient, appropriate evidence and reporting the results. When auditors perform their work in this manner and comply with GAGAS in reporting the results, their work can lead to improved government management, better decision making and oversight, effective and efficient operations, and accountability for resources and results. 1.04 Laws, regulations, contracts, grant agreements, or policies frequently require audits in accordance with GAGAS. Many auditors and audit organizations also voluntarily choose to perform their work in accordance with GAGAS. The requirements and guidance in this document apply to audits and attestation engagements of government entities, programs, activities, and functions, and of government assistance administered by contractors, nonprofit entities, and other • 2 The term "auditor" throughout this document includes individuals performing work wider GAGAS (including audits and attestation engagements) and, therefore, individuals who may have the titles auditor, analyst, evaluator, inspector, or other similar titles. "The term "audit organization" is used throughout the standards to refer to government audit organizations as well as public accounting firms that perform audits using GAGAS. Page 6 GAO- 07 -731G Government Auditing Standards Chapter 1 Use and Application of GAGAS with the IAASB standards and the related statements on International Statements on Auditing (ISA). 1.16 For performance audits, auditors may use other professional standards in conjunction with GAGAS, such as the following: a. International Standards for the Professional Practice of Internal Auditing, The Institute of Internal Auditors, Inc.; b. Guiding Principles for Evaluators, American Evaluation Association; c. The Program Evaluation Standards, Joint • Committee on Standards for Education Evaluation; and d. Standards for Educational and Psychological Testing, American Psychological Association. Types of GAGAS 1.17 This section describes the types of audits and Audits and attestation engagements that audit organizations may Attestation perform under GAGAS. This description is not intended Engagements to limit or require the types of audits or attestation engagements that may be performed under GAGAS. 1.18 All audits and attestation engagements begin with objectives, and those objectives determine the type of audit to be performed and the applicable standards to be followed. The types of audits that are covered by GAGAS, as defined by their objectives, are classified in this document as financial audits, attestation engagements, and performance audits. 1.19 In some audits and attestation engagements, the standards applicable to the specific audit objective will be apparent. For example, if the audit objective is to express an opinion on financial statements, the • Page 12 GAO- 07 -731G Government Auditing Standards • 0 Chapter 1 Use and Application of GAGAS nongovernmental entities when the use of GAGAS is required or is voluntarily followed. Use of Terminology 1.05 GAGAS contain professional requirements together to Define with related guidance in the form of explanatory Professional material.' Auditors have a responsibility to consider the Requirements in entire text of GAGAS in carrying out their work and in GAGAS understanding and applying the professional requirements in GAGAS. 1.06 Not every paragraph of GAGAS carries a professional requirement that auditors and audit organizations are expected to fulfill. Rather, the professional requirements are identified through use of specific language. 1.07 GAGAS use two categories of professional requirements, identified by specific terms, to describe the degree of responsibility they impose on auditors and audit organizations, as follows: a. Unconditional requirements: Auditors and audit organizations are required to comply with an unconditional requirement in all cases in which the circumstances exist to which the unconditional • requirement applies. GAGAS use the words must or is required to specify an unconditional requirement. b. Presumptively mandatory requirements: Auditors and audit organizations are also required to comply with a presumptively mandatory requirement in all cases in which the circumstances exist to which the 'The terminology used in GAGAS to designate professional requirements and explanatory material is intended to be consistent with the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standard No. 102, Defining Professional Requirements in Statements on Auditing Standards. Page 7 GAO- 07 -731G Government Auditing Standards S Chapter 1 Use and Application of GAGAS presumptively mandatory requirement applies; however, in rare circumstances, auditors and audit organizations may depart from a presumptively mandatory requirement provided they document their justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the objectives of the presumptively mandatory requirement. GAGAS use the word should to specify a presumptively mandatory requirement. 1.08 Explanatory material is defined as the text within GAGAS (including appendix I) other than the requirements defined in paragraph 1.07. Explanatory material uses the words may, might, and could to describe explanatory information and is provided to 5 a. provide further explanation and guidance on the professional requirements or b. identify and describe other procedures or actions relating to auditors' or audit organizations' activities. 1.09 Explanatory material is intended to be descriptive • rather than required. This material is intended, for example, to explain the objective of a requirement where it would be useful to do so; explain why particular procedures may be considered or employed under certain circumstances; or provide additional information to consider in exercising professional judgment. 1.10 Explanatory material that identifies and describes other procedures or actions does not impose a professional requirement on the auditor or audit organization to perform the suggested procedures or actions. How and whether to carry out such procedures or actions depends on the exercise of professional judgment consistent with the objective of the standard. Page 8 GAO- 07 -731G Government Auditing Standards • 0 Chapter 1 Use and Application of GAGAS Stating Compliance 1.11 When auditors are required to follow GAGAS or are with GAGAS in the representing to others that they followed GAGAS, they Auditors' Report should follow all applicable GAGAS requirements and should refer to compliance with GAGAS in the auditors' report as set forth in paragraphs 1.12 and 1.13. 1.12 Auditors should include one of the following types of GAGAS compliance statements in reports on GAGAS audits and attestation engagements, as appropriate. a. Unmodified GAGAS compliance statement: Stating that the auditor performed the audit or attestation engagement in accordance with GAGAS. Auditors should include an unmodified GAGAS compliance statement in the audit report when they have (1) followed all applicable unconditional and presumptively mandatory GAGAS requirements, or (2) have followed all unconditional requirements and documented justification for any departures from applicable presumptively mandatory requirements, and have achieved the objectives of those requirements through other means. b. Modified GAGAS compliance statement: Stating either that (1) the auditor performed the audit or attestation engagement in accordance with GAGAS, except for specific applicable requirements that were not followed, or (2) because of the significance of the departure(s) from the requirements, the auditor was unable to and did not perform the audit or attestation engagement in accordance with GAGAS. Situations when auditors use modified compliance statements include scope limitations, such as restrictions on access to records, government officials, or other individuals 'For financial audits and attestation engagements, AICPA reporting standards provide additional guidance when some or all of the standards are not followed. Page 9 GAO- 07 -731G Government Auditing Standards Chapter 1 Use and Application of GAGAS needed to conduct the audit. When auditors use a modified GAGAS statement, they should disclose in the report the applicable requirement(s) not followed, the reasons for not following the requirement(s), and how not following the requirements affected, or could have affected, the audit and the assurance provided. 1.13 When auditors do not comply with any applicable requirements, they should (1) assess the significance of the noncompliance to the audit objectives, (2) document the assessment, along with their reasons for not following the requirement, and (3) determine the type of GAGAS compliance statement. The auditors' determination will depend on the significance of the requirements not followed in relation to the audit objectives. • Relationship 1.14 Auditors may use GAGAS in conjunction with between GAGAS . professional standards issued by other authoritative and Other bodies. Auditors may also cite the use of other standards Professional in their audit reports, as appropriate. If the auditor is Standards citing compliance with GAGAS and inconsistencies exist between GAGAS and other standards cited, the auditor should use GAGAS as the prevailing standard for • conducting the audit; and reporting the results. 1.15 The relationship between GAGAS and other professional standards for financial audits and • attestation engagements is as follows: a. The American Institute of Certified Public • Accountants (AICPA) has established professional • standards that apply to financial audits and attestation & See footnote 35 for applicability of peer review and quality assurance requirements in this assessment. Page 10 GAO- 07 -731G Government Auditing Standards Chapter 1 Use and Application of GAGAS • engagements for nonissuers performed by certified public accountants (CPA). For financial audits, GAGAS incorporate the AICPA field work and reporting standards and the related Statements on Auditing Standards (SAS) unless specifically excluded or modified by GAGAS. For attestation engagements, GAGAS incorporate the AICPA general standard on criteria, and the field work and reporting standards and the related Statements on Standards for Attestation Engagements (SSAE) unless specifically excluded or modified by GAGAS. GAGAS describe ethical principles, and establish independence and other general • standards, and additional field work and reporting standards beyond those provided by the AICPA for performing financial audits and attestation engagements. • b. The Public Company Accounting Oversight Board (PCAOB) has established professional standards that apply to fmancial audits and attestation engagements for issuers. Auditors may use GAGAS in conjunction with the PCAOB standards. c. The International Auditing and Assurance Standards Board (IAASB) has established professional standards that apply to financial audits and attestation engagements. Auditors may use GAGAS in conjunction 'Under the Sarbanes -Oxley Act of 2002 (Public Law 107 -204), audits of issuers (generally, publicly traded companies with a reporting obligation under the Securities Exchange Act of 1934) are subject to rules and standards established by the Public Company Accounting Oversight Board. The term "nonissuer" refers to any entity other than an issuer under the Sarbanes -Oxley Act of 2002, such as privately held companies, nonprofit entities, and government entities. "Because GAGAS incorporate the field work and reporting standards of the AICPA for financial audits performed in which U.S. auditing standards are to be followed, auditors are not required to cite compliance with the AICPA standards when citing compliance with GAGAS, although auditors may cite both sets of standards. Page 11 GAO- 07 -731G Government Auditing Standards (110 • Chapter 1 Use and Application of GAGAS with the IAASB standards and the related statements on International Statements on Auditing (ISA). 1.16 For performance audits, auditors may use other professional standards in conjunction with GAGAS, such as the following: a. International Standards for the Professional Practice of Internal Auditing, The Institute of Internal Auditors, Inc.; b. Guiding Principles for Evaluators, American Evaluation Association; c. The Program Evaluation Standards, Joint S Committee on Standards for Education Evaluation; and d. Standards for Educational and Psychological Testing, American Psychological Association. Types of GAGAS 1.17 This section describes the.types of audits and Audits and attestation engagements that audit organizations may Attestation perform under GAGAS. This description is not intended Engagements to limit or require the types of audits or attestation engagements that may be performed under GAGAS. 1.18 All audits and attestation engagements begin with objectives, and those objectives determine the type of audit to be performed and the applicable standards to be followed. The types of audits that are covered by GAGAS, as defined by their objectives, are classified in this document as financial audits, attestation engagements, and performance audits. 1.19 In some audits and attestation engagements, the standards applicable to the specific audit objective will be apparent. For example, if the audit objective is to express an opinion on financial statements,. the Page 12 GAO- 07 -731G Government Auditing Standards 0 Chapter 1 Use and Application of GAGAS standards for financial audits apply. However, some engagements may have multiple or overlapping objectives. For example, if the objectives are to determine the reliability of performance measures, this work can be done in accordance with either the standards for attestation engagements or for performance audits. In cases in which there is a choice between applicable standards, auditors should evaluate users' needs and the auditors' knowledge, skills, and experience in deciding which standards to follow. 1.20 GAGAS requirements apply to the types of audit and attestation engagements that may be performed under GAGAS as follows: a. Financial audits: chapters 1 through 5 apply. b. Attestation engagements: chapters 1 through 3 and 6 apply. c. Performance audits: chapters 1 through 3 and 7 and 8 apply. 1.21 Appendix I includes supplemental guidance for auditors and the audited entities to assist in the implementation of GAGAS. Appendix I does not establish auditor requirements but instead is intended to facilitate auditor implementation of the standards contained in chapters 1 through 8. Financial Audits 1.22 Financial audits provide an independent assessment of and reasonable assurance about whether an entity's reported financial condition, results, and use of resources are presented fairly in accordance with recognized criteria. Reporting on financial audits performed in accordance with GAGAS also includes reports on internal control, compliance with laws and regulations, and provisions of contracts and grant Page 13 GAO- 07 -731G Government Auditing Standards • • 4110 • • Chapter 1 Use and Application of GAGAS agreements as they relate to financial transactions, systems, and processes. Financial audits performed . under GAGAS include fmancial statement audits and other related financial audits: a. Financial statement audits: The primary purpose of a financial statement audit is to provide reasonable assurance through an opinion (or disclaim an opinion) about whether an entity's financial statements are • presented fairly in all material respects in conformity with generally accepted accounting principles (GAAP), or with a comprehensive basis of accounting other than GAAP. b. Other types of financial audits: Other types of financial audits under GAGAS provide for different levels of assurance and entail various scopes of work, including: (1) providing special reports,_such as for specified elements, accounts, or items of a financial statement; 11) (2) reviewing interim financial information;" (3) issuing letters for underwriters and certain other requesting parties; (4) reporting on the controls over • 9 The three U.S. -based authoritative bodies for establishing accounting principles and financial reporting standards are the Federal Accounting Standards Advisory Board (federal government), the • Governmental Accounting Standards Board (state and local governments), and the Financial Accounting Standards Board (nongovernmental entities). 10 Special reports are auditors' reports issued in connection with the following: (1) financial statements that are prepared in conformity with a comprehensive basis of accounting other than generally accepted accounting principles; (2) specified elements, accounts, or items of a financial statement; (3) compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements; (4) financial presentations to comply with contractual agreements or regulatory requirements; or (5) financial information presented in prescribed forms or schedules that require a prescribed form of auditors' report. (See AU Section 623, Special Reports.) "See AU Section 722, Interim Financial Information. 10 Page 14 GAO- 07 -731G Government Auditing Standards 0 Chapter 1 Use and Application of GAGAS processing of transactions by service organizations;`' and (5) auditing compliance with regulations relating to federal award expenditures and other governmental financial assistance in conjunction with or as a by- product of,a financial statement audit. Attestation 1.23 Attestation engagements can cover a broad range Engagements of financial or nonfinancial objectives and may provide different levels of assurance about the subject matter or assertion depending on the users' needs. Attestation engagements result in an examination, a review, or an agreed -upon procedures report on a subject matter or on an assertion about a subject matter that is the responsibility of another party. The three types of attestation engagements are: a. Examination: Consists of obtaining sufficient, appropriate evidence to express an opinion on whether the subject matter is based on (or in conformity with) the criteria in all material respects or the assertion is presented (or fairly stated), in all material respects, based on the criteria. b. Review: Consists of sufficient testing to express a conclusion about whether any information came to the auditors' attention on the basis of the work performed that indicates the subject matter is not based on (or not in conformity with) the criteria or the assertion is not • presented (or not fairly stated) in all material respects based on the criteria. As stated in the AICPA SSAE, auditors should not perform review -level work for reporting on internal control or compliance with laws and regulations. . 12 A service organization is the entity or a segment of an entity that provides services to a user organization that are part of the user organization's information system. A user organization is an entity that has engaged a service organization. (See Ali Section 324, Service Organizations.) Page 15 GAO- 07 -731G Government Auditing Standards (10 Chapter 1 Use and Application of GAGAS c. Agreed -Upon Procedures: Consists of specific procedures performed on a subject matter. 1.24 The subject matter of an attestation engagement may take many forms. Possible subjects of attestation engagements include reporting on a. prospective financial or performance information; b. management's discussion and analysis (MD&A) presentation; c. an entity's internal control over financial reporting; d. the effectiveness of an entity's internal control over compliance with specified requirements, such as those governing the bidding for, accounting for, and reporting on grants and contracts; e. an entity's compliance with requirements of specified laws, regulations, policies, contracts, or grants; f. the accuracy and reliability of reported performance measures; g. incurred final contract costs are supported with required evidence and in compliance with the contract terms; h. the allowability and reasonableness of proposed contract amounts that are based on detailed costs; i. the quantity, condition, or valuation of inventory or assets; and j. specific procedures performed on a subject matter (agreed -upon procedures). Page 16 GAO- 07 -731G Government Auditing Standards • Chapter 1 Use and Application of GAGAS Performance Audits 1.25 Performance audits are defined as engagements that provide assurance or conclusions based on an evaluation of sufficient, appropriate evidence against stated criteria, such as specific requirements, measures, or defined business practices. Performance audits provide objective analysis so that management and those charged with governance and oversight can use the information to improve program' performance and operations, reduce costs, facilitate decision making by parties with responsibility to oversee or initiate corrective action, and contribute to public accountability. Reporting information without following GAGAS is not a performance audit but a nonaudit service provided by an audit organization. 1.26 Performance audits that comply with GAGAS 110 provide reasonable assurance that the auditors have obtained sufficient, appropriate evidence to support the conclusions reached. Thus, the sufficiency and appropriateness of evidence needed and tests of evidence will vary based on the audit objectives and conclusions. 1.27 A performance audit is a dynamic process that includes consideration of the applicable standards throughout the course of the audit. An ongoing assessment of the objectives, audit risk, audit procedures, and evidence during the course of the audit facilitates the auditors' determination of what to report and the proper context for the audit conclusions, including discussion about the sufficiency and appropriateness of evidence being used as a basis for the audit conclusions. Performance audit conclusions logically flow from all of these elements and provide an assessment of the audit findings and their implications. ' The term "program" is used in this document to include government entities, organizations, programs, activities, and functions. • Page 17 GAO- 07 -731G Government Auditing Standards • Chapter 1 Use and Application of GAGAS 1.28 Performance audit objectives may vary widely and include assessments of program effectiveness, economy, and efficiency; internal control; compliance; and prospective analyses. These overall objectives are not mutually exclusive. Thus, a performance audit may have more than one overall objective. For example, a performance audit with an initial objective of program effectiveness may also involve an underlying objective of evaluating internal controls to determine the reasons for a program's lack of effectiveness or how effectiveness can be improved. 1.29 Program effectiveness and results audit objectives are frequently interrelated with economy and efficiency objectives. Audit objectives that focus on program effectiveness and results typically measure the extent to which a program is achieving its goals and objectives. Audit objectives that focus on economy and efficiency address the costs and resources used to achieve program results. Examples of audit objectives in these categories include a. assessing the extent to which legislative, regulatory, or organizational goals and objectives are being achieved; b. assessing the relative ability of alternative approaches to yield better program performance or eliminate factors that inhibit program effectiveness; "In the context of performance audits, the term "internal control" in this document is synonymous with the term management control and covers all aspects of an entity's operations (programmatic, financial, and compliance). Page 18 GAO- 07 -731G Government Auditing Standards