Governmental units have audits of their financial statements for a variety of reasons which could include local or state laws, grant requirements, debt covenants and the governing body fulfilling its oversight responsibilities.
Financial audits provide an independent assessment of whether reported financial information such as financial condition, results and uses of resources is presented fairly in accordance with an applicable financial reporting framework such as Generally Accepted Accounting Principles (GAAP) or a regulatory framework. Ultimately, the primary purpose of a financial statement audit is for the auditor to provide an opinion or disclaimer of opinion as to whether the financials conform to the reporting framework in all material respects.
Auditors of governmental entities are required to perform their engagements in accordance with the American Institute of Certified Public Accountants’ generally accepted auditing standards. In addition, these audits are also conducted in accordance with Government Auditing Standards. These standards outline the roles of responsibilities of management and the auditor.
In addition to conducting the audit in accordance with applicable standards, the auditor is responsible for issuing a written report upon completion of the audit and communicating internal control related matters identified during the audit with those charged with governance. While auditors express an opinion on the financial statements, no such opinion is provided related to internal controls.
Management also has significant responsibilities in the audit process including the following:
- Determining the appropriate financial reporting framework while preparing and fairly presenting the financial statements in accordance with that framework.
- Designing, implementing and maintaining effective internal controls for the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
- Identifying and ensuring compliance with applicable laws and regulations.
- Designing and implementing programs and controls to prevent and detect fraud.
- Informing the auditor about all known, alleged or suspected fraud affecting the entity.
- Providing the auditor with access to all information that management is aware of that is relevant to preparing and fairly presenting financial statements.
- Providing additional information that the auditor may request of management for audit purposes.
- Providing unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.
- Providing the auditor with a letter confirming certain representations made during the audit.
- Adjusting the financial statements to correct material misstatements and providing the auditor with a representation that the effects of any uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.
A governing body is responsible for oversight and will often create an audit committee to ensure the following:
- Integrity of the government’s financial statements.
- Internal control including internal control over operations, compliance with laws and regulations, and financial reporting.
- Internal and independent auditor’s qualifications, independence and performance; the organization’s risk management and overall governance process; and
- The government’s ethics and compliance program, which includes legal and regulatory requirements.
A government’s audit committee provides governance and accountability but must address the enhanced transparency expectations of the public which it serves. Developing an entity specific charter as well as creating roles and responsibilities of the audit committee is generally the first step in achieving a successful audit committee.
The audit committee is not responsible for planning or conducting audits; this is the independent auditor’s responsibility. Neither is the audit committee responsible for (1) preparing and fairly presenting the government entity’s financial statements in accordance with generally accepted accounting principles, (2) maintaining effective internal control over financial reporting, and (3) ensuring the government entity’s compliance with applicable laws, regulations and other requirements.
These responsibilities are management’s, and the independent auditor and the governing board or its audit committee have independent and complementary oversight responsibilities for determining that the related objectives of management’s responsibilities and the audit process are achieved.