(a) Preparation of audit report. The auditor should observe the following requirements in the preparation of the audit report:

• (1) clearly identify each financial statement;
• (2) clearly identify time period(s) audited;
• (3) disclose any unaudited time period which report does not cover;
• (4) clearly identify each program included in audit report;
• (5) identify any limitation on scope of examination;
• (6) identify any statutory or administrative provisions adversely affecting accounting principles in use by agency, program or activity;
• (7) if a qualification is required, because of a lack of consistency that is material to the financial report, prepare a statement describing the reason for qualification, effect upon financial reports, and an opinion on acceptability of change;
• (8) note whether audit work was performed by more than one principal auditor. If noted in scope paragraph, also note in opinion paragraph. State division of responsibility and magnitude of portion of financial statements examined by each auditor;
• (9) state whether financial statements are presented in accordance with generally accepted accounting principles;
• (10) disclose any departures from generally accepted accounting principles in qualified opinion;
• (11) include separate explanatory paragraphs disclosing each substantive reason for withholding an unqualified opinion;
• (12) explain whether each reason for withholding an unqualified opinion results in a qualification, adverse or disclaimer of an opinion;
• (13) under separate report, describe any fraud, abuse, or illegal acts and the possible effect upon entity's financial statements;
• (14) include in audit report:
  • (A) a combining balance sheet;
  • (B) a combining statement of revenues, expenditures and changes in fund balances. (Funds must be separately identified by function, source or contract in basic financial statements or in a supplementary schedule.);
  • (C) a Statement of Cash Flows;
  • (D) a schedule of findings and questioned costs;
  • (E) a schedule of federal awards with notes. Placed in Supplemental Information section of report;
  • (F) a schedule of state awards placed in the Supplemental Information section of report;
  • (G) report(s) on internal controls;
  • (H) report(s) on compliance;
  • (I) Supplementary Schedule of Revenues and Expenditures - Budget and Actual - (for cost reimbursement contracts with preapproved budgets);
  • (J) Supplementary Schedule - Supported Living Overpayments (DDSD supported living contractors only); and
  • (K) date and signature of the auditor.

(b) Notes on financial statements. The auditor should comment in the notes to the financial statements on the following:

• (1) entity as being defined in such a manner that all known federal and state awards will be included in audit;
• (2) accounting policies including those that might have an adverse effect upon federal and state awards;
• (3) contingent liabilities payable to federal and state governments;
• (4) any material violation of finance related legal and contractual provisions that affect or could affect federal and state awards;
• (5) subsequent events that affected or could affect federal and state awards;
• (6) identity of employee groups covered by entity's pension plan any pension obligations;
• (7) any changes in amortization of past and prior service costs, a change in treatment of actuarial gains and losses, a change in actuarial method or assumptions;
• (8) any new pronouncements by authoritative bodies that have been implemented;

(c) Internal controls. This Section discusses evaluation of internal controls (accounting and administrative), and auditing considerations and procedures that should be considered by auditors in conducting audits of nonprofit entities.

• (1) The extent of the auditor's study and evaluation of internal control (accounting and administrative) systems used in administering major federal and state financial assistance programs should be the type of study and evaluation the auditor would perform in accordance with AICPA requirements (i.e., Audits of State and Local Governmental Units (50 percent rule), Statement on Auditing Standards (SAS) No. 55, Consideration of the Internal Control Structure in a Financial Statement Audit, etc.). (OMB) Circular A-110 states that recipient financial management systems should provide for:
  • (A) an orderly set of records supported by source documentation;
  • (B) current, accurate and complete disclosure of financial results of each Federal and State sponsored project or program;
  • (C) adequate identification of source and application of funds for federal and state sponsored activity;
  • (D) effective control and accountability for funds, property and other assets;
  • (E) minimizing time elapsing between receipt and expenditure of funds for advance payments;
  • (F) determining reasonableness, allocability and allowability of costs in accordance with provisions of applicable cost principles and terms and agreements of awards; and
  • (G) assuring subrecipients also meet requirements of this Part.
• (2) Auditors are expected to perform sufficient tests to form an opinion as to adequacy of described financial management system. The following five critical elements, having significant impact on federal and state funding, must be addressed to meet objectives discussed in this Part:
  • (A) management information system (internal control);
  • (B) accounting system;
  • (C) cash management;
  • (D) reporting systems; and
  • (E) property management.
• (3) Auditors should exercise professional judgment to determine any additional areas that need to be addressed to accomplish overall audit objectives set forth in this Part. It is recognized that some systems affecting federal and state activities, at major nonprofit organizations, are complex and require extensive effort to perform studies and evaluation of them. In addition, auditors should:
  • (A) reference all financial statements presented;
  • (B) comply with GAO's Government Auditing Standards, AICPA's Audits of State and Local Governmental Units and OMB Circulars A-133, Audits of Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations or OMB Circular A-128, Audits of State and Local Governments;
  • (C) clearly describe examination and responsibilities on internal controls;
  • (D) identify significant internal accounting controls and those controls designed to provide reasonable assurance that federal and state programs are being managed in compliance with laws and regulations;
  • (E) identify controls not evaluated, as well as those evaluated;
  • (F) identify any reportable conditions and whether they constitute material weaknesses in internal controls;
  • (G) include recommendations for corrective action to improve problem areas noted in report;
  • (H) include any recommendations for improvements in internal control process of entity's operation; and
  • (I) date and sign audit report.

(d) Compliance. Compliance tests must be designed to meet federal testing levels or for state funds, to establish an opinion an compliance with laws and regulations per Government Auditing Standards.

• (1) The auditor should:
  • (A) use federal government's definition of major programs, as explained in OMB Circular A-128, for federal programs, or OMB Circular A-133 for Non-Profit Organizations;
  • (B) use state government's definition of programs, as explained in state contracts;
  • (C) identify compliance by using:
    • (i) OMB Compliance Supplement for Single Audits of State and Local Governments or Compliance Supplement for Audits of Higher Learning and Other Non-profit Institutions for federal compliance; and
    • (ii) Contract provisions and general assurances and DDSD Supported Living Audit Guidelines for Supported Living contractors for state compliance;
  • (D) test all major federal and state programs;
  • (E) extend testing, if necessary, to include a sample of non-major federal and state programs to insure that programs representing at least fifty (50) percent of federal expenditures and fifty (50) percent of state expenditures have been tested;
  • (F) reference all financial statements presented;
  • (G) state whether examination was performed in compliance with GAO's Government Auditing Standards, AICPA's Audits of State and Local Governmental Units or OMB Circular Letters A-133, or A-128;
  • (H) clearly describe examination method used and degree of responsibility being taken, should more than one auditing entity be involved;
  • (I) include a statement of positive assurance with laws and regulations (including compliance with laws and regulations pertaining to reimbursements for those items tested);
  • (J) include an expression of negative assurance for those items not tested;
  • (K) include an opinion on compliance with specific requirements;
  • (L) identify questioned costs;
  • (M) include recommendations for corrective action to improve problem areas noted in report on compliance;
  • (N) identify status of prior year findings; and
  • (O) date and sign audit report.
• (2) The auditor is responsible for having an exit conference with representatives of audited entity and cognizant agency. Copies of draft single audit report should be available to both parties one week prior to conference for review.