The Office of Public Accountability plays a critical
role in the financial affairs of the Government of Guam. Indeed,
Auditing is essential to the credibility of accounting and financial
reporting by state and local governments. However, not everyone
is familiar with all the concepts, terminologies, and principles
prevalent in the auditing profession. This glossary and list of
frequently asked questions is designed to help the average citizen
better understand the auditing profession as it applies to government
entities.
Click here for a list of Glossary Terms
What is an audit?
What are the different types of audits?
Who performs audits?
How do auditors obtain the information they need?
What is materiality?
What are internal controls?
What is a reportable condition?
What is a material weakness?
What are an auditor's reports on internal controls?
What are auditor's reports on compliance?
What are findings?
What is performance auditing?
What is an audit?
An audit can be defined as the systematic examination
of an organization's financial accounts, assertions, or actions
in order to evaluate conformity with some norm or predetermined
standard.
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What are the different types of audits?
A. Financial Audits include financial statement and
financial related audits.
1. Financial statement audits provide reasonable assurance
about whether the financial statements of an audited entity present
fairly the financial position, results of operations, and cash flows
in conformity with generally accepted accounting principles.
2. Financial related audits include determining whether
(a) financial information is presented in accordance with established
or stated criteria, (b) the entity has adhered to specific financial
compliance requirements, or (c) the entity's internal control structure
over financial reporting and/or safeguarding assets is suitably
designed and implemented to achieve control objectives.
B. Performance audits include economy and efficiency
and program audits:
1. Economy and efficiency audits include determining
whether (a) whether the agency is acquiring, protecting, and using
its resources (such as personnel, property, and space) economically
and efficiently, (b) the causes of inefficiencies or uneconomical
practices, and (c) whether the entity has complied with laws and
regulations concerning matters of economy and efficiency.
2. Program audits include (a) determining the extent
to which the desired results of benefits established by the legislature
or other authorizing body are being achieved, (b) the effectiveness
of organizations, programs, activities, or functions, and (c) whether
the agency has complied with laws and regulations applicable to
the program.
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Who performs audits?
External auditors are independent of the entities they
audit. They are typically CPA firms or organizationally independent
auditors e.g. Office of Public Accountability. External auditors are
used to perform the annual audit of a government's financial statements.
Internal auditors are employed by the entities they
audit and report to management. Although they are classified as
internal, they are still expected to maintain a degree of independence
pursuant to fulfilling their responsibilities as auditors.
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How do auditors obtain the information they need?
Auditors inspect, observe, confirm, and analyze evidence
to determine whether financial statements are fairly presented.
Evidence can be documentary, testimonial, physical, or analytical
and must be relevant, competent, and sufficient.
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What is materiality?
Materiality refers to the potential effect that an
error could have on a reader's impression of financial statements.
An error can be considered material if it could result in the reader's
changed impression. An error can be material in quantity or quality.
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What are internal controls?
Internal controls are the policies and procedures established
by management to ensure integrity and comprehensiveness of information
gathered by the accounting system for use in internal and external
financial reporting.
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What is a reportable condition?
A reportable condition can be defined as significant
deficiencies in internal controls over the fair presentation of
financial reporting.
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What is a material weakness?
A material weakness is a condition that could potentially
result in the material misstatement of the financial statements.
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What are an auditor's reports on internal controls?
A report on internal controls is a report that briefly
lists the controls that were tested during the financial statement
audit as well as any reportable conditions discovered as a result
of that test. If any of the reportable conditions are material weaknesses,
the auditor is required to identify them.
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What are auditor's reports on compliance?
In a report on compliance, the auditor indicates whether
the entity being audited is in compliance with applicable laws and
regulations that could have a material effect on the fair presentation
of financial statements. The auditor makes two limited and specific
observations based on the procedures performed as part of the financial
statement audit. First, the auditor states that the transactions
tested were in compliance with applicable laws and regulations,
unless otherwise noted. Second, the auditor states that nothing
came to his attention that indicates that transactions not tested
were not in compliance with applicable laws and regulations.
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What are findings?
Audit findings are the format in which reportable conditions
(including material weaknesses) are presented. A traditional finding
is composed of four major elements:
Criteria: Basis for identifying that a condition is
an internal control weakness or instance of noncompliance.
Condition: The internal control weakness or instance
of noncompliance identified by the auditor.
Cause: Explanation of why the weakness or noncompliance
occurred.
Effect: The negative effect that resulted or could
result from the condition.
Recommendation: The auditor's assessment on how to
improve the condition.
Management Response: Management's viewpoint of the
findings.
Follow-Up: The auditor's review of management's implementation
of the recommendation.
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What is performance auditing?
Performance auditing is an assessment of whether management
is performing its duties economically and efficiently and whether
programs are achieving their intended purpose.
