LIST OF SUBSTANTIVE CHANGES AND ADDITIONS. PPC s Guide to HUD Audits. Twenty-first Edition (August 2014)

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1 Route To: j Partners j Managers j Staff j File Tax & Accounting P.O. Box 966 Fort Worth, TX Tel (817) (800) Fax (817) ppc.thomsonreuters.com LIST OF SUBSTANTIVE CHANGES AND ADDITIONS PPC s Guide to HUD Audits Twenty-first Edition (August 2014) General Update Features. The following are some of the features of the 2014 Edition of PPC s Guide to HUD Audits. Current Developments Affecting HUD Audits. Through HUD housing letters and changes in the electronic submission process, HUD continues to issue new guidance that affects your HUD audits and your clients reporting responsibilities. Your Guide helps you stay current with practical guidance and audit programs, checklists, letters, and report examples that are tailored to help you perform your HUD audits effectively and efficiently. Updated Guidance on Single Audits. If you perform Single Audits of HUD nonprofit entities, you know how complex the auditing requirements are and that they change every year. Your Guide provides up-to-date guidance and practice aids for performing and reporting on Single Audits of HUD entities, including changes in the 2014 Compliance Supplement and the Data Collection Form. We also keep you informed of big changes on the horizon for the Single Audit process. New Report Examples and Practice Aids. Your Guide includes new report examples that illustrate an adverse opinion on compliance and a new, optional, practice aid to provide an alternative way to document the performance of a walkthrough. The new practice aid, Walkthrough Documentation Memo, assists you in documenting a walkthrough in a memo format that can be used in place of the existing Walkthrough Documentation Table. Your Guide also includes a new letter that can be used to request a service auditor s report. Guidance for FHA-approved Title I and Title II Lenders. HUD implemented the new Lender Electronic Assessment Portal (LEAP) for lender recertification and electronic submission of the annual financial reporting package and issued an update of 7 of the HUD audit guide in May 2014 to reflect the changes. Your Guide discusses the new submission process and the latest developments in HUD requirements for FHA-approved lenders and mortgagees. Revision of the AICPA Ethics Code. The AICPA s new revised Code of Professional Conduct is effective for members on December 15, Your Guide continues to provide you with up-to-date coverage of certain AICPA ethics requirements and has been updated for the revised code. Updated COSO Framework. To help entities design and implement internal control, in May 2013 COSO issued its new Internal Control Integrated Framework (2013 Framework). The 2013 Framework builds on the previous version and clarifies a number of concepts to make it easier to use and apply. Your Guide, including the practice aids, has been revised for changes in the 2013 Framework. hudp14sub 1

2 Application Guidance for Audits of Group Financial Statements. The clarified auditing standards imposed significant new requirements for audits of group financial statements involving the use of component auditors. Your Guide includes new audit procedures for determining if those auditing standards are applicable and for applying them. Specialized Disclosure Checklists. The FASB has issued several new ASUs in the past year. Several new ASUs have been issued by the FASB in the past year. Your Guide provides separate disclosure checklists tailored for for-profit and nonprofit entities that have been updated for the recently-issued standards. Your Guide also includes a checklist for common HUD-specific disclosures and another disclosure checklist for the Schedule of Expenditures of Federal Awards (SEFA) used in Single Audits. 1 Overview 2 HUD Multifamily Housing Programs 1. Updated the footnote about the AICPA s plan to retain the AU-C identifier for the clarified auditing standards. 2. Streamlined the discussion of Government Auditing Standards 2011 Revision. 3. Added a footnote about HUD Housing Notice H , Change in Annual Financial Statement (AFS) Submission Requirements for Some Multifamily Housing Projects. 4. Updated for issuance of a revision of 7 of the HUD audit guide as Handbook REV-2, CHG 18 in May Paragraph Paragraph , Updated for new issuances of HUD handbooks. Exhibit Added a discussion of recent changes to Single Audit Paragraph requirements for nonprofit audits in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). 7. Expanded the discussion about the scope of the Guide , 107.4, Updated the list of items in PPC s Government Documents Library to include the Uniform Guidance. 1. Updated the HUD program descriptions with current funding data. 2. Updated the discussion about the HUD regulatory agreement for issuance of revisions to HUD Form Updated the discussion of the surplus cash calculation for changes to the HUD-prescribed chart of accounts in the Industry User Guide for the Financial Assessment System Multifamily Housing (the FASSUB User Guide). 4. Updated for issuance of HUD Handbook REV-1, CHG Updated forms for recent issuances from HUD and updated the note alerting auditors about the expiration of some HUD forms reproduced in the appendix. 6. Updated the definition of the glossary term, surplus cash. Appendix 1B Throughout the chapter Paragraph Appendix 2B Appendix 2D 2

3 3 Accounting Considerations and Financial Statement Presentation 4 Pre-engagement Considerations and Audit Planning 1. Expanded the discussion about consolidated submissions through FASSUB. 2. Clarified the discussion of other-than-temporary impairment of securities. 3. Added a footnote about ASU , Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps-Simplified Hedge Accounting Approach. 4. Added a paragraph about the general source of guidance for revenue recognition, including a footnote about the issuance of ASU , Revenue from Contracts with Customers. 5. Updated the discussion about amortization of goodwill for the issuance of ASU , Intangibles Goodwill and Other. 6. Added a footnote about issuance of a new standard HUD regulatory agreement. 7. Added a note about HUD s new standard regulatory agreement and the effect on the calculation of surplus cash. 8. Revised the discussion of the financial statements submitted through FASSUB for clarity Paragraph Paragraph Paragraph Exhibit Updated for revisions in the FASSUB User Guide Added a discussion about updates to the FASSUB Paragraph system. 1. Updated for issuance of the AICPA s revised Code of Professional Conduct , , , , , Updated for issuance of the new Uniform Guidance , Updated the discussion of other HUD documents that should be considered in pre-engagement and planning activities. 4. Updated the discussion of considerations for nonaudit services. 5. Added a discussion of professional judgment based on guidance from the GAS/A-133 AICPA Audit Guide. 6. Expanded the discussion of competency and continuing education. 7. Added a footnote about the instructions to the AICPA s supplemental peer review checklist for audits of HUD-assisted entities. Paragraph Paragraph , Paragraph

4 6 Concluding the Audit 8. Added a footnote about HUD Notice H , Added a discussion about the preconditions for an audit. Paragraph Added a discussion about considerations for updating Paragraph the understanding of the client. 11. Expanded the discussion of the nature of the entity to include consideration of the entity s structure and associated risks. 12. Added a discussion about the auditor s consideration of different aspects of internal control. 13. Added a discussion of the new COSO internal control framework released in Expanded the discussion of considering control objectives/principles. 15. Added a discussion of understanding the effect of IT on internal control. 16. Added a discussion of COSO principles that incorporate the control environment elements. 17. Revised the discussion of the risk assessment process for clarity. 18. Expanded the discussion of considerations when the client uses a service organization. 19. Expanded the discussion of evaluating projected misstatements from a sample to include management s involvement in identifying and correcting misstatements in the class of transactions. 20. Added a discussion of documentation deficiencies noted in recent AICPA peer reviews and in AICPA audit publications. 21. Revised the discussion about loss of client records or audit documentation to include guidance from AICPA technical practice aids. 22. Updated the discussion of component materiality to include guidance from an AICPA technical practice aid. Paragraph Paragraph Paragraph Paragraph Paragraph , Paragraph Paragraph Paragraph Revised the discussion of group audits for clarity Added a discussion of guidance for group audits provided in an AICPA technical practice aid , , Updated for issuance of the new Uniform Guidance. Paragraph Updated to include discussion of the ABA s preference for the format of the legal representation letter. 3. Added a footnote about common audit findings discussed in a recent AICPA audit risk alert. Paragraph Paragraph

5 7 Compliance Auditing 4. Updated the list of subsequent events review procedures to include the evaluation of evidence about estimates. 5. Added a footnote about the FASB s project to issue new accounting standards for disclosing going concern uncertainties. 6. Added a discussion about the requirements of the AICPA independence requirements related to the preparation of financial statements based on the AICPA s revised Code of Professional Conduct. 7. Added a discussion about Yellow Book requirements for documenting independence considerations. 8. Added a discussion of internal control considerations when the auditor provides financial statement preparation assistance. 9. Updated the discussion about the professional requirements when considering independence issues; also updated for issuance of the AICPA s revised Code of Professional Conduct. 1. Expanded the discussion about the changed reporting requirements in the 2013 revision of 2 of the HUD audit guide for considerations related to the fair housing and non-discrimination compliance requirement. Paragraph , Paragraph Paragraph , 707.4, Added a discussion of HUD Notice H , Added a discussion or a footnote about the new Uniform Guidance that affects Single Audits of nonprofit entities , , Auditor s Reports and Other Communications 4. Added a discussion of weaknesses in audit documentation found during quality control reviews. 5. Expanded the discussion about performing additional procedures when abuse is detected. 6. Updated for issuance of Change 4 to HUD Handbook REV Added a discussion or footnote about HUD Notice H Added a discussion or a footnote about the new Uniform Guidance that affects Single Audits of nonprofit entities. Paragraph Paragraph , Expanded the discussion about the effect of audit findings on the auditor s reports. 4. Expanded the discussion of modification of the auditor s report. Paragraph Paragraph

6 5. Added a discussion of circumstances that might result in a scope limitation in a HUD audit. 6. Added a discussion of circumstances that might result in a going concern uncertainty in a HUD audit. 7. Added a footnote to mention auditors may voluntarily choose to perform an audit in accordance with the Yellow Book. 8. Added a discussion about reporting solely in accordance with the Yellow Book. 9. Updated to include new report examples of an adverse opinion on compliance. 10. Updated for the new requirement in Single Audits for referencing audit findings. 11. Expanded the discussion of information about sampling and noncompliance. Paragraph Paragraph Paragraph Paragraph , , Exhibit 8-6, Exhibit 8-8, Exhibit 8-10 Paragraph Revised the exhibit for clarity. Exhibit 8-5, Exhibit 8-7, Exhibit Broadened the discussion about interim communication of possible deficiencies in internal control over compliance. 14. Added guidance about notifying agencies when a submission will be late. Paragraph Paragraph Added a discussion about automatic extensions. Paragraph Updated for changes in the data collection form Expanded the discussion about cost certification audits Added a note about when multiple locations are identified on a firm s letterhead and added other notes that cite the authoritative guidance for the contents and format of the report. 19. Modified the paragraph that describes the reason for the qualified opinion. 20. Revised the paragraph describing the going concern matter and added a note about the effect on reporting on supplementary information. 21. Added a note about how to modify the report in a Yellow Book-only engagement. 22. Added a new report example illustrating the auditor expressing an adverse opinion on compliance for a major program. Appendix 8A-1, Appendix 8E Appendix 8B-1 Appendix 8B-2 Appendix 8C-2, Appendix 8C-3 Appendix 8D-3, Appendix 8G-3 6

7 9 Compliance Audits of FHA-Approved Lenders 10 Low-income Housing Tax Credit Projects Practice Aid AUDIT PROGRAMS (HUD-AP) Audit Program for General Planning Procedures 1. Updated throughout for applicable changes in the revision of 7 of the HUD audit guide released in May 2014 as HUD Handbook REV-2, CHG Added a discussion about the May 2014 revision of 7 of the HUD audit guide. Throughout the chapter Paragraph Added a discussion of Mortgagee Letter Paragraph Updated the discussion about electronic submissions for changes to the requirements of HUD s Lender Electronic Assessment Portal (LEAP). 1. Added a discussion of temporary disaster relief guidance issued by the IRS in August Added a discussion about the characterization of bond issuance costs. 3. Updated to add a reference to IRS guidance about bond issuance costs. 4. Streamlined and clarified the paragraph in the auditor s report that discusses other matters. 1. Updated the notice about revisions to the HUD audit guide for current developments. 2. Added a new audit program step to consider whether the entity being audited includes financial information of more than one component and the requirements of AU-C 600 apply. 3. Added practical considerations about the new Uniform Guidance that affects Single Audits of nonprofit entities. 4. Added a practical consideration noting that the Guide has been updated for COSO s 2013 Framework. 5. Added practical considerations about extensions for filing deadlines granted by the Federal Audit Clearinghouse that affect Single Audits. 6. Expanded a practical consideration about the Yellow Book competency requirements. 7. Added a practical consideration about the issuance of SAS No. 128 noting that since the use of internal auditors in HUD audits is rare, this Guide does not discuss the requirements of the new auditing standard Paragraph Paragraph Paragraph Appendix 10A HUD-AP-1 HUD-AP-1 HUD-AP-1 HUD-AP-1 HUD-AP-1 HUD-AP-1 HUD-AP-1 7

8 Audit Program for General Auditing and Completion Procedures Audit Program for Cash Audit Program for Investments and Derivatives Audit Program for Prepaids, Deferred Charges, Intangibles, and Other Assets Audit Program for Accounts Payable, Accrued Liabilities, and Other Liabilities 8. Revised the audit program to provide separate audit program steps when all component auditors are members of the group engagement team and when not all component auditors are members of the group engagement. Revised the procedures for recent developments. 9. Added audit program steps for the Involvement of Another Office, Correspondent, or Affiliate. 10. Revised and expanded the audit program steps for Use of Service Organizations. 1. Revised the objectives to explicitly state that determining the auditor s report is appropriate in the circumstances should include any supplementary information. Updated the notice about revisions to the HUD audit guide for current developments. 2. Modified the steps for determining independence in accordance with Government Auditing Standards. 3. Added a practical consideration about the new Uniform Guidance that affects Single Audits of nonprofit entities. 4. Added a practical consideration about documentation deficiencies found in quality control reviews. 5. Revised and expanded the step with procedures when possible material abuse exists. 6. Expanded the practical consideration about the Yellow Book requirements for reporting on internal control. 7. Added a step to determine whether events occurring up to the date of the auditor s report provide audit evidence about accounting estimates. 8. Added practical considerations about the format for referencing audit findings. 9. Expanded the step for obtaining management representations. 10. Added a new step with audit procedures for testing interbank transfers. 11. Added subheadings and reordered some steps to distinguish audit procedures that relate only to for-profit entities from those that relate only to nonprofit entities. 12. Added new audit program steps for testing goodwill when the provisions of ASU , Accounting for Goodwill, have been adopted 13. Added new audit program steps for Joint and Several Liability Arrangements. HUD-AP-1, Other Audit Procedures HUD-AP-1, Other Audit Procedures HUD-AP-1, Other Audit Procedures HUD-AP-4, Extended Procedures HUD-AP-5 HUD-AP-6, Other Audit Procedures HUD-AP-9, Extended Procedures 8

9 Audit Program for Equity For-profit Audit Program Compliance Requirements for For-profit HUD Multifamily Housing Programs For-profit Audit Program Compliance Requirements for FHA-approved Lenders Nonprofit Audit Program Complia nce Requirements for Section 202 and Section 811 Programs Nonprofit Audit Program Compliance Requirements for Section 8 Project-based Cluster Programs Nonprofit Audit Program Federal Award Programs Not Included in the Compliance Supplement 14. Added a practical consideration noting that if management refuses to allow external confirmations, procedures to be performed are provided in HUD-AP Revised the step about additional procedures in response to the fraud risk assessment to include requesting a statement from the vendor. 16. Added and modified audit program steps related to tests of net assets and classification of net assets of nonprofit entities. 17. Modified the steps for testing rights and restrictions on equity accounts. 18. Modified the practical considerations to the steps for testing the residual receipts deposits and surplus cash computation in the Residual Receipts compliance area. 19. Updated the step for testing tenant security deposits for issuance of Handbook REV-1, CHG-4 in the Tenant Security Deposits compliance area. 20. Updated the instructions and the program steps for issuance of the May 2014 revision of 7 of the HUD audit guide. 21. Updated the instructions and the audit program for issuance of the 2014 OMB Circular A-133 Compliance Supplement, and updated the instructions with current information about the new Uniform Guidance. 22. Updated the instructions and the audit program for issuance of the 2014 OMB Circular A-133 Compliance Supplement, and updated the instructions with current information about the new Uniform Guidance. 23. Updated the instructions and the audit program for issuance of the 2014 OMB Circular A-133 Compliance Supplement, and updated the instructions with current information about the new Uniform Guidance. HUD-AP-9, Extended Procedures HUD-AP-9, Extended Procedures HUD-AP-12 HUD-AP-12, Other Audit Procedures HUD-AP-14 HUD-AP-14 HUD-AP-15 HUD-AP-16 HUD-AP-17 HUD-AP-18 9

10 Nonprofit Audit Program Schedul eofexpendituresof Federal Awards CHECKLISTS AND PRACTICE AIDS (HUD-CX) Application of Practice Aids to Engagements Engagement Acceptance and Continuance Form Nonattest Services Documentation Form Evaluating Independence Government Auditing Standards, 2011 Revision For-profit Entity Compliance Audit Determination and Planning Worksheet Nonprofit Single Audit and Major Program Determination Worksheet Nonprofit Low-risk Federal Program Determination Worksheet Nonprofit High-risk Federal Program Determination Worksheet Understanding the Entity and Identifying Risks 24. Updated the instructions and the audit program for issuance of the 2014 OMB Circular A-133 Compliance Supplement, updated the instructions with current information about the new Uniform Guidance, and revised and updated the audit program for changes in AICPA technical guidance. 1. Where applicable, updated the checklists to reflect requirements of the revised AICPA Code of Professional Conduct and to provide dual references to the previously-effective code. 2. Updated for changes made to the practice aids. 3. Added a practical consideration with items to consider during the acceptance or continuance process. 4. Added a practical consideration about PEEC guidance that considers financial statement preparation, cash-to-accrual conversions, and reconciliations to be nonattest services. 5. Added a discussion about reevaluating possible threats to independence when circumstances in the audit change. 6. Updated the instructions for issuance of HUD Notice H Updated the instructions and the form for issuance of the 2014 OMB Circular A-133 Compliance Supplement, updated the instructions with current information about the new Uniform Guidance, and provided information about filing extensions granted by the Federal Audit Clearinghouse 8. Updated the instructions and the form for issuance of the 2014 OMB Circular A-133 Compliance Supplement, and updated the instructions with current information about the new Uniform Guidance. 9. Updated the instructions and the form for issuance of the 2014 OMB Circular A-133 Compliance Supplement, and updated the instructions with current information about the new Uniform Guidance. 10. Added a practical consideration with current information about the new Uniform Guidance, expanded the item about prior year findings to include consideration of internal control weaknesses, and revised the conclusion on the form. HUD-AP-19 Throughout the section HUD-CX-1.1 HUD-CX-1.2 HUD-CX-1.3 HUD-CX-1.5 HUD-CX-1.6 HUD-CX-1.7 HUD-CX-1.8 HUD-CX

11 Engagement Team Discussion Fraud Risk Inquiries Form 11. Added a practical consideration about persons excluded from the engagement team and expanded the items that could be discussed. 12. Expanded the instructions the form with additional considerations that could be pertinent in a HUD audit. HUD-CX-3.2 HUD-CX-3.3 Audit Inquiries Form 13. Revised for changes in inquiries made in other forms. HUD-CX-3.4 Understanding the Design and Implementation of Internal Control Financial Reporting System Documentation Form Financial Reporting Documentation Form Financial Close and Reporting, Significant Transaction Classes Walkthrough Documentation Forms Walkthrough Documentation Memo Activity and Entity-level Control Forms Entity Risk Factors Risk of Material Noncompliance Assessment Form Federal Award Programs Inherent Risk of Noncompliance Assessment Form Federal Award Programs 14. Updated the form to include principles adapted from COSO s updated internal control framework. 15. Expanded the instructions to included documenting risks on the appropriate risk assessment form. 16. Modified the form to emphasize consideration of the process to reconcile material account balances to the underlying detail records. Modified the practical considerations to indicate that when understanding and documenting control activities, the auditor would consider how the entity has responded to IT risks. 17. Added instructions for performing walkthroughs and documenting procedures. 18. Added a new, optional practice aid to provide an alternative way to document the performance of a walkthrough. The new practice aid assists in documenting a walkthrough in a memo format and can be used in place of the existing form at HUD-CX Updated the instructions and modified the entity-level control forms to incorporate principles adapted from COSO s internal control framework. Recategorized the controls by principle on the entity-level control forms at HUD-CX-5.1 through HUD-CX Added control reference numbers to each control that can be used as a quick way to identify the control or as a cross-reference to it from other workpapers. HUD-CX-4.1 HUD-CX-4.2 HUD-CX HUD-CX-4.3 HUD-CX HUD-CX-5.1 through HUD-CX-5.16 HUD-CX Expanded the risk factors to consider. HUD-CX Updated with current information about the new Uniform Guidance. 23. Updated with current information about the new Uniform Guidance. HUD-CX-7.3 HUD-CX

12 Tests of Compliance For-pr ofit Sampling Planning and Evaluation Form Tests of Compliance Nonp rofit Sampling Planning and Evaluation Form Tests of Compliance Controls Sampling Planning and Evaluation Form Disclosure Requirements for Financial statements of Nonpublic Businesses Nonprofit Organization Disclosure Checklist Audit Finding Development Worksheet Federal Award Programs Going Concern Checklist Confirmation and Correspondence Control CONFIRMATION AND CORRESPONDENC ELETTERS (HUD-CL) 24. Modified the last question on the form to include additional considerations. 25. Expanded the form to include additional factors and modified the last question on the form to include additional considerations. 26. Expanded the instructions about dual-purpose sampling. 27. Updated the checklist for disclosure requirements of recently issued accounting standards. 28. Updated the checklist for disclosure requirements of recently issued accounting standards. 29. Updated to provide guidance about the format for referencing audit findings. 30. Updated the practical considerations to note the August 2014 issuance of ASU , Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. HUD-CX-8.5 HUD-CX-8.7 HUD-CX-10.4 HUD-CX-13.1 HUD-CX-13.2 HUD-CX-15.3 HUD-CX Updated for changes to the practice aids. HUD-CX Where applicable, updated the letters to reflect requirements of the revised AICPA Code of Professional Conduct and to provide dual references to the previously-effective code. Throughout the section 12

13 Audit Engagement Letters 2. Updated the letters and the practical guidance in the notes to Conform more closely to example language in the auditing standards. Clarify the requirements for reporting on supplementary information. Provide additional considerations in group audits. Provide guidance about client s failure to provide the agreed level of assistance and client s potential discussion of employment with members of the engagement team. HUD-CL-1.1 and HUD-CL-1.2 Legal Representation Letters Management Representation Letters Communication with Those Charged with Governance during Planning Related Party Confirmation Request for Service Auditor s Report Note the issuance of SAS 128 on the use of internal audit. 3. Noted that the lawyer s response concerning amounts due for services may be reconciled with accounts payable analyses. 4. Updated the letters and the practical guidance in the notes to Provide additional representations the auditor may obtain in an audit of group financial statements. Clarify when representations may be limited to matters considered individually or collectively material. Add a specific representation about the minutes provided to the auditor. 5. Added a practical consideration about the issuance of SAS 128 on the use of internal audit. HUD-CL-2.1 and HUD-CL-2.2 HUD-CL-3.1 and HUD-CL-3.2 HUD-CL Added a new question in the related party questionnaire. HUD-CL Added a new letter for requesting a service organization s audit report. HUD-CL

14 14 HUD 8/14