Compliance testing may require auditor ingenuity. The CPA firm of which you are

Question

Compliance testing may require auditor ingenuity. The CPA firm of which you are a manager has placed you in charge of the audit of the Thomburg School District. The district receives substantial financial support from the State Education Agency. The state requires aid recipients to have annual single audits conducted by independent CPA firms. The firms are responsible for verifying that recipients have complied with the provisions of all financial awards from the state. From your preliminary survey you learn that the district received an award of $3 million to provide free hot lunches to elementary school children of low-income families. The award specifies that only children from families with incomes under $30,000 are eligible to par- ticipate in the program. The state requires districts to determine eligibility, but it provides no guidance on how they are to do so. Based only on this limited information, it is obviously not possible to develop a specific audit program to ensure that the district has complied with the eligibility provisions. However, before you even meet with district officials to discuss the audit, you wish to have a preliminary strategy in mind. 1. As best you can from the limited amount of information provided, design a strategy to test compliance with the eligibility provisions. Suppose that the audit was being conducted under the federal Single Audit Act and the auditors were required to adhere to all its reporting provisions. As part of your examination you found that 25 students out of 350 in the program failed to meet the eligibility requirements. Assuming that the auditors con- sider the amounts involved as indicative of a weakness in internal controls, how, if at all, should that 2. finding affect your report on the program?

Explanation / Answer

Solution-1: Strategy to test compliance with the eligibility provisions comprises of both physical walkthrough and substantive testing. Firstly, I would inquire the School administrator to understand the process of School district for identification of students having family income less than $30K. Then, I would just do one-sample walkthrough to analyse the segregation of duties control and effectiveness & efficiency of implemented control. Then, I would obtain the complete list of students along with mapped family income and random student sampling would be done to test accuracy of information. Then, I would obtain the list of students which have been identified as eligible for the program. Eligible identified students would be traced back to earlier obtained list to verify that all these students have family income less than $30k. Out of all eligible students, inquiry would be done with sample students to check whether they have been offered program benefits as planned.

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