Government And Non Profit Accounting

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The CPA ?rm of which you are a manager has placed you in charge of the audit of the Thornburg School District.The district receives substantial ?nancial support from the State Education Agency. The state requires aid recipients to have annual single audits conducted by independent CPA ?rms. The ?rms are responsible for verifying that recipients have complied with theprovisionsofall ?nancial 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 speci?es that only children from families with incomes under $30,000 are eligible to participate in the program. The state requires districts to determine eligibility, but it provides no guidance as to how they are to do so. Based only on this limited information, it is obviously not possible to develop a speci?c audit program to ensure that the district has complied with the eligibility provisions. However, before you even meet with district of?cials 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.

(2) Suppose that the audit is being conducted under the federal Single Audit Act and that the auditor is required to adhere to all of its reporting provisions. As part of your examination, you ?nd that 25 students out of 350 in the program failed to meet the eligibility requirements. Assuming that the auditors consider the amounts involved as indicative of a weakness in internal controls, how, if at all, should that ?nding affect your report on the program?

 

 

14-7

Performance audits are often far removed from ?nancial audits, but even seemingly unauditable programs can be evaluated. The president of a major state university has a problem. A group of alumni are complaining that the university’s athletic program is an embarrassment to the university and are demanding that the athletic director be ?red. In response, the president has promised an intensive ‘‘audit’’ of all aspects of the department’s performance. The university has never explicitly established formal goals for the athletic department.

Nevertheless, ?ve years prior to this crisis, at the press conference announcing his appointment, theathleticdirector (withcharacteristicexuberance andhyperbole)made thefollowing statements:

1.We intend to win national championships in all major sports.

2.Every one of our athletes will be graduated in ?ve years.

3.The student body will, once again, be proud of its teams, showing its support by attending our games.

4.We will be ‘‘number one’’ as measured by TV appearances and revenues.

Althoughthese commentsareobviously visions, rather than operational objectives, they do imply performanceindicators thatcanbe objectively assessed.

Suppose that you are placed in charge of the president’s promised audit of the athletic department. For each of the four visions, propose objective indicators that could be used to assess the department’s performance. Recognizing that you will be unable to make de?nitive judgments as to whether the department’sperformancehas been satisfactory or not, tell what information you would want to provide the president and the university’s board of trustees so that they can make an informed judgmentastothe quality ofthedepartment’s performance.

 

14-9

Even when objectives are clearly stated, the reasons they have not been met may not be easy to discern.

The City on the Lake Convention Center was constructed at a cost of $250 million, with the aim of attracting visitors to the area. Taxpayers were assured that the convention center would be self-supporting: that convention center revenue would be suf?cient to cover all expenses, including debt service.Yet, in its ?rst ?ve years of operation, the center consistently reported operating de?cits.

Ina recentreportto thecitycouncil, the convention center manager attributed the de?cits to the center’s inability to attract suf?cient conventions andotherevents. Whereasconvention plannershad projectedthatthe centerwould have events scheduled for at least 250 days during the year, it had so far averaged only 180 days—far fewer than the break-even point.

As the city auditor, you have been requested by the city council to conduct a performance audit to learn why the center has been unable to attract the projected number of conventions and other events and to make recommendations for appropriate changes so that the projections can be met.

Propose, in general terms, an approach to ful?lling the mandate of the city council.

    • 8 years ago
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