Frequently Asked Questions
Why are State Departments and Agencies Audited?
What is an Internal Control Audit?
What are the Types of Auditors?
What is the Audit Division?
The Audit Division was created to fulfill the statutory requirements placed upon the State Comptroller in the creation of the Department of Accounting and General Services in 1959 (Act 1, First and Special Session Laws of Hawaii 1959).
The statutory requirements are:
- Ensure the legality of expenditures and the accuracy of accounts of all departments in the executive branch of the State government (Section 26-6, HRS);
Ensure that all accounting and internal control systems of departments in the executive branch of the State government adhere to prescribed policies (Section 40-2, HRS);
- Count the money and securities in the state treasury each fiscal year, determine that state funds deposited with local depositories meet statutory requirements, and that securities deposited by local depositories as protection for funds on deposit with them are sufficient (Section 40-7, HRS);
- Audit the books of account kept by any public school in connection with school fees and all other moneys collected by these schools (Section 40-83, HRS);
Audit the accounts and transactions of the clerks of the courts in their official capacity as guardians of the property of protected persons or as personal representatives of small estates, and report the results of the audit to the judges of the respective courts (Section 560:3-1214, HRS).
The audit activities are:
Annual audits required by statute.
Annual audits by request.
Department and agency requests with urgent needs.
Audits of other departments and agencies not requiring annual audits.
What is an Audit?
The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. Audits are performed to ascertain the validity and reliability of information; also to provide an assessment of a system’s internal control. The goal of an audit is to express an opinion on the person / organization/system (etc) in question, under evaluation based on work done on a test basis. Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements – a concept influenced by both quantitative and qualitative factors.
Audit is a vital part of Accounting. Traditionally, audits were mainly associated with gaining information about financial systems and the financial records of a company or a business (see financial audit). However, recent auditing has begun to include other information about the system, such as information about environmental performance. As a result, there are now professions conducting environmental audits.
Why are State Departments and Agencies Audited?
The State departments and agencies that receive federal financial assistance are required to have an audit as mandated by the Single Audit Act of 1984 (Public Law 98-502) which was enacted by Congress on October 4, 1984.
Under the Act, each state and local government which receives a total amount of federal financial assistance equal to or in excess of $750,000 in any fiscal year must have an audit conducted for such fiscal year. The audit must be conducted by an independent auditor in accordance with generally accepted governmental auditing standards. Each audit conducted must cover the entire state or local government’s operations, except that, at the option of each government, such audit may cover only each department, agency or establishment which received, expended or otherwise administered federal financial assistance during the fiscal year.
What is a Financial Audit?
In financial accounting, an audit is an independent assessment of the fairness by which a company’s financial statements are presented by its management. It is performed by competent, independent and objective person(s) known as auditors or accountants, who then issue an auditor’s report based on the results of the audit.
Such systems must adhere to generally accepted standards set by governing bodies regulating businesses; these standards simply provide assurance for third parties or external users that such statements present a company’s financial condition and results of operations “fairly.”
What is a Compliance Audit?
A compliance audit is an audit of determining whether an entity is in compliance with laws, rules and regulations, and policies and procedures.
What is an Internal Control Audit?
An internal control audit is an audit of an entity’s compliance with established internal controls to initiate, authorize, record, process, or report financial data reliably.
In accounting and auditing, internal control is defined as a process effected by an organization’s structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives. It is a means by which an organization’s resources are directed, monitored, and measured. It plays an important role in preventing and detecting fraud and protecting the organization’s resources, both physical (e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks). At the organizational level, internal control objectives relate to the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals, and compliance with laws and regulations. At the specific transaction level, internal control refers to the actions taken to achieve a specific objective (e.g., how to ensure the organization’s payments to third parties are for valid services rendered.) Internal control procedures reduce process variation, leading to more predictable outcomes. Internal control is a key element of the Foreign Corrupt Practices Act (FCPA) of 1977 and the Sarbanes-Oxley Act of 2002, which required improvements in internal control in United States public corporations. Internal controls within business entities are called also business controls.
Internal control can provide reasonable, not absolute, assurance that the objectives of an organization will be met. The concept of reasonable assurance implies a high degree of assurance, constrained by the costs and benefits of establishing incremental control procedures.
Effective internal control implies the organization generates reliable financial reporting and substantially complies with the laws and regulations that apply to it. However, whether an organization achieves operational and strategic objectives may depend on factors outside the enterprise, such as competition or technological innovation. These factors are outside the scope of internal control; therefore, effective internal control provides only timely information or feedback on progress towards the achievement of operational and strategic objectives, but cannot guarantee their achievement.
Internal control involves human action, which introduces the possibility of errors in processing or judgment. Internal control can also be overridden by collusion among employees or coercion by top management.
What is a Single Audit?
In the United States, the Single Audit, also known as the OMB A-133 audit, is a rigorous, organization-wide audit or examination of an entity that expends $750,000 or more of Federal assistance (commonly known as Federal funds, Federal grants, or Federal awards) received for its operations. Usually performed annually, the Single Audit’s objective is to provide assurance to the US federal government as to the management and use of such funds by recipients such as states, cities, universities, and non-profit organizations. The audit is typically performed by an independent certified public accountant (CPA) and encompasses both financial and compliance components. The Single Audits must be submitted to the Federal Audit Clearinghouse along with a data collection form, Form SF-SAC.
What is a Performance Audit?
Performance audit refers to an examination of a program, function, operation or the management systems and procedures of a governmental or non-profit entity to assess whether the entity is achieving economy, efficiency and effectiveness in the employment of available resources. The examination is objective and systematic, generally using structured and professionally adopted methodologies.
In most countries, performance audits of governmental activities are carried out by the external audit bodies at federal or state level. Many of these audit bodies have established guides for conducting performance audits which explain how performance audits are planned, conducted and its results reported.
In the United States, the standard for government performance audits is the Generally Accepted Government Auditing Standards (GAGAS), often referred to as the “yellow book”, maintained by the federal Government Accountability Office (GAO). Performance audits may also be conducted by Internal Auditors who are employees of the entity being audited. However, some national governments require agencies, departments and branches to periodically retain outside auditors to conduct them.
In the USA, all auditors who follow GAGAS standards are required to maintain independence, supervision, continuing professional education, and conduct the audit using a specific process designed to increase the quality of the audit and reduce the politicization of audit work. Although there are separate professional credentials and certifications for Financial Auditors, the persons that conduct Performance Audits in the USA are often Certified Public Accountants, Certified Internal Auditors, or have a broad background in public policy, business or public administration.
The scope of performance audits may include the detection of fraud, waste and abuse, although often these are not included in the scope. Prior to engaging in a performance audit, the auditor must have a scope and plan defined which will be used to guide the audit process.
Performance auditing differs from performance measurement, the latter being the responsibility of management of the entity. In addition, performance measurement may include a broad variety of activities that do not meet the rigor of an independent external assessment.
What are the Types of Auditors?
There are two types of auditors:
- Internal auditors are employees of a company hired to assess and evaluate its system of internal control. To maintain independence, they present their reports directly to the board of directors or to top management. They provide functional operation to the concern. Internal auditors are employed by the organization they audit; their familiarity with the organization provides more insight into potential fraud and wrongdoing.
- External auditors are independent staff assigned by an auditing firm to assess and evaluate financial statements of their clients or to perform other agreed-upon evaluations. Most external auditors are employed by accounting firms for annual engagements. They are called upon from outside the company.