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What is an audit?

An audit consists of the process used by properly trained and experienced persons, who are independent from management of an auditee, to gather evidence from both inside and outside an organization to allow the formation and communication of a professional opinion about the fairness of the organization's financial reports and its compliance with applicable legal requirements. Auditing is the art of objectively evaluating the evidence gathered, making judgments, and reaching logical conclusions from the evidence.

Financial statements prepared by management and transmitted to outsiders without first being independently audited, suffer a lack of credibility. In reporting on its own administration of government affairs, management can hardly be expected to be entirely impartial and unbiased, any more than a basketball coach could be expected to serve as both coach and official referee in the same game.

Because persons who audit financial statements must be both technically competent and independent of the entity being audited, the public can have confidence in their objectivity and impartiality. Audits provide credibility to financial statements. Credibility means that the financial statements can be believed; that is, they can be relied upon by outsiders, such as the Legislature, taxpayers, other levels of government, creditors, and others.

Financial and compliance audits of governments, through inquiries, observations, analyses, and sampling of transaction data, are designed to determine whether a public-sector entity's financial statements are presented fairly in accordance with generally accepted accounting principles or other accepted basis of accounting, and to determine whether the government entity has complied with applicable laws, regulations and contractual agreements that may have a material effect on the financial statements.

A Single Audit or Uniform Guidance Audit is a special type of audit, required by the federal government, that has specific guidelines for auditors to follow. Those guidelines must be followed in order to determine how many and which federal awards to test, which compliance requirements to test for each program, and how much testing is adequate.

When the amount of federal awards expended by an entity during its fiscal year exceeds a certain level, the Single Audit Act requires an entity-wide audit that includes all funds, programs, and operations of the entity. All federal granting agencies are supposed to rely on the entity-wide Single Audit, in lieu of requiring individual audits of federal awards. The Act places audit responsibility with the states and local governments that receive federal awards. Both DLA and IPAs are required to conduct Single Audits in accordance with Generally Accepted Auditing Standards and Government Auditing Standards.