Most common audit deficiencies that generate ethics violation investigations

The AICPA’s Professional Ethics Division has published their report on most common ethics violations in the last year.

About 40% of the cases investigated by the Division deal with audits of government agencies and NPOs.  That’s a depressing portion of ethical issues arising from those two areas. I doubt that is reflective of portion of total audits performed.

That statistic should end the perception that audits of government agencies and NPO don’t have risk. If there is a disproportionate possibility you will wind up in front of an AICPA Ethics hearing, you are not dealing with a low risk audit.

Their report provides a good survey of the major issues.

CPA Success blog, from the Maryland Association of CPAs provides their recap of the issues at Heads Up: Most Frequently Violated Professional Standards.

The Division’s webpage is here.

Their December 2012 report is here.

Here’s my summary of the issues they identified for NPO audits. I’ll exclude the single audit, government, and benefit plan issues. Consider for yourself whether the remaining items are possibly a proxy for all audits.

Auditors reports:

  • Improper audit report date, usually because of additional procedures performed after the date
  • Supplemental information – incorrect identification of auditors responsibility
  • Summarized information – no disclosure that such information is not IAW GAAP
  • SAS 115 – not using the current wording of significant deficiencies & material weaknesses

Audit procedures:

  • Lack of sufficient competent evidential matter – apart from issues related to single audits, items mentioned are out-of-date work programs or disclosure checklists along with not understanding difference between interim control & compliance testing.
  • Inadequate documentation – report says this is seen in all areas of audits
  • Audit programs –not using or customizing an audit program.


  • Functional allocation – not disclosing expenses by major class of program and supporting services
  • Donated services – recording donated services that don’t meet GAAP requirements. The report asserts this is done in order to meet matching requirements. My observation – this is really dangerous ground because if that is the case, the client is deceiving primary readers of the financial statements. Neither your insurance carrier nor a jury will be amused with that concept.
  • Nature of temporary and permanently restricted net assets not disclosed
  • Fair value disclosures – errors in disclosures or omitted disclosures. The report says this is the most frequently seen disclosure issue.
  • Prior period adjustments– disclosures don’t include nature, reason, or amount. Disclosures don’t identify all the items that were changed
  • Minimum payments on long-term debt – notes need to have five years of payments and describe terms and rates on debt
  • Subsequent events disclosures

I’ve taken the above summary, condensed it further, and prepared a reminder list for my audits as an extra double-check.

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