March 2008 Single Audit Information Service Newsletter
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March 2008 Single Audit Information Service Newsletter

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Auditors Should Dig a Little for a Juicy EffectBy Leita Hart-FantaThe Government Auditing Standards, also • The client has no idea what its cash po-known as the Yellow Book, asks auditors to sition is.develop five elements for each finding — the • Errors and omissions could go condition, the cause, the criteria, the effect undetected.Leita Hart-Fanta, CPA, and the recommendation.CGFM is the author of • The client has bounced 15 checks and “The Risk Assessment Let’s concentrate on the fourth item. The incurred $625 in bank fees.SASs,” and has been definition of effect or potential effect for teaching Yellow Book financial audits, as found in Chapter 4.18 Which One Is Best? standards for 10 years. During her five years of the Yellow Book, states: “The effect is a Well, the first way an auditor eliminates with the Texas State clear, logical link to establish the impact or potentially boring effects and concentrates Auditor’s Office, she potential impact of the difference between on the real hook is to take out anything that acted as both an auditor the situation that exists (condition), and the would be of interest only to auditors or ac-and a communications required or desired state (criteria). The effect countants. I would say the first bullet would specialist. Hart-Fanta led the team that or potential effect identifies the outcomes or give most accountants fits. How can they live produced a national consequences of the condition. When the au- with a ...

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March 2008 |
Single Audit Information Service
Auditors Should Dig a Little for a
Juicy Effect
By Leita Hart-Fanta
The
Government Auditing Standards
, also
known as the Yellow Book, asks auditors to
develop five elements for each finding — the
condition, the cause, the criteria, the effect
and the recommendation.
Let’s concentrate on the fourth item. The
definition of effect or potential effect for
financial audits, as found in Chapter 4.18
of the Yellow Book, states: “The effect is a
clear, logical link to establish the impact or
potential impact of the difference between
the situation that exists (condition), and the
required or desired state (criteria). The effect
or potential effect identifies the outcomes or
consequences of the condition. When the au-
ditors’ objectives include identifying the ac-
tual or potential consequences of a condition
that varies (either positively or negatively)
from the criteria identified in the audit, ‘ef-
fect’ is a measure of those consequences.
Effect or potential effect may be used to
demonstrate the need for corrective action in
response to identified problems or relevant
risks.”
One of my audit directors defined the ef-
fect as the “Who cares?” statement. We con-
sidered it the hook in the report, the element
most likely to get attention and make folks
see the relevance of the finding.
If we could not come up with a compel-
ling effect, we would often drop the finding.
We didn’t want to bore our readers with is-
sues that we couldn’t even drum up interest
in inside our own office.
For example, let’s say an auditor is writing
a client up for not doing cash reconciliations
for a major grant for the past six months.
Here are some potential effects:
• The cash balance is misstated in the
general ledger.
• The cash balance is misstated in the
financial report.
• There is a potential for fraud.
• The client will lose the grant.
• The client has no idea what its cash po-
sition is.
• Errors and omissions could go
undetected.
• The client has bounced 15 checks and
incurred $625 in bank fees.
Which One Is Best?
Well, the first way an auditor eliminates
potentially boring effects and concentrates
on the real hook is to take out anything that
would be of interest only to auditors or ac-
countants.
I would say the first bullet would
give most accountants fits. How can they live
with a misstated cash balance in the general
ledger! But to most people, that would be a
major yawner. If the final user of the audi-
tor’s report is auditors or accountants, the
auditor should take this approach, but usually
the audit’s final reader is a board or managers
who could care less about the accuracy of the
general ledger. I would eliminate the second
bullet using similar reasoning.
Although not as boring, the fraud effect is
extreme. In general, I try to stay away from
the word fraud because it packs an emotional
wallop. It’s like the fable of the boy who
cried wolf. Twice he cried that his sheep
were being eaten by a wolf and the towns-
people ran to his aid, even though there was
no wolf. The third time, there was a wolf, but
the townsfolk refused to come. The wolf ate
the sheep and the boy! Auditors shouldn’t cry
fraud, unless they mean it.
And on that note, auditors should not put
mild threats in their findings, such as “If you
continue to act like this, you will lose your
grant.” I have seen heinous actions go unpun-
ished by the federal government, and doubt
a grantor agency would revoke an award be-
cause a grantee didn’t do cash reconciliations
for six months. Auditors should save this idle
threat for the big stuff.
Next, auditors should eliminate effects
that are vague and bureaucratic. The problem
See
Audit Effect
, p. 
Leita Hart-Fanta, CPA,
CGFM is the author of
“The Risk Assessment
SASs,” and has been
teaching Yellow Book
standards for 10 years.
During her five years
with the Texas State
Auditor’s Office, she
acted as both an auditor
and a communications
specialist. Hart-Fanta
led the team that
produced a national
award-winning report
summarizing the
financial condition of the
state. She is a certified
public accountant and
a certified government
financial manager and
serves on the conference
planning committees
of the local chapters of
the Institute of Internal
Auditors and the Texas
Society of CPAs. The
views expressed in
this article are the
author’s own and do not
necessarily reflect the
view of the
Single Audit
Information Service
.