ES, IG-00-026, Quality Control Review of Price Waterhouse Coopers LLP Audit of Dartmouth College for Fiscal Year Ended June 30, 1998

QUALITY CONTROL REVIEW OF
PRICE WATERHOUSE COOPERS LLP AUDIT OF
DARTMOUTH COLLEGE FOR FISCAL YEAR ENDED JUNE 30, 1998
IG-00-026

Executive Summary

Background

Dartmouth College (Dartmouth) of Hanover, New Hampshire, is a private, nonprofit institution that combines features of an undergraduate liberal arts college with those of a research university.
The Department of Health and Human Services (HHS) is the cognizant audit agency for Dartmouth, and the National Aeronautics and Space Administration (NASA) is a Federal funding agency to Dartmouth. HHS granted the NASA Office of Inspector General (OIG) permission to perform a quality control review of the PricewaterhouseCoopers LLP (PwC) audit of the Dartmouth fiscal year ended June 30, 1998.⁽¹⁾ Office of Management and Budget (OMB) Circular A-133⁽²⁾ requires the audit. Dartmouth reported total fiscal year Federal expenditures for NASA of $1,096,185 and total expenditures of $85,966,464.
Appendix A provides details on the single audit requirements.

Objectives

The objective of our report review was to determine whether the report Dartmouth submitted to the Federal Audit Clearinghouse⁽³⁾ meets the applicable reporting standards and OMB Circular A-133 reporting requirements.
The objectives of our quality control review were to determine whether PwC conducted the financial statement and research and development major program audit in accordance with applicable standards and whether the audit meets the auditing and reporting requirements of OMB Circular A-133. See Appendixes B and C for details on the objectives, scope, and methodology.

Results of Review

PwC issued its audit report on Dartmouth on September 2, 1998. The PwC working papers for the audit contained deficiencies.

Reported A-133 Results. PwC (1) identified no findings, (2) questioned no costs, and (3) issued an unqualified opinion⁽⁴⁾ on the financial statements, Schedule of Expenditures of Federal Awards,⁽⁵⁾ and major program compliance.⁽⁶⁾ Also, the auditors found no instances of noncompliance in the financial statement audit that are required to be reported under generally accepted government auditing standards.⁽⁷⁾ Finally, the auditors noted no matters involving internal controls (relating to the financial statement or major programs) that are considered to be material weaknesses.⁽⁸⁾

Report Quality Review Results. The Dartmouth audit report meets the applicable reporting guidance and regulatory requirements contained in OMB Circular A-133.

Audit Quality Review Results. The PwC audit work does not meet the applicable auditing guidance and requirements contained in: (1) OMB Circular A-133 and its related Compliance Supplement, (2) generally accepted government auditing standards, and (3) generally accepted auditing standards for the research and development major program. The auditors did not adequately oversee the internal auditor's work related to the research and development program internal controls. Also, the PwC working papers do not support a review of the Summary Schedule of Prior Audit Findings.⁽⁹⁾ As a result, Federal agencies and others could not rely on the Dartmouth audit report without correction of these deficiencies to provide assurances that the internal controls were in place and functioning properly or that the status of prior audit findings were accurately represented. The deficiencies are detailed in Findings A and B.

Recommendations

We recommend that, for the Dartmouth College fiscal year ended June 30, 1998, and for future audits, the Dartmouth College internal auditors obtain and document their understanding of the 5 components of internal control for each of the 14 compliance requirements that are applicable and material to the research and development major program.
We recommend that for the Dartmouth College fiscal year ended June 30, 1998, and for future audits, the PwC:

Document the internal audit scope of work to ensure compliance with OMB Circular A-133 and generally accepted government auditing standards.
Document the working papers to show that the internal auditor's work satisfies the OMB Circular A-133 audit objectives.
Revise its audit scope to include reviewing and documenting its review and conclusions on the Summary Schedule of Prior Audit Findings.
Review and document the review and conclusions of the Summary Schedule of Prior Audit Findings for the fiscal year 1998 and future audits.

Dartmouth's Response

Dartmouth did not state whether it concurred or nonconcurred with the recommendations. However, management did not concur with the conclusion that report users cannot rely on the internal auditors' review of internal controls. Dartmouth completed an internal control checklist that summarizes the various internal controls in place and provides references to the already existing working papers that support the auditors' review of internal controls. Management stated that the checklist duplicates the work that has already been performed. The complete text of the Dartmouth response is in Appendix D.

PwC's Response

PwC did not state whether it concurred or nonconcurred with the recommendations. However, PwC did not concur with the conclusions that its audit work does not meet the applicable auditing guidelines and requirements; that report users cannot rely on the report for assurance on internal controls, and that the Schedule of Prior Audit Findings is materially represented. PwC provided additional working papers that address the intent of the recommendations. The text of the PwC response is in Appendix E. The PwC working papers referenced in the response were too numerous to include in the appendix to this report.

Evaluation of Management's Response

The supplemental internal control checklist meets the intent of the recommendation. Therefore, we conclude that report users can rely on the internal auditors' review of internal controls. The recommendations are resolved and dispositioned.
The actions performed by PwC are responsive to all the recommendations. Therefore, the recommendations are resolved and dispositioned. As a result, the PwC audit work now meets the applicable auditing guidelines and requirements, and report users can rely on the report for assurance on internal controls and that the Schedule of Prior Audit Findings is materially represented.
Appendix F addresses management's concern regarding our conclusions on the audit work, internal controls, and the Schedule of Prior Audit Findings.

FOOTNOTES

1. The Boston, Massachusetts, office of PwC performed the single audit for Dartmouth for the fiscal year ended June 30, 1998.

2. Refer to Appendix A, which contains information regarding OMB Circular A-133, "Audits of States, Local Governments, and Non-Profit Organizations," audit requirements.

3. The Single Audit Act Amendments of 1996, §7504(c), requires the Office of Management and Budget to establish the Federal Audit Clearinghouse to receive the Circular A-133 audit reports.

4. An unqualified opinion means that the financial statements are presented fairly in all material respects, expenditures of Federal funds are presented fairly, in relation to the financial statements taken as a whole, and the auditee has complied with all applicable laws, regulations, and contract provisions that could have a direct and material effect on each major program.

5. The Schedule of Expenditures of Federal Awards is a schedule showing the amount of annual Federal award expenditures by Federal agency for each program, grant, or contract.

6. Major program compliance refers to an assessment of the auditee's compliance with laws, regulations, and provisions of contracts or grant agreements that could have a direct and material effect on each major program.

7. These standards are broad statements of the auditors' responsibilities, promulgated by the Comptroller General of the United States.

8. The American Institute of Certified Public Accountants (AICPA) SOP 98-3, Appendix D, defines a material weakness as "... the condition in which the design or operation of one or more of the internal control components [control environment, risk assessment, control activities, information and communication, and monitoring] does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions."

9. Finding B discusses the Summary Schedule of Prior Audit Findings.

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Background	Dartmouth College (Dartmouth) of Hanover, New Hampshire, is a private, nonprofit institution that combines features of an undergraduate liberal arts college with those of a research university. The Department of Health and Human Services (HHS) is the cognizant audit agency for Dartmouth, and the National Aeronautics and Space Administration (NASA) is a Federal funding agency to Dartmouth. HHS granted the NASA Office of Inspector General (OIG) permission to perform a quality control review of the PricewaterhouseCoopers LLP (PwC) audit of the Dartmouth fiscal year ended June 30, 1998.⁽¹⁾ Office of Management and Budget (OMB) Circular A-133⁽²⁾ requires the audit. Dartmouth reported total fiscal year Federal expenditures for NASA of $1,096,185 and total expenditures of $85,966,464. Appendix A provides details on the single audit requirements.
Objectives	The objective of our report review was to determine whether the report Dartmouth submitted to the Federal Audit Clearinghouse⁽³⁾ meets the applicable reporting standards and OMB Circular A-133 reporting requirements. The objectives of our quality control review were to determine whether PwC conducted the financial statement and research and development major program audit in accordance with applicable standards and whether the audit meets the auditing and reporting requirements of OMB Circular A-133. See Appendixes B and C for details on the objectives, scope, and methodology.
Results of Review	PwC issued its audit report on Dartmouth on September 2, 1998. The PwC working papers for the audit contained deficiencies. Reported A-133 Results. PwC (1) identified no findings, (2) questioned no costs, and (3) issued an unqualified opinion⁽⁴⁾ on the financial statements, Schedule of Expenditures of Federal Awards,⁽⁵⁾ and major program compliance.⁽⁶⁾ Also, the auditors found no instances of noncompliance in the financial statement audit that are required to be reported under generally accepted government auditing standards.⁽⁷⁾ Finally, the auditors noted no matters involving internal controls (relating to the financial statement or major programs) that are considered to be material weaknesses.⁽⁸⁾ Report Quality Review Results. The Dartmouth audit report meets the applicable reporting guidance and regulatory requirements contained in OMB Circular A-133. Audit Quality Review Results. The PwC audit work does not meet the applicable auditing guidance and requirements contained in: (1) OMB Circular A-133 and its related Compliance Supplement, (2) generally accepted government auditing standards, and (3) generally accepted auditing standards for the research and development major program. The auditors did not adequately oversee the internal auditor's work related to the research and development program internal controls. Also, the PwC working papers do not support a review of the Summary Schedule of Prior Audit Findings.⁽⁹⁾ As a result, Federal agencies and others could not rely on the Dartmouth audit report without correction of these deficiencies to provide assurances that the internal controls were in place and functioning properly or that the status of prior audit findings were accurately represented. The deficiencies are detailed in Findings A and B.
Recommendations	We recommend that, for the Dartmouth College fiscal year ended June 30, 1998, and for future audits, the Dartmouth College internal auditors obtain and document their understanding of the 5 components of internal control for each of the 14 compliance requirements that are applicable and material to the research and development major program. We recommend that for the Dartmouth College fiscal year ended June 30, 1998, and for future audits, the PwC: Document the internal audit scope of work to ensure compliance with OMB Circular A-133 and generally accepted government auditing standards. Document the working papers to show that the internal auditor's work satisfies the OMB Circular A-133 audit objectives. Revise its audit scope to include reviewing and documenting its review and conclusions on the Summary Schedule of Prior Audit Findings. Review and document the review and conclusions of the Summary Schedule of Prior Audit Findings for the fiscal year 1998 and future audits.
Dartmouth's Response	Dartmouth did not state whether it concurred or nonconcurred with the recommendations. However, management did not concur with the conclusion that report users cannot rely on the internal auditors' review of internal controls. Dartmouth completed an internal control checklist that summarizes the various internal controls in place and provides references to the already existing working papers that support the auditors' review of internal controls. Management stated that the checklist duplicates the work that has already been performed. The complete text of the Dartmouth response is in Appendix D.
PwC's Response	PwC did not state whether it concurred or nonconcurred with the recommendations. However, PwC did not concur with the conclusions that its audit work does not meet the applicable auditing guidelines and requirements; that report users cannot rely on the report for assurance on internal controls, and that the Schedule of Prior Audit Findings is materially represented. PwC provided additional working papers that address the intent of the recommendations. The text of the PwC response is in Appendix E. The PwC working papers referenced in the response were too numerous to include in the appendix to this report.
Evaluation of Management's Response	The supplemental internal control checklist meets the intent of the recommendation. Therefore, we conclude that report users can rely on the internal auditors' review of internal controls. The recommendations are resolved and dispositioned. The actions performed by PwC are responsive to all the recommendations. Therefore, the recommendations are resolved and dispositioned. As a result, the PwC audit work now meets the applicable auditing guidelines and requirements, and report users can rely on the report for assurance on internal controls and that the Schedule of Prior Audit Findings is materially represented. Appendix F addresses management's concern regarding our conclusions on the audit work, internal controls, and the Schedule of Prior Audit Findings.