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With the issuance of the new chapter one of the HUD Audit Guide this year, AHACPA has received many inquiries regarding the guidance in this chapter on reporting audit findings. Chapter 1-4 Audit Scope and Approach - contains the following paragraph relative to audit findings (highlighting added):

"HUD requires the reporting of all compliance violations and an identification of total questioned cost for each finding as a result of noncompliance. HUD requires that all instances of noncompliance with any HUD requirement or regulation, material weakness in internal control, all instances of fraud or illegal acts, and contract violations be reported as findings in the audit report."

The language of this paragraph indicates that all instances of noncompliance with any HUD requirement will be reported as findings. However, further reading of the same paragraph indicates the following:

"Noncompliance, deficiencies, and instances of violations that were corrected during the audit, after the fiscal year under audit, or before the issuance of the audit report must be included in the report as resolved findings. Audit finding sections are also included in chapter 2 and in chapters 3 through 8 of this guide in the event that the auditor following the audit steps in a specific chapter does not refer to chapter 2. The criteria for reporting findings vary among programs. Please refer to the finding sections in the program chapters for any specific detailed information the program may have on reporting of noncompliance."

Chapter 1-7 - Planning the Audit contains the following conflicting guidance:

"C. Reporting. All material instances of noncompliance or compliance violations identified by the auditor must be reported as a finding, even in those cases in which corrective action was taken by the auditee after the audit period. For guidance, consult the particular program chapter. The schedule of findings and questioned costs (chapter 2, example F) contains all of the information required to be included in a finding as applicable based on the deficiency being reported. Please refer to chapter 2 for further guidance."

This language conflicts with the previously quoted information from chapter 1-4 above. This is not the first conflict of this nature that has arisen in the recent history. Currently chapter 8 of the Guide for audits of Title I lenders contains the following conflict:

"8-4 - Audit and Reporting Requirements.

A. Audit Requirements.

All instances of noncompliance with any HUD requirements identified by the auditor (including adjusted net worth or liquidity deficiencies) must be reported as findings in the report on compliance, even in those cases in which corrective action was taken by the auditee after the end of the fiscal year. Refer to paragraph 8-7 for information on reporting findings in the audit report. A suggested format for the computation of the adjusted net worth and the list of unacceptable assets are shown in paragraph 8-6 of this chapter."

"8-7 Audit Finding Reporting.

All material instances of noncompliance with any HUD requirement, regulation, including adjusted net worth and/or liquidity deficiencies, deficiencies in internal control, instances of fraud or illegal acts, or contract violations that were disclosed during the audit process must be reported as findings in the audit report. All nonmaterial instances of noncompliance, deficiencies in internal control, instances of fraud or illegal acts, or contract violations disclosed during the audit process may be reported separately to management. Such reporting must be in writing in a Management Letter or other type of written auditor communication and must be mentioned in the Independent Auditor's Report including the date of the Management Letter or other written communication. Non compliances, deficiencies, instances or violations that were corrected during the audit process, after the fiscal year under audit, or if they were disclosed as a part of the audit process before the end of the fiscal year under audit, and/or prior to the issuance of the audit report, must be included in the report as resolved findings or in a management letter depending on their materiality."

AHACPA has received many requests to interpret the conflicting requirements. Unfortunately, there is no authoritative guidance to resolve this issue. However, we encourage all auditors to review the following additional guidance on findings included in other chapters of the Guide and determine for themselves how they will define findings in the upcoming audit period. To assist in making this decision, we believe it is imperative to continue to refer to the individual program chapters for this guidance. With regard to multifamily projects, we continue to refer to the following guidance contained in chapter 3 as follows:

3-8. Audit Finding Reporting.

"All instances of conditions contained in Appendix B (equity skimming), material noncompliance with any HUD requirement or regulations which result in material questioned or disallowed cost and/or, deficiencies in internal control, instances of fraud or illegal acts, or contract violations that were disclosed during the audit process must be reported as findings in the audit report. All nonmaterial instances of noncompliance disclosed during the audit process must be reported separately to management. Such reporting must be in writing in a management letter or other type of written communication, and form and date of written communication must be mentioned in the independent auditor's report. Noncompliance, deficiencies, or violations that were corrected before the issuance of the audit report must be included in the report as resolved findings or in a management letter or other written communication depending on their materiality."

We also have similar guidance contained in Appendix A to the guide as follows:

HUD Audit Guide Appendix A - Attribute Sampling

"When planning to test a particular sample of transactions, the auditor should consider the specific audit objective to be achieved and should determine whether the audit procedure, or combination of procedures, to be applied will achieve that objective. The size of a sample necessary to provide sufficient evidential matter depends on both the objectives and the efficiency of the sample. As noted in section 3-8 of this chapter, all material instances of noncompliance, including those identified through sampling, must be reported as findings in the audit report."

Testing and Evaluating Results.

"The sample sizes in the table above are based on an expectation of no exceptions. If the testing performed discovers no exceptions, then the auditor has achieved a high degree of confidence that the attribute/assertion is performed at an acceptable level. If there are observed exceptions, the auditor should investigate the nature and cause of the exceptions to determine whether the exceptions are immaterial or material compliance findings, significant deficiencies, or material weaknesses in internal control. It is not necessary to expand testing when exceptions are found. All exceptions must be reported. Refer to paragraph 3-8 for reporting requirements using this audit guide.

In cases in which an exception is found, the auditor must determine whether the individual exception is material enough to be included in the report. If it is determined that an exception is not material enough to be reported as a finding, the auditor may want to apply additional procedures to evaluate the magnitude of the exception."

For supervised and nonsupervised lenders, Chapter 7 of the Guide contains the following guidance: 

7-4 Audit and Reporting Requirements.

A. Audit Requirements.

"All material instances of noncompliance with any HUD requirements identified by the auditor (including net worth or liquidity deficiencies) must be reported as findings in the report on compliance and immaterial instances of noncompliance must be reported in a management letter, even in those cases in which corrective action was taken by the auditee after the end of the fiscal year. Refer to paragraph 7-7 for information on reporting findings in the audit report or management letter. "

7-7 *Audit Finding Reporting.

"All material instances of noncompliance with any HUD requirement, regulation, including adjusted net worth and/or liquidity deficiencies, deficiencies in internal control, instances of fraud or illegal acts, or contract violations that were disclosed during the audit process must be reported as findings in the audit report. All nonmaterial instances of noncompliance, deficiencies in internal control, instances of fraud or illegal acts, or contract violations disclosed during the audit process may be reported separately to management. Such reporting must be in writing in a management letter or other type of written auditor communication and must be mentioned in the Independent auditor's report including the date of the management letter or other written communication. Non compliances, deficiencies, instances or violations that were corrected during the audit process, after the fiscal year under audit, or if they were disclosed as a part of the audit process before the end of the fiscal year under audit, and/or prior to the issuance of the audit report, must be included in the report as resolved findings or in a management letter depending on their materiality."

We do not anticipate HUD issuing clarifying guidance on this issue soon. Given the conflicting language auditors are left to decide which guidance to follow. AHACPA believes that the general intention of HUD OIG is to only report material noncompliance as a finding. Anything other than material noncompliance is to be reported as a management letter item, which would trigger the management letter submission requirements included in this chapter.

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