GAQC Alert No. 210 

GAQC Alert
New HUD Consolidated Audit Guide Revisions
January 25, 2013
GAQC Alert #210
In This Alert
New Reporting Guidance for all Entities Covered by the HUD Guide
Status of Illustrative HUD Reports
Updated Audit Threshold for FHA-Approved Lenders
Updated Audit Guidance for FHA-Approved Lenders
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HUD Information
Dear Center Members
The purpose of this GAQC Alert is to provide you with important information regarding audits performed of for-profit entities under the U.S. Housing and Urban Development (HUD) Consolidated Audit Guide for Audits of HUD Programs (HUD Guide). Late yesterday, HUD posted several updated chapters of the HUD Guide to its Web site. After reading this GAQC Alert you will be aware of the following:
New auditor reporting guidance for all entities covered by the HUD Guide;
The status of updated illustrative HUD reports;
A revised audit threshold for Federal Housing Administration (FHA)-approved lenders which will result in all FHA-approved lenders needing audits that result in an opinion on compliance; and
A reminder regarding other recent updated audit guidance for FHA-approved lenders that was issued in December 2012.
Because the HUD Guide covers for-profit entities such as banks and multifamily housing entities, you should be sure to pass this information along to your colleagues within your practices that perform these types of audits.
New Reporting Guidance for all Entities Covered by the HUD Guide
HUD updated the reporting guidance in Chapter 2, Reporting Requirements and Sample Reports. The revised chapter aligns HUD's reporting guidance with the 2011 Government Auditing Standards issued by the U.S. Government Accountability Office and generally accepted auditing standards, issued by the AICPA. A significant change in the new chapter is the elimination of the requirement for separate reporting on nonmajor HUD programs. However, as noted in the "Updated Audit Threshold for FHA-Approved Lenders" section below, for FHA-approved approved lenders HUD has removed the major program threshold for FHA-approved lenders such that all FHA-approved lenders will be required to undergo a compliance audit that results in an opinion on compliance (although smaller FHA-approved lender audits will only have to address certain compliance requirements in chapter 7 of the HUD Guide as further described below). Note that the updated chapter 2 does not include auditor's reporting examples. Those reports will be added in a future revision (see the "Status of Illustrative HUD reports" section below).

Chapter 2 will be effective for audits of entities with fiscal years ending on or after March 31, 2013. However, early application is encouraged by HUD. In addition to the elimination of nonmajor reporting, the other significant changes to chapter 2 are summarized below:
New background on the reporting standards and requirements applicable to an audit performed pursuant to the HUD Guide were added.
The HUD report issuance and distribution requirements were revised.
The instructions relating to the required reporting package were updated.
The format of the suggested auditor's reporting on internal control and compliance has been aligned to be consistent with the AICPA's Audit Guide: Government Auditing Standards and Circular A-133 Audits. That is, in addition to the report on the financial statements, HUD is suggesting one report to meet the requirements of Government Auditing Standards and a separate report that provides an opinion on compliance with HUD requirements and the related reporting on internal control over compliance.
HUD is eliminating the separate reporting applicable to fair housing and nondiscrimination.
Status of Illustrative HUD Reports

As noted above, the revised Chapter 2 of the HUD Guide does not include updated illustrative auditor reports. HUD has asked the AICPA to provide it with updated "clarified" illustrations that are in line with those that will appear in the AICPA Audit Guide, Government Auditing Standards and Circular A-133 Audits (GAS-A133 Guide). The AICPA is nearing completion of the development of updated clarified reports for the GAS-A133 Guide that will meet the requirements of the 2011 edition of Government Auditing Standards and the clarified auditing standards. This development process has included reviews by the AICPA Auditing Standards Board, the Government Accountability Office and various federal agency representatives. As soon as the GAS-A-133 Guide reports are made final, the AICPA staff will modify them for HUD language and send them to HUD so that it can begin the process of revising Chapter 2 to include them. At the time that draft reports are sent to HUD, the AICPA will post the draft reports on the GAQC Web site so that practitioners can access them (along with the clarified reports relating to the GAS-A133 Guide). If auditors need to issue HUD reports prior to the AICPA's issuance of the clarified reports, they should use the requirements and guidance in AU-C 935, Compliance Audits, and the 2011 edition of Government Auditing Standards. As soon as the HUD reports are posted, which we hope will be in the next few weeks, we will advise members in a GAQC Alert.

Updated Audit Threshold for FHA-Approved Lenders
As noted below, in late 2012, HUD updated its guidance for FHA-approved lenders. Yesterday, HUD released a related amendment to Chapter 1, General Audit Guidance, of the HUD Guide (see page 1-5), to eliminate the $2 million major program threshold for FHA-approved lenders. This change was made in light of the revisions to Chapter 2 of the HUD Guide (see above) that eliminated the nonmajor program reporting requirement. However, since all FHA-lenders must comply with quality control, net worth, liquidity, and licensing requirements, under the revision to Chapter 1, HUD is now requiring that FHA-approved lenders having combined originations and a servicing portfolio of less than $2 million, to undergo a compliance audit that covers only the following compliance requirements in Chapter 7: (1) section 7-5.A., Quality Control Plan; and (2) section 7-5.G., Lender Annual Recertification, Adjusted Net Worth, Liquidity and Licensing. For all other FHA-approved lenders, the compliance audit continues to be performed using Chapter 7 of the HUD Guide in its entirety. This change applies to audits of entities with fiscal years ending on or after March 31, 2013. However, for those auditors electing early application of the nonmajor program changes to Chapter 2 of the HUD Guide, this change is to be used for audits of entities with fiscal years ending on or after December 31, 2012.
Updated Audit Guidance for FHA-Approved Lenders
Just a reminder that in December 2012, HUD updated the guidance contained within the HUD Guide relating to institutions that participate in the FHA insurance programs for Title I property improvement and manufactured housing loans and for Title II single family and multifamily mortgages. A new Chapter 7, FHA-Approved Lenders Audit Guidance, was issued that merged the content of the previous chapter 8 of the HUD Guide with chapter 7 and eliminated chapter 8 from the HUD Guide. The requirements in chapter 7 apply to audits of profit-motivated FHA-approved lenders with fiscal years ending on or after December 31, 2012. The significant changes made by HUD to the chapter include:
An extension of the applicability to all approved supervised and nonsupervised lenders;
Removal of references to loan correspondents and insertion of information on third-party originators;
Revised terminology to refer to "lenders" and borrowers" instead of "mortgagees" and "mortgagors;"
Updated guidance to differentiate the reporting requirements for the various types of lenders approved to participate in FHA programs;
Revised audited financial statement reporting requirements for supervised lenders in parent-subsidiary structures;
An expanded discussion of lender responsibility for the electronic submission of the audited financial statements and compliance data and auditors' involvement in the electronic submission process;
A restructuring of the compliance requirements and suggested audit procedures to set forth requirements and procedures relating to both Title I and Title II lenders and those that relate to only Title I lenders; and
The inclusion of financial reporting requirements for multifamily lenders.

We hope you have found the information in this GAQC Alert to be useful to your practice. Watch future GAQC Alerts for additional updates in this area.

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AICPA Governmental Audit Quality Center

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