GAQC Alert No. 316

GAQC Alert
New Education For-Profit SFA Audit Guide Issued
September 29, 2016
GAQC Alert #316
In This Alert
Background and Effective Date
Applicability of the Guide
Accessing the Revised Guide
Overview of Chapters
Summary of Key Changes
How to Submit Questions and Comments
Data Collection Form Event Archived
The GAQC Web event, The New Data Collection Form and Federal Audit Clearinghouse Update, is now available. Access the archived event.
Free Quality Control Practice Aid Issued
AICPA members can access, Establishing and Maintaining a System of Quality Control for a CPA Firm's Accounting and Auditing Practice, which is available in two versions—one for small-and-medium-sized firms and another for sole practitioners. This practice aid contains customizable illustrative policies and procedures and includes tips, warnings and reminders to help practitioners better implement the quality control policies and procedures.
Additional Resources
GAQC Alerts

Archived GAQC Web Events

Audit Practice Aids and Tools

HUD Information
Dear Center Members
If you audit a for-profit school (proprietary school) that participates in the U.S. Department of Education (ED) student financial assistance (SFA) programs under Title IV of the Higher Education Act of 1965, as amended (HEA), or third-party servicers of such a school, you should be aware that ED has issued updated audit guidance and requirements for these entities. The purpose of this GAQC Alert is to provide you with important information about the recently issued, Guide for Audits of Proprietary Schools and For Compliance Attestation Engagements of Third-Party Servicers Administering Title IV Programs (Guide). After reading this GAQC Alert you will:
Learn about the background of the Guide and its effective date;
Understand the applicability of the Guide;
Be able to access the Guide and its related transmittal letter;
Gain an overview of what each chapter covers;
Learn about the key changes made to the Guide; and
Know where to submit questions or comments on the Guide.
Background and Effective Date
Section 487(c) of the HEA and Section 668.23 of Title 34 of the Code of Federal Regulations (CFR) require all proprietary schools participating in SFA programs to have an annual financial and compliance audit performed by an independent auditor. Proprietary schools that participate in SFA programs frequently engage third-party servicers to perform certain functions related to the administration of SFA programs. Those servicers are required to have an annual compliance attestation engagement on the servicer's administration of SFA programs. The guidance and requirements in the new ED Guide apply to the financial statement audits and compliance audits of proprietary schools and compliance attestation engagements of third-party servicers.

This Guide has been in existence for many years. Its last formal issuance was in January 2000. However, ED has issued several "Dear CPA Letters" containing relevant guidance to these audits since then. ED has been working on updating this Guide for several years. The GAQC Executive Committee had the opportunity to review various drafts of the Guide and to provide comments addressing potential auditor issues. Additionally, we held several calls with ED staff to further discuss some of those issues. We believe the revised Guide better addresses the needs of ED and auditors as a result of the GAQC input.

The revised Guide is effective for fiscal years beginning after June 30, 2016, with early implementation allowed and encouraged by ED. It supersedes the following:
Audits of Federal Student Financial Assistance Programs at Participating Schools and School Servicers (January 2000);
Dear CPA Letter No. 07-03 (issued September 2007) – Amendment to January 2000 Audit Guide, Audits of Federal Student Financial Assistance Programs at Participating Institutions and Institution Servicers – Prohibited Inducements Paid by Lenders and Denying Students' Access to Lenders and Guaranty Agencies of Their Choice;
Dear CPA Letter No. 07-01 (Issued August 2007) – Amendment to School/Servicer Audit Guide to cover Academic Competitiveness Grants (ACG) and National Science and Mathematics Access to Retain Talent (SMART) Grants;
Dear CPA Letter (CPA-99-02) on the calculation of 90/10 Revenue Tests; and
Dear CPA Letter (CPA-99-01) on the calculation of 85/15 Revenue Tests.
Applicability of the Guide
As noted earlier, the Guide applies to proprietary schools and third-party servicers. Keep in mind that colleges and universities administered by state and local governments or not-for-profit organizations are not subject to the Guide. Instead, they are subject to the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Additionally, the Guide does not apply to foreign colleges, universities, and higher educational schools. Those foreign schools are required to undergo an engagement performed in accordance with ED's Foreign School Audit Guide.
Accessing the Revised Guide and Transmittal Letter
The revised Guide is posted to ED's Office of Inspector General (OIG) Non-Federal SFA Website.
Access a PDF version of the Guide (note that a downloadable Word version is also available on the ED OIG site).
Access the related ED transmittal letter.
Overview of Chapters
The Guide is extensive, growing in size from approximately 130 pages to over 200 pages. It consists of 4 chapters as follows:

Chapter 1, General Requirements. This chapter provides the purpose, background, implementation, and effective date of the Guide. The general requirements and guidance in Chapter 1 that pertain to compliance audits of proprietary schools also apply to servicer compliance attestation engagements unless otherwise specified or the requirement/guidance is not applicable to the servicer environment.

Chapter 2 – Financial Statement Audits. This chapter provides specific information and required procedures for performing financial statement audits of proprietary schools.

Chapter 3 – School Compliance Audits. This chapter provides specific information and required procedures for performing compliance audits of proprietary schools.

Chapter 4 – School Servicer Compliance Attestation Engagements. This chapter provides specific information and required procedures for performing compliance attestation engagements of servicers.
Summary of Key Changes
In light of the number of years since the last revision, the changes made to this Guide are significant. Numerous requirements and related auditor guidance have been incorporated and updates have been made throughout. The following is intended to provide members with several of the key changes made by ED. However, auditors should review the Guide in its entirety to ensure an appropriate understanding.

Audit Versus Attestation Engagement. The Guide has been revised to require the auditor to perform a compliance audit of proprietary schools under AU-C section 935, Compliance Audits. The previous version of the Guide required an examination-level attestation engagement relative to the school's management's assertions about compliance. The Guide continues to require compliance attestation engagements of third-party servicers.

Updated Requirements. As it has been so many years since the last update to the Guide, numerous changes were needed to update both the auditee and auditor requirements. The Guide reflects statutory and regulatory changes made by ED through July 1, 2016. Additionally, the Guide was also revised to reflect changes in Government Auditing Standards and generally accepted auditing standards (GAAS) that have occurred over the years since the previous Guide's issuance.

Must Versus Should. GAAS and Government Auditing Standards define two levels of professional requirements and use specific terminology (i.e., must and should) to identify these requirements. The Guide uses the same levels of requirements and terminology to be consistent with the standards. That is, unconditional requirements are identified using the term "must" and presumptively mandatory requirements are identified using the term "should." Unless otherwise noted, the audit procedures in Chapters 2, 3, and 4 are presumptively mandatory requirements. The previous version of the Guide described audit procedures as being "suggested." Chapter 1 provides more information in this area.

Continued Emphasis on Reporting Fraud and Abuse. Chapter 1 of the Guide updates previous guidance on fraud and abuse and continues to impose upon the auditor a responsibility beyond that of GAAS and Government Auditing Standards. If the auditor detects indications of fraud related to Title IV funds, or learns that management identified possible fraud related to Title IV funds and failed to report the possible fraud as required, the auditor must report this immediately to the appropriate regional office of ED's OIG, Investigation Services (OIG/IS). A listing of these offices is included in Appendix A to the Guide. After reporting the matter immediately, the auditor must then promptly prepare a separate written report concerning fraud or indications of such activities using the guidance in Chapter 1.

90/10 Revenue Percentage and Related Party Requirements. While not new, the Guide clarifies the auditee and auditor requirements for ED's requirements for the 90/10 revenue percentage and related parties. Proprietary schools subject to the Guide are required to prepare disclosures relating to both areas. Chapter 2 outlines auditor procedures for both areas which are performed in conjunction with the financial statement audit. The auditor's report issued to meet the requirements of Government Auditing Standards has also been modified to specifically call out that the 90/10 revenue percentage and related party requirements were among the laws and regulation subject to the compliance tests in the audit. Auditor findings in these areas would be developed and reported like other audit findings reported under Government Auditing Standards. An illustration of the auditor's reporting is included in Chapter 2, as well as illustrations of the required auditee disclosures.

Compliance Audit Considerations. Chapter 3 of the Guide updates various areas that used to be considered as part of the compliance attestation engagement but are now part of the compliance audit. For example, the guidance on sampling has been updated and streamlined. The requirements for site visits have also been expanded. Auditors are now required to perform a site visit to every location at which at least 50 percent of an educational program is offered and to each location where the school performs administrative functions relating to the Title IV programs. Internal auditors can be used to assist with the site visits. Auditors should carefully review Chapter 3 to ensure an appropriate understanding.

Servicer Attestation Engagements. Chapter 4 of the Guide has primarily been updated to reflect revisions to standards and requirements. It has also been streamlined and revised, as appropriate, to be consistent with changes made in other sections of the Guide.

Illustrative Auditor Reporting and Other Illustrations. The Guide includes illustrative auditor reporting in various chapters that have been updated to reflect current requirements and standards. Other illustrations, such as a Schedule of Findings and Questioned Costs, Auditor Information Sheet, and Corrective Action Plan continue to be included and should be reviewed closely by both auditors and auditees.
How to Submit Questions and Comments on the Guide
There are bound to be questions as you begin working with the updated Guide. The transmittal issued with the Guide states that questions about the Guide should be sent to the ED OIG Non-Federal Audit team at Additionally, Appendix B to the Guide includes a form for you to use to provide ED with broader feedback on the Guide. It states that the form can be completed and e-mailed to
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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