www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 February 21, 1990 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 90-5 TO: ALL APPROVED MORTGAGEES SUBJECT: Standards for Audits of All HUD-Approved Nonsupervised Mortgagees and Loan Correspondents HUD's regulations at Section 2O3.4(b)(4) require nonsupervised mortgagees (and loan correspondents by authority of Section 203.5(b)) to submit an annual audit report as a condition of continued HUD-FHA approval. The substance and format for these audit reports is set forth In HUD Handbook IG 4000.3 REV-2, Audit Guide for Use by Independent Public Accountants in Audits of HUD-Approved Nonsupervised Mortgagees, Loan Correspondents, and Coinsuring Mortgagees (Audit Guide), dated January 1987. It has come to the Department's attention that many of the audit reports prepared by independent public accountants (IPA's) and submitted by mortgagees are not in compliance with the provisions of the Audit Guide. The Audit Guide requires IPA's to comply with generally accepted governmental auditing standards as established in the Standards for Audit of Governmental Organizations, Programs, Activities, and Functions (Government Auditing Standards), published by the Comptroller General of the United States. The Government Auditing Standards incorporate standards issued by the American Institute of Certified Public Accountants (AICPA), and add a number of supplemental standards to the AICPA Standards in order to meet the special needs for public accountability in the use of government assistance. For HUD's purpose, the IPA's must prepare a written supplemental evaluation of internal accounting controls and compliance testing as detailed in Appendix 1 of Audit Guide. The report on compliance testing is mandated by HUD's regulations at Section 2O3.4(b)(4)(ii). Many of the substandard audit reports fail to show that compliance tests and internal control reviews were performed. Positive and negative assurances in the IPA's supplemental report are often missing, along with a statement that the examination was performed in accordance with government accounting standards. A more detailed explanation of these specific problem areas is contained in an attachment to this Mortgagee Letter. _____________________________________________________________________ 2 An example of an acceptable audit report can be found in Appendix 2 of the Audit Guide. Required audits of HUD-approved mortgagees should be sent to: U.S. Department of Housing and Urban Development Office of Lender Activities and Land Sales Registration 451-7th Street, SW, Room 9146 Washington, DC 20410 Effective immediately, HUD will only accept audit reports which meet the substance and format requirements of the Audit Guide. Audits received that do not meet HUD Handbook IG 4000.3 requirements will be rejected. Mortgagees are advised that grounds for administrative actions under the jurisdiction of the Mortgagee Review Board include the failure of a mortgagee to submit the required annual audit of its financial condition, an evaluation of internal accounting controls and compliance testing prepared in accordance with HUD instructions. The audit requirement has been approved by the Office of Management and Budget and assigned approval number 2502-0005. If you have any further questions concerning this letter, please contact the Office of Lender Activities and Land Sales Registration at (202) 755-6924. Sincerely, C. Austin Fitts Assistant Secretary for Housing Federal Housing Commissioner Attachment _____________________________________________________________________ ATTACHMENT Compliance Testing The compliance tests identified in Appendix 1 of HUD Handbook IG 4000.3 are intended to guide the IPA in reviewing the mortgagee's books and records and fulfilling the audit requirements of this guide. The IPA's supplemental report regarding tests of compliance shall also contain positive and negative assurances. A positive assurance consists of a statement by the IPA that the tested items were in compliance with applicable laws and regulations. A negative assurance is a statement that nothing came to the IPA's attention as a result of specified procedures that caused the IPA to believe that the untested items were not in compliance with applicable laws and regulations. The report on compliance testing shall include all material instances of noncompliance and all instances or indications of illegal acts along with the IPA's recommendations and observations warranting the attention of both the mortgagee and HUD officials. The views and comments of mortgagee officials shall be included for each item. Comments shall also be made as to the status of the corrective action taken or to be taken by the mortgagee on these items. It is expected that errors or exceptions which the IPA judges to be significant or that represent a pattern of noncompliance with HUD regulations or instructions will be reported. Minor procedural noncompliances that are not illegal need not be disclosed. The IPA shall attempt to identify the condition, criteria, effect, and cause of each weakness to permit timely and proper corrective action. In instances of fraudulent reports or statements to HUD and defalcations related to FHA-insured mortgages or Section 235 subsidy payments, the IPA shall advise the mortgagee of the possible irregularity and obtain documented assurance prior to issuance of the audit report, that the mortgagee has fully disclosed the particulars of the possible irregularity to HUD's Assistant Inspector General for Audit or other appropriate HUD officials. If the mortgagee does not make such notification, the IPA must do so. A nonsupervised mortgagee or loan correspondent that originates 100 or fewer HUD-insured single family mortgages annually may choose to submit a Management Letter and Management Letter Response as an alternative to the compliance tests. All coinsuring mortgagees must have the compliance tests performed, regardless of the number of mortgages originated. Evaluating the significance of departures from compliance with HUD regulations or guidelines requires the exercise of professional judgment by the IPA. The compliance tests are not intended to limit that judgment. _____________________________________________________________________ 2 Evaluation of Internal Accounting Control. The audit shall include an evaluation of internal accounting control. Both AICPA standards and generally accepted government auditing standards specify the need for a proper study and evaluation of internal accounting control as part of the audit. The study and evaluation establish a basis for determining the extent to which auditing procedures are to be restricted and are intermediate steps in forming an opinion on the financial statements. The report shall identify as a minimum: (1) the auditee's significant internal accounting controls; (2) the controls identified that were evaluated; (3) the controls identified that were not evaluated; and (4) the material weaknesses identified as a result of the evaluation. The IPA must attempt to identify the condition, criteria, effect and cause to provide sufficient information to permit timely and proper corrective action. If circumstances exist which justify not making a study and evaluation of internal accounting control, the report must explain why they were not made. This standard does not require any additional audit effort other than that required as part of a normal financial and compliance audit conducted in accordance with generally accepted governmental auditing standards as set forth by the Comptroller General. _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________