|Dear Center Members:
|This GAQC Alert informs you about two important developments relating to compliance audits performed under the Housing and Urban Development (HUD) Consolidated Audit Guide (HUD Audit Guide), Chapter 6, “Ginnie Mae Issuers of Mortgage-Backed Securities Audit Guidance.” Please share this information with your colleagues working in the banking/depository institutions area of practice so they can determine if this information is relevant to your firm. The following topics are covered in this alert:
|GNMA COVID-19 Accommodation
On November 9, 2020, Ginnie Mae issued an All Participant Memorandum (APM) 20-14: Alternative Procedures Permitted for Certain Aspects of Issuer Annual Audit Report for Fiscal Year 2020 ("APM 20-14") to allow for the use of alternative procedures to those detailed in Chapter 6 of the HUD Audit Guide for Issuers with a fiscal year ending on or before December 31, 2020. These procedures are in lieu of the suggested audit procedures provided in Chapter 6 requiring on-site inspection and observation.
APM 20-14 requires Issuers to submit to Ginnie Mae the details necessitating the use of an alternative procedure, a description of the alternative procedure used, and the independent auditor’s rationale on how the alternative procedures met the original objective of the document custodian review audit. Questions have arisen as to how this Issuer communication with Ginnie Mae be made. Based on input of representatives of the AICPA DIEP, the GAQC recommends that the audit report, which is part of the Issuer submission, be the vehicle for the APM 20-14 required communication. The following illustrative report language does not consider the AICPA’s new suite of auditor reporting standards. Firms that have early implemented those standards will need to revise the illustrative report wording to incorporate the appropriate changes.
Considerations When Alternative Procedures Can be Performed
Below is illustrative report language that may be added as a separate paragraph under the "Other Matters" section in the required "Report on Compliance for Each Major HUD Program and Report on Internal Control over Compliance" to facilitate compliance with APM 20-14 when alternative procedures are able to be performed. Such report language can be used under either the single auditor approach or the multiple auditor approach, and tailored based on specific facts and circumstances.
Considerations When Alternative Procedures Cannot be Performed
Ginnie Mae issued All Participant Memorandum 20-14: Alternative Procedures Permitted for Certain Aspects of Issuer Annual Audit Report for Fiscal Year 2020 ("APM 20-14") related to Chapter 6 of the Consolidated Audit Guide for Audits of HUD Programs ("HUD Audit Guide") associated with the review of the processes and controls of document custodian(s) associated with the Issuer. The current restrictions due to COVID-19 limiting the performance of audit procedures at business sites necessitated the use of alternative procedures. The procedures in the HUD Audit Guide related to inspection of original, endorsed, or certified copies of loan, pool and other documents, or copies, if the copies clearly show the document recording information, were performed remotely in lieu of an on-site inspection using copies or electronic versions of such documents. When observations were required to be performed on-site in accordance with the HUD Audit Guide, virtual observations were performed.
There may be situations when alternative procedures to the on-site inspection and observation procedures outlined in Chapter 6 may not be able to be performed by the auditor. In that case, a scope limitation may be necessary. The following provides illustrative opinion language for two situations that may occur. The first would be appropriate for situations where the Issuer uses a third-party custodian. The second is for situations when the Issuer is its own custodian.
Note that the following illustration only addresses the scope limitation report modification. If the auditor identifies material noncompliance or a significant deficiency or material weakness in internal control over compliance, additional modifications will need to be made to the report. Auditors can refer to other report illustrations in the HUD Audit Guide, Chapter 2, “Reporting Requirements and Sample Reports,” for examples of those types of report wording modifications.
Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its HUD program.
Our responsibility is to express an opinion on compliance for ABC Company's major HUD program based on our audit of the compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, and the HUD Audit Guide. Those standards and the HUD Audit Guide require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a direct and material effect on the major HUD program occurred. An audit includes examining, on a test basis, evidence about ABC Company's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our qualified opinion on compliance for the major HUD program. However, our audit does not provide a legal determination of ABC Company’s compliance.
OPTION 1: Basis for Qualified Opinion on the Major HUD Program (WHEN USING THIRD PARTY CUSTODIAN)
Due to the impact of the Coronavirus Disease 2019 (COVID-19) pandemic, ABC Company was not able to provide us with access to certain records and information related to its Ginnie Mae portfolios document custodian(s). As a result, we were unable to obtain sufficient appropriate audit evidence supporting the compliance of ABC Company with requirements regarding Review of Custodial Documents, specifically [Insert details causing the limited scope], consequently we were unable to determine whether ABC Company complied with those requirements applicable to the program.
OPTION 2: Basis for Qualified Opinion on the Major HUD Program (WHEN ISSUER IS ITS OWN CUSTODIAN)
Due to the impact of the Coronavirus Disease 2019 (COVID-19) pandemic, ABC Company was not able to provide us with access to certain records and information related to its Ginnie Mae portfolios document custody. As a result, we were unable to obtain sufficient appropriate audit evidence supporting the compliance of ABC Company with requirements regarding Review of Custodial Documents, specifically [Insert details causing the limited scope], consequently we were unable to determine whether ABC Company complied with those requirements applicable to the program.
Qualified Opinion on the Major HUD Program
In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion on the Major HUD Program paragraph, ABC Company complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on the major HUD program for the year ended December 31, 202X.
Ginnie Mae Issuers received a written communication from GNMA dated March 2020 announcing that as of March 6, 2020, Bank of New York Mellon is no longer an approved GNMA Document Custodian. The GNMA communication describes the responsibilities and options available to the Issuer to ensure its own continued compliance with GNMA Mortgage-Backed Securities requirements.
The GNMA communication will likely have an impact on 2020 compliance audits performed under Chapter 6 of the HUD Audit Guide. The AICPA DIEP has issued a series of nonauthoritative questions and answers that are intended to assist Issuers and practitioners performing compliance audits during a period when Issuers may have changed document custodians at the request of GNMA. Access the FAQ document under the Expert Panel Projects heading.
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AICPA Governmental Audit Quality Center