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GAO Gives Facelift to Government Audit Standards, Clarifies Key Points

By:
Chris Gaetano
Published Date:
Dec 14, 2018

2018-Yellow-Book

In July, the U.S. Government Accountability Office (GAO) released its latest revision of Generally Accepted Government Auditing Standards (GAGAS)—also called the Yellow Book because the physical document’s cover is literally yellow—which supersedes the 2011 version. Yellow Book standards are used for audits of governmental agencies, usually on the federal level, as well as for audits of the private entities that contract with them. The 2018 revision is effective for financial audits, attestation engagements and reviews of financial statements for periods ending on or after June 30, 2020, and for performance audits beginning on or after July 1, 2019.

Susan M. Barossi, chair of the NYSSCPA’s Government Accounting and Auditing Committee, said that the major difference between the 2011 and 2018 versions involves presentation. The GAO reorganized chapters into a revised format that differentiates between requirements and application guidance related to those requirements. In addition, the GAO either removed supplemental guidance from the appendix of the 2011 revision or incorporated it into the individual chapters of the new version. She compared the process to the codification of Generally Accepted Accounting Principles in 2009, which similarly reorganized and clarified already-existing standards into a single document.

“What it’s become is a how-to manual,” she said. “It more truly defines what’s right or wrong regarding the preparation.”

Not that there are only structural changes. The new edition did come with some substantive changes, too.

One change is a specific definition for waste—the act of using or expending resources carelessly, extravagantly or to no purpose. Importantly, waste can include activities that do not include abuse. It does not necessarily involve a violation of law. Rather, waste relates primarily to mismanagement, inappropriate actions and inadequate oversight.

Another difference is actually less of a change and more of a clarification of what exactly the standards mean when they refer to independence. The new standards clarify that preparing financial statements from a client-provided trial balance—an accounting report that lists the balances in each of an organization’s general ledger accounts—or from underlying accounting records, generally creates significant threats to auditors’ independence. Auditors preparing such statements should document the threats, as well as the safeguards applied in order to eliminate and reduce those threats to an acceptable level, or they should decline to perform the service.

Barossi noted that the 2018 revision brings the Yellow Book auditing standards more into alignment with commercial auditing standards, which have incorporated independence considerations as the norm for years. Most audit organizations, whether engaging private or government entities, had already been operating with this assumption in mind. Barossi said that this clarification will mostly affect those firms that haven’t yet incorporated independence considerations—mainly governmental practice units in very small firms that have been both preparing financial statements and conducting audits for the same client.

John F. Georger Jr., a member of the Government Accounting and Auditing Committee, said that these revisions mirror a recent change that the American Institute of Certified Public Accountants (AICPA) made to its own ethics standards, further demonstrating the Yellow Book’s continuing alignment with commercial standards.

“The AICPA changed [its] ethics standards [in 2017]. Prior to the AICPA change, the preparation of financial statements was considered a routine activity and not a non-attest service. The AICPA has changed [its] standards, now saying you have to look at the organization and make sure you [are] independent and consider it a non-attest service, and therefore [you] have to address threats to independence to that service,” he said.

He added that the independence standards also concern documentation, so that the main change would be that firms that perform both the financial statement preparation as well as the audit will need to document how they are working to overcome independence threats.

The latest edition of the Yellow Book also has new peer review standards requiring that audit organizations comply with their respective affiliated organizations’ peer review requirements and GAGAS peer review requirements. Additional requirements are provided for audit organizations not affiliated with recognized organizations. Georger said that while peer review, as many CPAs understand it, generally involves other CPA firms, this was not always the case before.

“One of the confusions over the Yellow Book, especially to us CPAs, was we have this bias that the word ‘auditor’ means CPA,” he said. “But … a lot of state auditor organizations perform state audits, [and] are subject to peer review, but they don’t need it done by a CPA firm; state auditors will use associations of state auditors; county auditors will use county auditor organizations.”

Under the new standards, the recognized affiliated organizations include the AICPA, the Council of the Inspectors General on Integrity and Efficiency, the Association of Local Government Auditors, the  International Organization of Supreme Audit Institutions and the National State Auditors Association. Any audit organization not affiliated with one of these organizations should, instead, set out to meet the minimum GAGAS peer review requirements discussed in paragraphs 5.66 through 5.94 of the Yellow Book.

Despite these changes, both Barossi and Georger said that the new standards will make little difference in how they perform their work, as the main changes presented in the new Yellow Book—the parts concerning peer review and independence—were already standards they were following. Barossi did acknowledge, however, that having fresh standards will be good for educating clients.

“It’s good … when speaking to clients, to explain something,” she said. “It’s always good to refer to something that is fresh, especially if a client wanted you to prepare the financial statements and you feel there would be an independence issue.”

 

 

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