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2011 Yellow Book: What You Need to Know

West Virginia AGA Spring Training

MOV AGA ChapterParkersburg, WV

May 14, 2013Nicole M. Burkart

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Session Objectives

The 2011 revision of Government Auditing Standards represents a modernized version of the standards. During this session, we will:• Highlight major changes from the 2007 revision,

focusing on independenceConceptual framework for independence addedNew documentation requirements

• Highlight changes made for financial audits and attestation engagements

• Highlight changes made for performance audits

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Primary Yellow Book Changes

• Conceptual framework for independence added Identify, evaluate, and apply safeguards to address

threats to independenceCan be applied to many variations in circumstances

• New documentation requirementsFocus on nonaudit services

• Changes made for financial audits and attestation engagements Focused on converging standards where practical

• Changes made for performance auditsClarified definition of validity

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2011 Yellow BookApplicability

• Chapters 1, 2, and 3 apply to all GAGAS engagements Chapter 1: Government Auditing: Foundation and

Ethical Principles Chapter 2: Standards for Use and Application of

GAGAS Chapter 3: General Standards

• Chapter 4: Standards for Financial Audits – applies only to financial audits

• Chapter 5: Standards for Attestation Engagements – applies only to attestation engagements

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2011 Yellow BookApplicability (Continued)

• Chapters 6 and 7 apply only to performance audits Chapter 6: Field Work Standards for Performance

Audits Chapter 7: Reporting Standards for Performance Audits

• Appendix I: Provides supplemental guidance (not requirements) for all GAGAS engagements

• Available on the Yellow Book webpage: Interpretations Supplemental guidance (not requirements) for areas of

particular interest or sensitivity

2011 Yellow BookEffective Dates

• Effective for financial audit periods ending on or after December 15, 2012

• Effective for attestation periods ending on or after December 15, 2012

• Effective for performance audits starting on or after December 15, 2011

• Independence may be impacted before the beginning of an engagement

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Chapter 1:Purpose and Applicability of GAGAS

• GAGAS provides a framework for conducting high quality audits with competence, integrity, objectivity, and independence. For use by auditors of government entities and entities

that receive government awards

• Provisions of laws, regulations, contracts, grant agreements, or policies frequently require audits to be conducted in accordance with GAGAS.

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Chapter 2: Types of GAGAS Engagements

• All audits begin with objectives and those objectives determine the type of audit to be performed and the applicable standards to be followed.

• The types of audits that are covered by GAGAS, as defined by their objectives, are classified in the Yellow Book as:

financial audits, attestation engagements, and performance audits.

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Chapter 2: Financial Audits

• Financial audits provide an independent assessment of whether an entity’s reported financial information is presented fairly in accordance with recognized criteria. Reasonable assurance

• Financial audits performed in accordance with GAGAS include: Financial statement auditsOther types of financial audits

• GAGAS incorporates by reference AICPA SASs and includes additional requirements

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Chapter 2: Attestation Engagements

• Attestation engagements can cover a broad range of financial or nonfinancial objectives about the subject matter or assertion depending on the users’ needs.

• GAGAS incorporates by reference AICPA SSAEs and includes additional requirements

• The three types of attestation engagements are:ExaminationReviewAgreed-Upon Procedures

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Chapter 2: Attestation Engagements (Continued)

• ExaminationOpinionReasonable assurance

• ReviewConclusionLimited assuranceAuditors should not perform review-level work for

reporting on internal control or compliance with provisions of laws or regulations.

• Agreed-Upon ProceduresFindings (NOT an Opinion or Conclusion)

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Chapter 2: Performance Audits

• Performance audits are defined as audits that provide findings or conclusions based on an evaluation of sufficient, appropriate evidence against criteria.

• Performance audits provide objective analysis to assist management and those charged with governance and oversight in using the information to: improve program performance and operations, reduce costs, facilitate decision making, and contribute to public accountability.

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Chapter 2: Nonaudit Services

• GAGAS does not cover nonaudit services, which are defined as professional services other than audits or attestation engagements.

• When audit organizations provide nonaudit services to entities for which they also provide GAGAS audits, they should assess the impact that providing those nonaudit services may have on auditor and audit organization independence and respond to any identified threats to independence in accordance with the GAGAS independence standard.

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Chapter 2: Use of Terminology

• Requirements are identified through the use of specific language. Must indicates an unconditional requirement Should indicates a presumptively mandatory

requirement Text not using the above conventions is considered

explanatory material• Auditors have a responsibility to consider the

entire text of GAGAS in carrying out their work and in understanding and applying the requirements in GAGAS.

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Chapter 2: Stating Compliance with GAGAS

• Auditors should include one of the following types of GAGAS compliance statements in reports on GAGAS audits:Unmodified Modified

• Determining the appropriate GAGAS compliance statement is a matter of professional judgment.

• Auditors may also cite the use of other standards in reports on GAGAS audits when they have met the requirements of those standards, as well as GAGAS.

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Chapter 3: General Standards

• General standards, along with the overarching ethical principles presented in Chapter 1, establish a foundation for the credibility of auditors’ work.

• Chapter 3 is comprised of four sections: IndependenceProfessional JudgmentCompetenceQuality Control and Assurance

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Chapter 3:Independence

• In all matters relating to the audit work, the audit organization and the individual auditor, whether government or public, must be independent.

• Independence comprises: Independence of Mind – state of mind that permits the

performance of an audit without being affected by influences that compromise professional judgment

Independence in Appearance – absence of circumstances that would cause a reasonable and informed third party to conclude that integrity, objectivity, or professional skepticism had been compromised

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Chapter 3:Independence (Continued)

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Chapter 3:Independence (Continued)

• Independence TimeframesAny period of time that falls within the period covered

by the financial statements or subject matter of the audit (i.e. the period of time covered by the audit)

The period of the professional engagement• The period of the professional engagement lasts

for the entire duration of the professional relationship (which, for recurring audits, could cover many periods).

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Chapter 3:Conceptual Framework

• GAGAS establishes a conceptual framework that auditors use to identify, evaluate, and apply safeguards to address threats to independenceCan be applied to many variations in circumstances

that create threats to independenceAllows auditors to address threats to independence

that result from activities that are not specifically prohibited by GAGAS

Serves as a hybrid framework that balances principle and rules based standards

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Chapter 3:Conceptual Framework (Continued)

Assess condition or activity for threats to independence

Assess safeguard(s) effectiveness

Identify and apply safeguard(s)

Assess threat for significance

Is threat significant?

Threat identified?

Is threat eliminated or reduced to an acceptable level?

Yes

Yes

Document nature of threat and any safeguards applied

Yes

No

Independence impairment; do

not proceed

No

Is threat related to a nonaudit service?

Is the nonaudit service specifically prohibited in GAGAS paragraphs

3.36 or 3.49 through 3.58?No

No

Yes

Yes

Proceed

Proceed

Proceed

No

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Chapter 3:Conceptual Framework (Continued)

• Threats to independence are circumstances that could impair independence.NatureSignificanceSafeguards

• Threats are conditions to be evaluated using the conceptual framework.

• Safeguards are controls designed to eliminate or reduce to an acceptable level threats to independence.

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Chapter 3:Conceptual Framework (Continued)

• Applying the Conceptual Framework Identify threats to independenceEvaluate the significance of the threats identified, both

individually and in the aggregateApply safeguards as necessary to eliminate the

threats or reduce them to an acceptable level• Safeguards need to be effective in order address

threats to independence.• If it is necessary to apply safeguards, auditors

should document the threats identified and the safeguards applied to eliminate the threats or reduce them to an acceptable level.

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Chapter 3:Conceptual Framework (Continued)

• Categories of ThreatsSelf-InterestSelf-ReviewBiasFamiliarityUndue InfluenceManagement Participation Structural

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Chapter 3:Conceptual Framework (Continued)

• Examples of safeguards include:consulting an independent third party, such as a

professional organization, a professional regulatory body, or another auditor;

involving another audit organization to perform or re-perform part of the audit;

having a professional staff member who was not a member of the audit team review the work performed; and

removing an individual from an audit team when that individual’s financial or other interests or relationships pose a threat to independence.

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Chapter 3: Documenting Threats and Safeguards

• Threat and Safeguard Documentation RequirementsDocument threats to independence that require the

application of safeguards (i.e. threats that are not at an acceptable level), along with safeguards applied, in accordance with the conceptual framework

Document how safeguards were applied (i.e. appropriately designed and implemented) to ensure that an audit organization structurally located within a government entity is independent

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Chapter 3:Provision of Nonaudit Services

Nonaudit Services versus Routine Activities• Nonaudit services are consistent with auditors’

skills and expertise, but do not relate directly to the performance of an audit. Providing nonaudit services may create threats to

independence.• Routine activities related directly to the

performance of an audit are not considered nonaudit services under GAGAS. Routine activities generally involve providing advice or

assistance on an informal basis as part of an audit.Routine activities are typically insignificant in terms of

time incurred or resources expended.

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Chapter 3:Documenting Nonaudit Services

• Nonaudit Service Documentation RequirementsDocument consideration of audited entity

management’s ability to effectively oversee a nonaudit service to be provided by the auditor

Document the auditor’s understanding with an audited entity for which the auditor will perform a nonaudit service

• Before providing nonaudit services, the auditor should determine that the audited entity has designated an individual who possesses suitable skill, knowledge, or experience, and that the individual understands the services to be performed sufficiently to oversee them.

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Chapter 3:Prohibited Nonaudit Services

Assuming Management Responsibilities• Setting policies and strategic direction for the audited entity• Directing and accepting responsibility for the actions of the

audited entity’s employees in the performance of their routine, recurring activities

• Having custody of an audited entity’s assets• Reporting to those charged with governance on behalf of

management• Deciding which of the auditor’s or outside third party’s

recommendations to implement• Accepting responsibility for the management of an audited

entity’s project• Accepting responsibility for designing, implementing, or

maintaining internal control

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Chapter 3:Prohibited Nonaudit Services

Assuming Management Responsibilities (Continued)• Providing services that are intended to be used as

management’s primary basis for making decisions that are significant to the subject matter of the audit

• Developing an audited entity’s performance measurement system when that system is material or significant to the subject matter of the audit

• Serving as a voting member of an audited entity’s management committee or board of directors

• Performing ongoing monitoring procedures on behalf of management

Complete List of Prohibited Nonaudit Services: Paragraphs 3.36 and 3.49 – 3.58

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Chapter 3:Continuing Professional Education

No revision to overall requirements:• Minimum of 24 hours of CPE every 2 years

Government auditing or the government environmentSpecific or unique environment in which the audited

entity operates• Additional 56 hours of CPE for auditors:

Involved in any amount of planning, directing, or reporting on GAGAS audits, or

Charging 20 percent or more of their time annually to GAGAS audits.

• Minimum of 20 hours of CPE each year

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Chapter 3:Continuing Professional Education

Changes Related to CPE:• Clearer distinction between internal and external

specialistsExternal specialists assisting in performing a GAGAS

audit are not required to meet GAGAS CPE requirements, but should be qualified and competent in their areas of specialization

Internal specialists who are not involved in directing or performing audit procedures or reporting on a GAGAS audit are also not required to meet GAGAS CPE requirements, but should be qualified and competent in their areas of specialization

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Chapter 3:Monitoring of Quality

• The auditor organization should analyze and summarize the results of its monitoring process at least annually, with identification of any systemic or repetitive issues needing improvement, along with recommendations for corrective action.

• The audit organization should communicate to appropriate personnel any deficiencies noted during the monitoring process and make recommendations for appropriate remedial action.

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Chapter 3:External Peer Review

• The audit organization should obtain an external peer review at least once every 3 years.

• The peer review team uses professional judgment in determining the type of peer review report. The following are the types of peer review reports:Peer review rating of passPeer review rating of pass with deficienciesPeer review rating of fail

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Chapter 4:Standards for Financial Audits

• Eliminated redundancy with AICPA standards• Clarified additional GAGAS requirements

Performing Financial AuditsReporting on Financial Audits

• Additional GAGAS considerationsMaterialityEarly Communication of Deficiencies

• Combined 2007 GAGAS Chapters 4 and 5 into one chapter (2011 GAGAS Chapter 4)

No new requirements were added for financial audits.

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Chapter 5:Standards for Attestation Engagements

• Separated attestation engagement requirements by category of engagementExamination EngagementsReview EngagementsAgreed-Upon Procedures Engagements

• Within each category, emphasized:Additional GAGAS reporting requirementsRequired elements of AICPA reporting

No new requirements were added for attestation engagements.

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Chapters 6 and 7:Performance Audits

• The discussion of validity as an aspect of the quality of evidence has been revised to indicate that it is the extent to which evidence is a meaningful or reasonable basis for measuring what is being evaluated. In other words, validity refers to the extent to which

evidence represents what it is purported to represent.

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Chapters 6 and 7:Performance Audits (Continued)

• The fraud reporting requirement is now limited to occurrences that are significant within the context of the audit objectives, with a requirement to communicate in writing other instances of fraud that warrant the attention of those charged with governance.

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Questions?

The Yellow Book is available on GAO’s website at:

www.gao.gov/yellowbook

For technical assistance, contact us at:

yellowbook@gao.gov (202) 512-9535