Academic journal article Journal of Accountancy

What the 1994 Yellow Book Means for Auditors

Academic journal article Journal of Accountancy

What the 1994 Yellow Book Means for Auditors

Article excerpt

After three years of review--and for the first time since 1988--the U.S. General Accounting Office revised Government Auditing Standards, commonly known as the yellow book, in June 1994. This article highlights significant changes the 1994 yellow book made in field work and reporting standards to be used for financial statement audits. (See the exhibit on page 55 for a summary.) It also provides practical advice to CPAs as they implement the yellow book revisions. (This article does not address the 1994 changes to performance audit standards, which are effective beginning on or after January 1, 1995.

Auditors must use the revised standards when performing

* Single audits under Office of Management and Budget (OMB) Circulars A-128, Audits of State and Local Governments, and A-133, Audits of Institutions of Higher Education and Other Nonprofit Organizations.

* Audits under guides issued by fed agencies such as the Department of Housing and Urban Development and the Department of Education.

* Financial statement audits of federal departments and agencies under the Chief Financial Officers Act of 1990.

For financial audits, the effective date is audits of periods ending on or after January 1, 1995.


The 1994 yellow book continues to incorporate American Institute of CPAs field work standards by reference. In doing so, it emphasizes parts of Statement on Auditing Standards no. 55, Consideration of the Internal Control Structure in a Financial Statement Audit, that are important in applying the internal control standard in audits subject to the yellow book. The 1994 yellow book also prescribes three additional field work standards that, while perhaps part of today's audit practice, are not explicitly stated in AICPA standards. The additional standards require auditors to

* Follow up on known material findings and recommendations from previous audits.

* Design the audit to detect material noncompliance with provisions of contracts or grant agreements.

* Document in their working papers sufficient information to enable an experienced auditor to ascertain the evidence supporting significant conclusions and judgments.

Aspects of the internal control structure. Unlike the exposure draft, (see JofA, Oct. 93) the 1994 yellow book does not prescribe additional internal control standards for financial statement audits. However, it does provide guidance on four aspects of internal controls that may affect the auditor's work.

1. Control environment is the overall tone set by top management to reflect its attitude, awareness and actions relative to internal controls. Judgments about the control environment may positively or negatively influence judgments about specific control procedures.

2. Safeguarding controls are controls that prevent or detect on a timely basis unauthorized transactions and unauthorized access to assets resulting in possible losses material to the financial statements. Understanding such controls helps auditors plan the audit to detect material misappropriations as well as to assess other risks that the financial statements could be materially misstated.

3. Controls over compliance with laws and regulations are important to auditors in identifying the types of potential misstatements that could occur and the factors that could affect the risk of material misstatement. Such information can help provide reasonable assurance the financial statements are free of material misstatements resulting from violations of laws and regulations with a direct and material effect on determining financial statement amounts.

4. Control risk assessments are critical in determining the nature, timing and extent of audit tests to be performed. Auditors are not required to assess control risk below the maximum. However, auditors may find it efficient to rely on controls for larger clients or those with complex operations. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.