Magazine article Government Finance Review

Yellow Book Exposure Draft: While the Guidance in the Yellow Book Pertains to Auditors, Government Officials Should Be Aware of Some of the Proposed Changes in the GAO's April 2017 Exposure Draft That Could Affect Their Governments

Magazine article Government Finance Review

Yellow Book Exposure Draft: While the Guidance in the Yellow Book Pertains to Auditors, Government Officials Should Be Aware of Some of the Proposed Changes in the GAO's April 2017 Exposure Draft That Could Affect Their Governments

Article excerpt

State and local governments that receive federal funds and require a single audit are subject to the requirements of Government Auditing Standards, also known as the Yellow Book. While the guidance in the Yellow Book pertains to auditors, government officials should be aware of some of the proposed changes in the U.S. Government Accountability Office's April 2017 Exposure Draft (ED) that could affect their governments.

The last revision to the Government Auditing Standards (Yellow Book) was in 2011. The Yellow Book, also referred to as generally accepted government auditing standards, is a set of auditing standards developed by the Government Accountability Office for auditors and audit organizations at audit federal, state, and local governmental entities. The Yellow Book provides standards and requirements for auditors and audit organizations in the areas of independence, continuing professional education, quality control, peer reviews, and reporting.

NONAUDIT SERVICES

Auditors need to be independent of the governmental agencies that they audit, regardless of whether the auditee receives federal funds or not. However, for governmental entities that are subject to the Yellow Book standards for their audits, those standards go beyond what is required for auditor independence in an audit performed in accordance with generally accepted auditing standards. Sometimes governments ask their auditors to perform services in addition to the annual financial statement and single audit. Auditors are required to evaluate the type of service that is being requested to ensure that their independence as the auditor is not impaired. The Yellow Book identifies certain nonaudit services that a government's auditor is prohibited from performing because those services would impair the auditor's independence. The ED identifies the following items as significant threats to auditor independence but does not prohibit auditors from performing these tasks or impair auditor independence, so long as the proper safeguards are in place and documented by the auditor:

1. Recording transactions for which management has determined or approved the appropriate account classification, or posting coded transactions to an audited entity's general ledger;

2. Preparing financial statements based on information in the trial balance;

3. Posting entries that have been approved by an audited entity's management to the entity's trial balance; and

4. Preparing account reconciliations that identify reconciling items for the audited entity management's evaluation.

WASTE AND ABUSE

The current Yellow Book addresses abuse with grants, laws, regulations, and contracts. The word waste appears only two times in the current Yellow Book in regards to a potential fraud risk factor, and instructs auditors to contact the Government Accountability Office if they become aware of fraud, waste, or abuse in federal programs. The ED has added a requirement for auditors to perform additional procedures if they become aware of waste or abuse that could be material to the government's financial statements or operations. Auditors would also be required, under the proposed standards, to report waste and abuse that is material to financial statements and, if applicable, the government's operations, in the auditor's report on internal controls. The Government Accountability Office defines waste in the ED as follows:

   Waste is the act of using or expending
   resources carelessly, extravagantly,
   or to no purpose. Waste
   involves the taxpayers not receiving
   reasonable value for money in
   connection with any government-funded
   activities because of an inappropriate
   act or omission by parties
   with control over or access to
   government resources. Importantly,
   waste can include activities that
   do not include abuse and does not
   necessarily involve a violation of
   law. Rather, waste relates primarily
   to mismanagement, inappropriate
   actions, and inadequate oversight. … 
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