The 2007 Yellow Book: What a Beginner Needs to

Report
The 2007 Yellow Book:
What a Beginner Needs to
Understand
A Governmental Audit Quality Center Web Event
February 9, 2011
1
Administrative Notes
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Governmental Audit Quality Center
2
Administrative Notes
We encourage you to submit your technical
questions – please limit your questions to the
content of today’s program
To submit a question, type it into the “Ask a
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This event is being recorded and will be posted in an
archive format to the GAQC Web site
Governmental Audit Quality Center
3
Continuing Professional Education
Must have registered for CPE credit prior to this
event; a link to the CPE Credit Approval Form was emailed to you
Listen for announcement of 4 CPE codes (7 digit
codes: ALL_ _ _ _ ) and 4 polling questions during
the event
Record CPE Codes on CPE Credit Approval Form
and return completed form (by fax or mail) to AICPA
Service Center for record of attendance; keep a copy
for your records
If you are not receiving CPE for this call, ignore the
CPE codes that we announce, but please answer the
polling questions
Governmental Audit Quality Center
4
Presenters
Flo Ostrum, CPA
Grant Thornton LLP
Brian Schebler, CPA
McGladrey & Pullen, LLP
Moderating:
Mary Foelster, CPA
AICPA - GAQC
Governmental Audit Quality Center
5
Background
Why are we hosting this event?
Proliferation of federal agencies beginning to
require that for-profits undergo financial
audits under Government Auditing Standards
and compliance audits
Several federal agencies involved and
differing types of for-profit entities
Many of the requirements are effective now
for the first time
Governmental Audit Quality Center
6
Examples of New Federal Requirements
Housing and Urban Development (HUD) Supervised Mortgagees (Depository Institutions)
• Financial statement audit under Government Auditing Standards
and compliance audit using the Consolidated Audit Guide for
Audits of HUD Programs (HUD Guide)
• Effective now!
• See GAQC Alert #159 (available at www.aicpa.org/GAQC)
Commerce and Agriculture – Telecommunications
Companies and Broadband Providers
• Awards relate to expansion of broadband technology
• Program-specific audit of federal awards and related compliance
audit using program-specific guidance (currently under
development)
Governmental Audit Quality Center
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Examples of New Federal Requirements
Energy – Electric Utilities, Automotive Companies,
Manufacturing Companies
• Financial audit of schedule of Energy awards and related
compliance audit using Energy program-specific guidance
• Effective now – Energy guidance to be issued any day
• FAQ document at:
http://management.energy.gov/documents/ForProfit_AuditFAQ1
21610.pdf
Governmental Audit Quality Center
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What Will We Cover?
Basic overview of the requirements of the
2007 Yellow Book
Key differences between the Yellow Book
and GAAS
Access to references, guidance and tools
Expected revision of the Yellow Book later in
2011
Governmental Audit Quality Center
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What Changes will a Yellow Book
Engagement Require?
CPE requirements for the entire engagement
team
Reporting on internal control over financial
reporting and compliance
Additional independence considerations
around nonaudit services
Provision of peer review report to
contracting parties
Governmental Audit Quality Center
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Basic Overview of the 2007 Yellow Book
Proper name: Government Auditing Standards, July
2007 Revision;
Commonly referred to as the Yellow Book or
Generally Accepted Government Auditing Standards
(GAGAS)
Issued by the Comptroller General of the United
States of the U.S. Government Accountability Office
(GAO)
Revised periodically
Governmental Audit Quality Center
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Content of the Yellow Book
Chapter 1: Use and Application of GAGAS
Chapter 2: Ethical Principles in Government Auditing
Chapter 3: General Standards
Chapter 4: Field Work Standards for Financial Audits
Chapter 5: Reporting Standards for Financial Audits
Chapter 6: General, Field Work, and Reporting Standards for Attestation
Engagements
Chapter 7: Field Work Standards for Performance Audits
Chapter 8: Reporting Standards for Performance Audits
Appendix I: Supplemental Guidance
Appendix II: Comptroller General's Advisory Council on Government
Auditing Standards
Index
*Bolded items will be covered in today’s presentation
Governmental Audit Quality Center
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Types of Audits and Attestation
Engagements Covered by the Yellow Book
Financial
• Financial statement audits
• Other (e.g., special reports, auditing compliance, etc.)
• Covered by first 5 chapters of Yellow Book
Attestation (will not be covering in today’s session)
• Examination, Review, and AUP
• Some federal agencies require attestation engagements for forprofits (e.g., Department of Education audit guides)
Performance (will not be covering in today’s
session)
• Program evaluations/program effectiveness and results audits
• Economy and efficiency audits
• Operational audits
Governmental Audit Quality Center
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When Does the Yellow Book Apply?
When required (for example, by law, regulation, or
contract)
Usually participation in federal programs (such as
grants or loan programs) over a certain dollar
threshold triggers a Yellow Book (and related
compliance audit) requirement
Client may decide to voluntarily apply the Yellow
Book in which case they would engage the auditor
to perform the audit using those standards
Governmental Audit Quality Center
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Relationship of Yellow Book with Other
Standards
AICPA field work and reporting standards are
incorporated by reference for financial audits and
then Yellow Book requires additional standards
Public Company Accounting Oversight Board
(PCAOB) and International Auditing and Assurance
Standards Board (IAASB) standards can be used in
conjunction with GAGAS for financial statement
audits
GAO guidance document provides guidance on
using the Yellow Book with PCAOB standards
(http://www.gao.gov/govaud/gagaspcaob2007.pdf)
Governmental Audit Quality Center
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Two Categories of Professional
Requirements in the Yellow Book
Use of “must” or “is required” refer to unconditional
requirements for which auditors are required to
comply with
Use of “should” equates to a presumptively
mandatory requirement
• Departure from these requirements rare
• Need to provide documentation supporting justification for the
departure and how an alternative procedure achieved the
objective
Tool available on GAO Web site which identifies all
unconditional and presumptively mandatory
requirements
(http://www.gao.gov/new.items/d08210g.pdf)
Governmental Audit Quality Center
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Ethical Principles
The ethical principles guiding the work of
auditors under GAGAS are:
•
•
•
•
The public interest
Integrity
Objectivity
Proper use of government information, resources,
and position
• Professional behavior
Governmental Audit Quality Center
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General Standards
The Yellow Book does not adopt the AICPA
general standards; instead, it establishes its
own
The four general standards are:
•
•
•
•
Independence
Professional judgment
Competence
Quality Control and Assurance
Governmental Audit Quality Center
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Yellow Book Independence Versus AICPA
GAAS audit = AICPA’s Code of Professional Conduct
Rule 101, Independence
GAGAS audit = Yellow Book independence
requirements
Some Yellow Book independence rules very similar
to AICPA rules
Other Yellow Book independence rules are more
stringent
AICPA has made available a comparison between
the two sets of standards at:
http://www.aicpa.org/InterestAreas/ProfessionalEthi
cs/Resources/Tools/DownloadableDocuments/2004_
02AICPA-GAO_rules_comparison.pdf
Governmental Audit Quality Center
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Yellow Book Independence
GAGAS states that the audit organization and the
individual auditor must:
• Be free from personal, external, and organizational impairments
to independence
• Avoid the appearance of such impairments of independence.
Comprehensive independence Q&A issued by GAO
and available at:
http://www.gao.gov/govaud/d02870g.pdf (currently
effective)
The Yellow Book defines certain steps an audit
organization should take if an impairment to
independence is identified after the audit report is
issued.
Governmental Audit Quality Center
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Yellow Book Independence
Chapter 3 of the Yellow Book addresses when
auditors their organizations are independent from
the following impairments:
• Personal
• External
• Organizational
If one or more of these impairments affects or can
be perceived to affect independence, the audit
organization (or auditor) should decline to perform
the work
Yellow Book adopts an engagement-team-focused
approach similar to AICPA Code for matters such as
financial interests of an individual auditor
Governmental Audit Quality Center
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Yellow Book Independence and Specialists
Assess the specialist's ability to perform the
work and report results impartially as it
relates to their relationship with the program
or entity under audit
If the specialist's independence is impaired,
auditors should not use the work of that
specialist
Governmental Audit Quality Center
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Nonaudit Services
Need to consider the effects of any nonaudit
services performed on independence for
current, future, and planned audit services.
Two Overarching Principles apply to the
auditor assessing the impact of performing a
nonaudit service:
• Should not provide nonaudit services that involve performing
management functions or making management decisions; and
• Should not audit own work or provide nonaudit services in
situations where the nonaudit services are material to the
subject matter of audit
Governmental Audit Quality Center
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Nonaudit Services
Nonaudit services generally fall into
one of the following categories:
• Nonaudit services that do not impair the audit
organization's independence
• Nonaudit services that would not impair the audit
organization's independence with respect to the
entities it audits as long as the audit organization
complies with identified supplemental safeguards
• Nonaudit services that do impair the audit
organization's independence
Governmental Audit Quality Center
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Nonaudit Services
Supplemental Safeguards
• Document consideration of nonaudit services, including
impact on independence
• Establish in writing an understanding with audited entity
about the nonaudit service and management
responsibilities
• Exclude personnel who provided the nonaudit services
from planning, conducting, or reviewing audit work in
the subject matter of the nonaudit services
• Do not reduce the scope and extent of audit work below
what would have been done if nonaudit service done by
an unrelated party
Governmental Audit Quality Center
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Nonaudit Services
Examples of nonaudit services provided in
connection with a financial statement audit
Assistance with:
•
•
•
•
Drafting of financial statements and footnotes
Maintenance of fixed asset records
Implementation of an accounting standard
Preparation of tax return(s)
Governmental Audit Quality Center
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Common Yellow Book Independence
Deficiencies
Failure to identify and address potential or
the appearance of impairments such as:
• Nonaudit services provided
• Making management decisions
• Failure to consider the GAO standards and related
Q&A
• Failure to comply or document compliance with
supplemental safeguards
Key to compliance with Yellow Book
independence is document, document,
document!
Governmental Audit Quality Center
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Professional Judgment
Requires that auditors must use professional
judgment in planning and performing audits and in
reporting the results
Includes exercising reasonable care and
professional skepticism
Similar to AICPA standard on due professional care
However, GAGAS expands the discussion of
professional judgment as it relates to its importance
in audit engagements (chapter 3 of the Yellow Book
provides further guidance and description)
Governmental Audit Quality Center
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Competence
Competence is derived from a blending of education and
experience
The staff assigned must collectively possess adequate
professional competence for the tasks required and include:
• knowledge of GAGAS applicable to the type of work being performed
• general knowledge of the environment in which the audited entity
operates
• skills to communicate clearly and effectively, both orally and in writing
• skills appropriate for the work being performed
If using GAGAS with other standards, auditors need to be
knowledgeable and competent in applying those standards.
Governmental Audit Quality Center
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CPE Requirement
Should complete every 2 years, at least
24 hours of Continuing Professional
Education (CPE) that directly relates to
government auditing, the government
environment, or the specific or unique
environment in which the audited entity
operates
Governmental Audit Quality Center
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CPE Requirement
An additional 56 hours of CPE (for a total of 80
hours of CPE in every 2-year period) is needed that
enhances the auditor's professional proficiency to
perform audits or attestation engagements
Applicable to:
• Auditors involved in any amount of planning, directing, or
reporting on GAGAS assignments; AND
• Auditors who are not involved in those activities but charge 20
percent or more of their time annually to GAGAS assignments
Auditors required to take the total 80 hours of CPE
should complete at least 20 hours of CPE in each
year of the 2-year periods
Governmental Audit Quality Center
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CPE Requirement
For Specialists:
• Internal specialists who are part of the audit
organization and perform as a member of the audit
team must comply with GAGAS, including the CPE
requirements
• External specialists are not required to meet the CPE
requirements but have to be qualified and maintain
professional competence
• Auditors using the work of external specialists should
assess the professional qualifications and document
their findings and conclusions
Governmental Audit Quality Center
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CPE Requirements
GAO has issued a guidance document on
the GAGAS CPE requirements that can be
found at:
http://www.gao.gov/govaud/ybcpe2005.pdf
Matters Covered:
•
•
•
•
•
Who is subject to the requirements?
How should compliance with CPE requirements be measured?
What qualifies as acceptable CPE?
Measuring CPE hours
How are CPE requirements to be administered?
Governmental Audit Quality Center
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Quality Control and Assurance
Paragraph 3.50 – 3.54 of Yellow Book
discuss QC Requirements
Each organization performing GAGAS
audits must:
• Establish a system of quality control that is designed
to provide reasonable assurance that the
organization and its personnel comply with
professional standards and applicable legal and
regulatory requirements; and
• Have an external peer review at least once every 3
years
Governmental Audit Quality Center
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Quality Control and Assurance
Keep in mind that you will also have to apply
the AICPA Statements on Quality Control
Standards (SQCS)
Yellow Book requirements for system of
quality control are generally consistent with
the SQCS
SQCS can be found at:
http://www.aicpa.org/Research/Standards/Audi
tAttest/Pages/SQCS.aspx
Governmental Audit Quality Center
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Quality Control and Assurance
Additional GAGAS Requirements
Audit organizations must make their most recent peer review
report publicly available
Those audit organizations seeking to enter into a contract to
perform a GAGAS audit or attestation engagement should
provide the following to the party contracting for such
services:
• The audit organization’s most recent peer review report and any letter
of comment
• Any subsequent peer review reports and letters of comment received
during the period of the contract
Auditors who are using another audit organization’s work
should request:
• The audit organization’s latest peer review report
• Any letter of comment
Governmental Audit Quality Center
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Quality Control and Assurance
Documentation
Must document & communicate
Policies must address:
• Leadership Responsibilities
• Independence, Legal & Ethical Requirements
• Initiation, Acceptance and Continuance of
Engagements
• Human Resources
• Engagement performance, documentation and
reporting
• Monitoring
Governmental Audit Quality Center
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Quality Control and Assurance
Monitoring
Monitoring is another difference between
AICPA and GAGAS
GAGAS requirements state that reviews of
the work and the report that are normally
part of supervision are not monitoring
controls when used alone
Purpose:
• Ensure adherence to requirements
• Ensure QC is appropriately designed
• Ensure QC policies & procedures are operating effectively
Governmental Audit Quality Center
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Quality Control and Assurance
Monitoring
Engagement Supervision Alone is not
Monitoring
Audit organizations to analyze and
summarize the results of monitoring
procedures at least annually
• Include identification of any systemic issues needing
improvement
• Include recommendations for corrective action
Should be performed by individuals that
collectively have sufficient expertise and
authority
Governmental Audit Quality Center
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Documentation
AICPA and GAGAS requirements for
documentation very similar
Experienced auditor concept should be met
GAGAS provides additional considerations
relating to:
• Auditors should document evidence of supervisory review prior
to report issuance
• Departures from GAGAS requirements due to law, regulation,
scope limitations, or other issues impacting audit should be
documented along with the impact on audit
• Policies and procedures should be established for safe custody
and retention
• Auditors should make appropriate individuals and audit
documentation available upon request
Governmental Audit Quality Center
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GAGAS Field Work – Internal Control Over
Financial Reporting
Generally, GAGAS identical to that of AICPA
requirements
Additional GAGAS requirements
• Communicate information (during planning) about the nature of
the planned work and level of assurance to be provided on
internal control
• Any potential restrictions on the scope of the audit should be
communicated
• Evaluate whether the entity has taken appropriate corrective
action to address findings and recommendations from previous
engagements
Governmental Audit Quality Center
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GAGAS Field Work – Compliance
GAGAS and AICPA requirements very similar
for consideration of compliance with laws,
regulations, as well as fraud and errors
Additional GAGAS requirements
• Communicate information (during planning) about the nature of
the planned work and level of assurance to be provided on
compliance
• Design audit to detect material misstatements due to
noncompliance with provisions of contracts or grants
• If evidence that possible illegal acts exist that could have a
material indirect effect on the financial statements, apply
procedures to ascertain whether illegal act occurred
• Evaluate whether appropriate corrective action to address
findings and recommendations from previous engagements
Governmental Audit Quality Center
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GAGAS Field Work – Abuse
Additional requirement of GAGAS
Abuse involves behavior that is deficient or
improper when compared with behavior that a
prudent person would consider reasonable and
necessary
May be the result of internal control deficiency
Examples provided in GAGAS:
•
•
•
•
•
Unneeded overtime
Staff performing personal errands
Misusing position for personal gain
Extravagant or expensive travel choices
Procurement or vendor selections that are contrary to policies
Governmental Audit Quality Center
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GAGAS Field Work – Abuse
Not required to design audit to detect
We are not providing reasonable assurance
of detecting abuse
Must follow-up when auditor becomes aware
of abuse that could be material to the
financial statements
• Quantitative considerations
• Qualitative considerations
Governmental Audit Quality Center
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GAGAS – Management Representations
Additional representations from
management:
• Responsibility for compliance and internal control over financial
reporting
• Identification of all direct and material laws, regulations, and
provisions of contracts and grants
• Has process for tracking status of audit findings and
recommendations
• Has identified previous audits and other studies related to audit
objective and whether recommendations implemented
• Has provided views on auditor’s reported findings, conclusions,
and recommendations as well as corrective actions
Governmental Audit Quality Center
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GAGAS Reporting Requirements
In addition to providing opinion on
financial statements the auditor must:
• Report on internal control over financial reporting
• Report on compliance with laws, regulations, and
provisions of contracts or grant agreements
• Report on certain fraud and abuse
Governmental Audit Quality Center
46
GAGAS Reporting Requirements
Additional Yellow Book requirements:
• Auditors’ compliance with GAGAS
• Internal control and compliance with laws,
regulations, and provisions of contracts or grant
agreements
• Deficiencies in internal control, fraud, illegal acts,
violations of provisions of contracts grant
agreements, and abuse
• Communicating additional significant matters in the
auditors’ report (always have the option)
Governmental Audit Quality Center
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GAGAS Reporting Requirements
Additional Yellow Book requirements:
• Restatement of previously-issued financial
statements (goes beyond what AICPA requires)
• Views of responsible officials (should be included in
findings write-ups)
• Confidential or sensitive information (if prohibited
from public disclosure auditor should disclose in
report that omitted and reason)
• Distributing reports (should clarify report distribution
responsibilities with auditee)
Governmental Audit Quality Center
48
GAGAS Reporting Requirements
When auditors comply with all applicable
GAGAS requirements, they should include a
statement in the auditors’ report that they
performed the audit in accordance with
GAGAS
GAGAS do not prohibit auditors from issuing
a separate report conforming only to AICPA
or other standards
Governmental Audit Quality Center
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GAGAS Reporting – The Yellow Book Report
Proper report title:
Report on Internal Control Over Financial Reporting and on
Compliance and Other Matters Based on an Audit of Financial
Statements Performed in Accordance With Government Auditing
Standards
Include description of scope of the auditor’s testing of internal
control over financial reporting and compliance
State whether tests performed provided sufficient, appropriate
evidence
When reporting separate from the financial statement opinion
(which is common practice) must add linkage paragraph to the
financial statement opinion
• That issued GAGAS report
• That GAGAS report is integral to the audit
Governmental Audit Quality Center
50
GAGAS Reporting – The Yellow Book Report
Include significant deficiencies and material
weaknesses
• Schedule of Findings and Responses
• Schedule of Findings and Questioned Costs
Include all instances of fraud and illegal acts unless
inconsequential
Include violations of provisions of contracts or
grants and abuse that could have a material effect
on the financial statements
Direct the reader to a management letter, when
issued, if it addresses control deficiencies and/or
noncompliance, fraud, or abuse that is other than
inconsequential.
Governmental Audit Quality Center
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GAGAS Reporting – The Management Letter
Auditors should communicate in writing:
• Violations of provisions of contracts or grant agreements or
abuse that have an effect that is less than material but more
than inconsequential
Determining whether and how to
communicate the following is a matter of
professional judgment:
• Illegal acts, violations of provisions of contracts or grant
agreements or abuse that is inconsequential
• Internal control deficiencies that have an inconsequential effect
on the financial statements
Governmental Audit Quality Center
52
Other Reporting Matters
Restricted Use Reports versus general use
reports
Transition from GAAS only to Yellow Book
(i.e., comparative financial statements)
Governmental Audit Quality Center
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Development of Findings
Findings include control deficiencies, fraud,
illegal acts, violations of provisions of
contracts or agreements, and abuse
Elements of a finding:
•
•
•
•
•
•
Criteria
Condition
Cause
Effect or potential effect (prevalence)
Recommendation(s) for improvement
Management’s corrective action plan(s)
Governmental Audit Quality Center
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Development of Findings
When reporting view of responsible officials,
auditors should:
• Obtain and report views of responsible officials
concerning findings, conclusions, recommendations,
and planned corrective actions,
• Include in report an evaluation of the comments, as
appropriate
If the audited entity does not provide
comments, auditors may issue the report
and indicate that the audited entity did not
provide comments
Governmental Audit Quality Center
55
References, Guidance and Tools
GAO Web Site for Yellow Book:
http://www.gao.gov/yellowbook
Government Auditing Standards, July 2007 Revision
(GAO-07-731G)
http://www.gao.gov/new.items/d07731g.pdf
Government Auditing Standards: Guidance on
GAGAS Requirements for Continuing Professional
Education (GAO-05-568G, April 2005)
http://www.gao.gov/govaud/ybcpe2005.pdf
Government Auditing Standards: Answers to
Independence Standard Questions (GAO-02-870G,
July 2002) http://www.gao.gov/govaud/d02870g.pdf
Governmental Audit Quality Center
56
References, Guidance and Tools
Guidance on Complying with Government Auditing
Standards Reporting Requirements for the Report
on Internal Control for Audits of Certain Entities
Subject to the Requirements of the Sarbanes-Oxley
Act of 2002 and Government Auditing
Standards (December 2007)
http://www.gao.gov/govaud/gagaspcaob2007.pdf
AICPA has made available a comparison between
AICPA and GAGAS independence standards at:
http://www.aicpa.org/InterestAreas/ProfessionalEthi
cs/Resources/Tools/DownloadableDocuments/2004_
02AICPA-GAO_rules_comparison.pdf
Governmental Audit Quality Center
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References, Guidance and Tools
Tool available on GAO Web site which identifies all
unconditional and presumptively mandatory
requirements
(http://www.gao.gov/new.items/d08210g.pdf)
For technical or practice questions directly related
to Government Auditing Standards, our e-mail
address is: [email protected]
Governmental Audit Quality Center
58
References, Guidance and Tools
GAQC Web site: http://aicpa.org/GAQC
AICPA Government Auditing Standards and Circular
A-133 Audits and related Risk Alert available at
http://www.cpa2biz.com/
• Chapters 1-4 relevant to GAGAS
• Report illustrations
Governmental Audit Quality Center
59
Future Revision of the Yellow Book
Final issuance of 2011 revision of Yellow Book expected later
this year
Government Auditing Standards, 2010 Exposure Draft (GAO10-853G, August 2010) and available at:
http://www.gao.gov/new.items/d10853g.pdf
Primary area of change is independence requirements (to
align the Yellow Book more closely with AICPA rules
Effective date
GAQC Archived Web event, What You Need to Know About
the 2010 Yellow Book Exposure Draft, provides you with
summary of major changes proposed
http://www.aicpa.org/InterestAreas/GovernmentalAuditQuality
/Resources/Pages/WhatYouNeedtoKnowAboutthe2010YBED–
MemberWebEvent.aspx
Governmental Audit Quality Center
60
Questions ???
61

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