1. Government Auditing Standards
System Administration
Internal Audit Committee
March 1, 2007

2. Auditing Standards Auditors’ report states standards followed:
Public issuers – PCAOB
Generally accepted (Nonpublic) – AICPA
Government (Yellow Book) – GAO
Internal Audit (Red Book) – IIA

3. Yellow Book Application
The Yellow Book is applicable to:
Audits of federal entities
Where required by federal agency or regulation (OMB A-133)
Where required by law (Texas Internal Auditing Act)
Where voluntarily adopted

4. Red vs. Yellow
What is the difference between the Red Book and the Yellow Book?
About 200 pages!

5. Red vs. Yellow
Purpose of the Red Book (emphasis on audit’s role in helping the organization improve):
Sets forth basic principles of internal auditing and elements of an audit function
Provides framework for performance of a wide range of auditing and consulting activities
Establishes basis for evaluation of internal audit activities through peer reviews
Focuses on improved organizational processes and operations

6. Red vs. Yellow
Purpose of the Yellow Book (emphasis on serving the public):
Provides a framework for conducting high quality audits with “competence, integrity, objectivity, and independence”
Emphasizes auditor ethics, independence, performance of fieldwork, and reporting language
Standards are specific and “mandatory”

7. Red vs. Yellow Yellow Book is more prescriptive: Peer reviews Training
Independence: allowable and unallowable activities
Documentation and audit policies
Report language

8. Yellow Book Sections Ethical principles General standards
Independence
Audit quality control (peer reviews)
Professional judgment
Competence of staff; training
Specific standards
Financial audit fieldwork and reporting
Attestation engagement fieldwork and reporting
Performance audit fieldwork and reporting

9. Ethics
New section for 2008
Provides guidance for audit’s responsibility relating to:
Serving the public
Maintaining integrity, objectivity and independence
Using government information, resources, and position
Acting in a professional manner

10. Independence Standard
“In all matters relating to the audit work, the audit organization and the individual auditor, whether government or public, should be free both in fact and appearance from personal, external, and organizational impairments to independence.”

11. Overarching Principles
Independence requirement is principles-based with two overarching principles:
Auditors should not perform management functions or make management decisions; and
Auditors should not audit their own work or provide non-audit services in situations where the amounts or services involved are significant/material to the subject matter of the audit.

12. Personal Impairments
Audit organizations must be alert to personal impairments that might:
Limit the extent of the inquiry
Limit disclosure
Weaken or slant audit findings

13. Personal Impairments
Internal quality control system is required to determine if auditors have any personal impairments to independence.
Auditor is responsible for notifying appropriate officials within audit organization if they have any personal impairments.

14. Personal Impairments
Principles for consideration of nonaudit services:
Audit organizations should not provide nonaudit services that involve performing management functions or making management decisions.
Audit organizations should not audit their own work or provide nonaudit services in situations where the nonaudit services are significant/material to the subject matter of audits.

15. External Impairments
External impairments occur when an auditor is deterred from acting objectively and exercising professional skepticism by pressures from management and employees of audited entity.

16. Organizational Impairments
Auditor organization should be free of impairments.
The auditor organization is the placement of the auditor within the government.

17. Other General Standards
Audit quality control – requires peer reviews:
Every three years
Knowledge of Yellow Book by team
Professional judgment
Requires exercise of care and skepticism
Ensures quality audit methodology
Competence of staff
80 CPE hours required every two years
Knowledge of audit required before start of fieldwork

18. Specific Standards
Fieldwork and reporting standards for different audit-services:
Financial audits in accordance with GAAP
Attestation engagements (e.g., NCAA agreed-upon procedures)
Performance audits (most internal audits)
Exploring potential to opt out of applying fieldwork and reporting standards as long as general standards are not violated.

19. Application to UT System
Requirements for following Yellow Book have been discussed with internal audit directors.
Audit directors have begun the process of becoming fully-compliant.
Peer reviews should begin to assess compliance.
Lack of compliance should be disclosed.
More changes to Yellow Book are expected as changes to AICPA and PCAOB standards are enacted – making it more difficult for internal auditors to serve their organizations in ways they have done in the past.