1. What You Need to Know About the 2010 Yellow Book Exposure Draft
A Governmental Audit Quality Center Web Event
September 22, 2010 1

2. Administrative Notes
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3. Administrative Notes
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4. Continuing Professional Education
Must have registered for CPE credit prior to this event; a link to the CPE Credit Approval Form was ed 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

5. Presenters
James Dalkin Government Accountability Office Nancy Miller Miller Foley Group Lisa Snyder American Institute of CPAs

6. What we will cover?
Why the Government Auditing Standards (the Yellow Book) is being revised
Anticipated timeline for the Yellow Book revision
Discussion on specific areas that GAO expects to be revised in the next Yellow Book, to include the AICPA and practitioner’s perspective
We will talk about adding value to the reviewed firm as a peer reviewer – no matter what type of report is issued
We will cover some tips for adding to the profitability of your peer review -- including charging your full billing rate
Mike will talk to you about serving as a peer review committee member – how to get involved and how that benefits you and your practice
Our final topic will cover the Team Captain Packages and provide you an outlet for submitting your suggestions for these.
We’ll wrap up the call with a question and answer session, however that session is not for giving feedback on the team captain packages as those are best handled by the address we will provide you.

7. Disclaimer Required to Receive a Preview
The revisions discussed are preliminary
and subject to change based on
feedback from the Comptroller General’s Advisory Council on Government
Auditing Standards and comments received on the Exposure Draft 7

8. Why the Yellow Book is Being Revised

9. Why the Yellow Book is being revised
Promote the modernization of auditing standards
Streamline with standard setters
Address issues GAO has observed
Streamline with standard setters
Encourage development of consistent, core auditing standards
Address issues GAO has observed
Questions sent to Yellow Book Technical Assistance
GAO’s work on the oversight of the American Recovery and Reinvestment Act
Example of GAO work on oversight of Recovery Act having an impact on GAGAS: Early communication of internal control and compliance deficiencies-No new standard but emphasizing requirement in SAS No. 115 to discuss the public interest of early communication so corrective action can start before the report is issued. (and in the case of single audit this report is due 9 months after the end of the entity’s fiscal year end.)

10. Anticipated Timeline for the Yellow Book Revision

11. Anticipated timeline for the Yellow Book Revision
August 2010:
Exposured Draft of 2011 Revision of GAGAS
November 22, 2010:
Comments due on Exposure Draft
February – March 2011:
Issue 2011 Revision of GAGAS
Effective date to be determined

12. Expected Revisions in the Next Yellow Book

13. Realigned Chapters 1 and 2
Significant Changes
Realigned Chapters 1 and 2
Along with the introduction, Chapter 1 now includes the foundation and ethical principles of government auditing
The overall discussion on the use and application of GAGAS is now in Chapter 2
Chapter 3
Revised independence standard

14. Significant Changes Chapter 4 Chapter 5 Chapters 6 and 7
The chapters on financial audit performance and reporting, formerly Chapters 4 and 5 respectively, have been combined into one chapter
Chapter 5
Clarified proper use of attest engagements
Chapters 6 and 7
Clarified obligation for reporting fraud

15. Use of footnotes is more consistent.
Format Changes
Use of footnotes is more consistent.
Footnotes are now used strictly to refer to other sections of GAGAS and to other audit standards
Other information that was in footnotes in previous GAGAS editions has either been moved into the GAGAS text itself or eliminated

16. Government Auditing: Foundation and Ethical Principles
Chapter 1
Government Auditing: Foundation and Ethical Principles

17. Chapter 1 – Government Auditing: Foundation and Ethical Principles
Clarified or added definitions of
Auditor
Audit organizations a

18. Chapter 1 – Government Auditing: Foundation and Ethical Principles
The audit function’s structural location relative to the audited entity.
External audit organizations report to third parties externally
Internal audit organizations are accountable to top management and usually don’t report externally
Government auditors who report to both third parties and top management are considered external auditors a

19. Chapter 1 – Government Auditing: Foundation and Ethical Principles
Contains concepts and ethical principles that serve as the foundation for the requirements and guidance for GAGAS.
Purpose and applicability of GAGAS (no major changes)
Ethical principles (no major changes)

20. Standards for the Use and Application of GAGAS
Chapter 2
Standards for the Use and Application of GAGAS

21. Chapter 2 – Standards for the Use and Application of GAGAS
Recognizes the terms that define professional requirements, which are consistent with terminology used in the AICPA’s Statements on Auditing Standards
Recognizes the longstanding GAGAS financial audit requirements to report on deficiencies in internal control; and on fraud, noncompliance with provisions of laws, regulations, contracts, and grant agreements, and abuse

22. Chapter 2 – Standards for the Use and Application of GAGAS
Clarified citing compliance with GAGAS
Determination of appropriate GAGAS compliance statement is a matter of professional judgment
Departures from presumptively mandatory requirements
Using GAGAS with other standards

23. Chapter 3 General Standards
Independence
Professional Judgment
Competence
Quality Control and Assurance

24. Chapter 3 – General Standards: Independence
GAGAS is adopting a conceptual framework approach to independence determinations
Provides a means for auditors to assess auditor independence in light of the unique circumstances that often apply to these determinations
Approach replaces consideration of independence in terms of the three categories of independence – personal, external, and organizational – included in previous editions of GAGAS
The framework includes definitions of both independence of mind and independence in appearance

25. Chapter 3 – General Standards: Independence
The conceptual framework for independence requires that auditors:
Identify threats to independence
Evaluate the significance of the threats identified
Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level

26. Considering Independence
New framework will combine rules (prohibitions) with a conceptual framework.
Certain prohibitions will remain
Generally consistent with Rule 101 AICPA
Beyond a prohibition
Apply the conceptual framework

27. Chapter 3 – General Standards: Independence
GAGAS framework will:
Provide consistent results when compared with AICPA and IFAC
Address unique governmental structural issues
GAO will retire current Questions and Answers to Independence Standard Questions guidance

28. Chapter 3 – General Standards: Independence
Threats to independence are circumstances that could impair independence
Usually, a threat to independence does not result in an independence impairment!
Safeguards are controls that eliminate or reduce to an acceptable level a threat’s potential to impair independence

29. Chapter 3 – General Standards: Independence
Seven categories of threats:
Self-interest threat
Self-review threat
Bias threat
Familiarity threat
Undue influence threat
Management participation threat
Structural threat

30. Safeguards
Safeguards created by the profession, legislation, or regulation
Professional or regulatory monitoring and disciplinary procedures
External review by a third party of the reports, communications or other information produced by the auditor
Safeguards in the work environment
Using different management and engagement teams with separate reporting lines for the provision of nonaudit services to and audited entity
Having additional review of the nonaudit service or the audit by staff who was not involved in providing the service/working on the engagement
The audited entity provides appropriate oversight and communication regarding the nonaudit service and the audit engagement

31. Assess condition or activity for threats to independence
Threat identified?
YES
Assess threat for significance NO
Is threat significant?
Proceed
YES
Identify and apply appropriate safeguard(s)
Assess safeguard effectiveness
Is threat eliminated or reduced to an acceptable level?
YES
Potential independence impairment; do not proceed NO 31

32. Independence Framework Example Payroll Accruals
Client requests auditor to assist with payroll accruals for financial statements prepared using GASB accounting standards
Threat—self-review threat
Safeguard-Knowledgeable staff at client that is able to review and check reasonableness of numbers based on analytical calculation
Safeguard-Staff assigned are not connected to the audit team

33. Assess condition or activity for threats to independence
Payroll Accruals example NO
Threat identified? (self-review threat)
YES
Assess threat for significance
Is threat significant?(material)
Proceed NO
YES
Identify and apply appropriate safeguard(s) (Knowledgeable management)
Assess safeguard effectiveness-depends on confidence on managements knowledge
The auditors might note that in the previous year the client has a significant deficiency in internal control over financial reporting. Consequently the client’s internal controls are probably not sufficient to safeguard against the threat to independence that would result from the auditors’ participation in preparing the financials. The auditors would then have to decide whether they will perform the audit or the nonaudit service.
GAGAS could adopt the pre-defined categories that would best serve government audit, and add new categories that apply specific to government audits.
In particular, we think Self-review, Familiarity, Self-interest, and Management participation threats are major threat categories in government auditing. We would propose adding another threat, “Bias threat.”
While preconceived ideas and biases can degrade the quality of any audit, the need to guard against these threats in government audits is especially important due to the sensitive and public nature of many government audits, and the qualitative nature of some performance audits.
YES
Is threat eliminated or reduced to an acceptable level?
Potential independence impairment; do not proceed NO 33

34. Nonaudit Services
Certain Non Audit Services may be permitted. For Yellow Book the auditor should
First, determine if there is a specific prohibition
If not, the auditor should apply the conceptual framework
The auditor should also
Be aware of existing AICPA guidance
General Comment
Non audit service prohibitions in this Exposure Draft are generally consistent with AICPA requirements.

35. Financial Statements Preparation
May be permissible provided
Audit entity managers charged with overseeing the nonaudit service must possess suitable skill, knowledge, and/or experience to evaluate the adequacy and results of the services performed
This requirement has is consistent with an existing AICPA requirement in ET 101 – 3 “Performance of non attest services”
For CPAs all the requirements of AICPA ET 101 – Independence apply
Otherwise no safeguard could reduce the threat to an acceptable level

36. Bookkeeping Services
Bookkeeping Services may be performed provided the auditor does not…
Determine or change journal entries, account codings or classifications for transactions, or other accounting records without obtaining client approval
Authorize or approve transactions
Prepare source documents
Make changes to source documents without client approval
The Yellow Book’s position on bookkeeping services is consistent with existing AICPA requirements in ET 101.

37. Prohibitions within Internal Audit
Certain internal audit services provided by external auditors
Setting internal audit policies or the strategic direction of internal audit activities
Deciding which recommendations resulting from internal audit activities to implement
Taking responsibility for designing, implementing and maintaining internal control

38. Prohibitions Related to Internal Control Assessments
Internal control monitoring
Auditors are prohibited from providing ongoing monitoring services
Management is responsible for designing, implementing and maintaining internal control.
Auditors may evaluate the effectiveness of controls, but may not design the system of internal controls and then assess its effectiveness

39. Prohibitions within IT Services
Certain IT services
Design or development of a financial or other IT system that would be subject to or part of an audit
Services that entail making other than insignificant modifications to the source code underlying such a system
Operating or supervising the operation of such a system

40. Prohibitions within Valuation Services
Certain valuation services
If the valuation services would have a material effect, separately, or in the aggregate, on the financial statements or other information that is the subject of an audit, and the valuation involves a significant degree of subjectivity

41. Nonaudit Services Audit Period
Technical Requirement
The impairment to independence resulting to the provision of nonaudit services applies during
the period of the audit,
the professional engagement, and
one audit cycle performed by another audit organization after the nonaudit service completion date provide a safeguard
Other Potential Impact
Independence for subsequent periods of audit and professional engagement
Independence for reporting material weaknesses and significant deficiencies resulting from the nonaudit service

42. Chapter 3 – General Standards: Professional Judgment
Emphasized that auditors use professional judgment in applying the conceptual framework for independence

43. Non Audit Services AICPA Perspective
Lisa Snyder will
Provide her perspective on the Yellow Book exposure draft in light of the AICPA’s independence rules.
Discuss a comparison of the GAO proposal and AICPA rules.
Please refer to the handout provided with this presentation.

44. Non Audit Services Practitioner Perspective
Documentation requirements
Not documented = not performed
Documentation required for non performance of presumptively mandatory requirements.
Assessment of risks and safeguards required when an independence threat is determined.
Peer reviewer’s will be looking for documentation of independence threat assessments

45. Non Audit Services Practitioner Perspective
Independence
If not specifically prohibited, apply conceptual framework
Non audit services
Generally similar to 101-3
Evaluate self-review threat where auditor is
Preparing workpapers
Proposing entries
Preparing financial statements

46. Non Audit Services Practitioner Perspective
Independence
Non audit services Con’t
Define safeguards (examples, not inclusive)
Performance by staff not on audit team
Review by staff not on audit team
Review by client personnel competent to evaluate services rendered
Outsourced review
Prohibited activity – taking on management responsibilities.
Prohibited under as well
Assess management competency to accept responsibility
If management can’t or won’t take responsibility – auditor is not independent.

47. Non Audit Services Practitioner Perspective
Independence
Non audit services Con’t
Bookkeeping services
need client approval
Documentation
Note safeguard of “cleansing audit”

48. Chapter 3 – General Standards: Competence
Continuing professional education: The distinction between internal and external specialists was highlighted
External specialists should be qualified and maintain professional competence, but are not required to meet GAGAS CPE requirements
Internal specialists performing GAGAS work should comply with CPE requirements. Training in areas of specialization counts towards the required 24 hours of CPE that relate to their area of expertise or government auditing

49. Chapter 3 – General Standards: Continuing Professional Education (CPE)
2007 Revision of GAGAS incorporated the revised CPE requirements that were issued in April 2005 (GAO G)
No revision to overall requirements
24 hours of CPE every 2 years directly related to GAGAS engagements
Additional 56 hours of CPE, involved in planning, directing, or reporting on GAGAS assignments or charge 20 percent or more of time annually to GAGAS assignments
20 hours of CPE each year 49

50. Chapter 3 – General Standards: Quality Control and Assurance
Harmonize Quality Control with AICPA standards
Communicate deficiencies noted during the monitoring process
Make recommendations for appropriate remedial action

51. Chapter 4 Financial Audits

52. Chapter 4 - Financial Audits Change in Terminology
When referring to financial audits, terminology has been updated for consistency with other standards.
The term “field work” has been replaced with “performance”
GAGAS still uses “field work” when discussing attestation engagements and performance audits

53. Chapter 4 - Financial Audits
No new requirements were added for financial audits
The additional government auditing standards requirements for government auditing relate to:

54. Chapter 4 - Financial Audits GAGAS Requirements Beyond AICPA
Clearly identified the additional GAGAS requirements beyond the AICPA. As in previous editions, the additional requirements relate to:
auditor communication
previous audits and attestation engagements
fraud, noncompliance with provisions of laws, regulations, contracts, and grant agreements, and abuse
developing elements of a finding
audit documentation

55. Chapter 4 - Financial Audits Removal of Duplication with AICPA
Referenced the AICPA standards when applicable, allowing removal of duplication between GAGAS and AICPA standards in the areas of:
Restatements
Definitions of internal control deficiencies
Communication of significant matters
Consideration of fraud and illegal acts

56. “New” vs. “Old” Definition of a Material Weakness
New Definition- SAS No. 115:
A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis
2007 GAGAS-SAS No. 112:
A significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that material misstatement of the financial statements will not be prevented or detected

57. “New” vs. “Old” Definition of a Significant Deficiency
New Definition- SAS No. 115:
A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance
2007 GAGAS-SAS No. 112:
A deficiency in internal control or combination of deficiencies, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected

58. Chapter 4 - Financial Audits AICPA Standards: Special Considerations for Government Audits
Highlighted considerations for applying certain AICPA standards in a GAGAS financial audit
Materiality
Auditors may find it appropriate to use a lower materiality level in a governmental environment
Early communication of control deficiencies in a GAGAS financial audit
For some matters, early communication is important because of significance and the urgency of corrective action
May communicate orally to management, and when appropriate those charged with governance, so timely remedial action can be taken to minimize risk of material misstatement

59. Chapter 4 - Financial Audits: Deleted Requirements
Deleted GAGAS requirements that were adequately covered by AICPA or elsewhere in GAGAS:
Document terminated engagements
Develop policies to address requests by outside parties to obtain access to audit documentation

60. Attestation Engagements
Chapter 5
Attestation Engagements

61. Chapter 5 - Attestation Engagements
No new requirements were added for attestation engagements Language was modified to clearly identify the additional GAGAS requirements beyond the AICPA and to reference the AICPA standards when applicable
The additional requirements for government auditing relate to:
a. auditor communication;
b. previous audits and attestation engagements
c. fraud, illegal acts, violations of provisions of contracts or grant agreements, or abuse that could have a material effect on the subject matter or an assertion about the subject matter
d. developing elements of a finding; and
e. attest documentation.[1]
[1] See paragraphs 5.06 through 5.23 for additional discussion of 5.05 a-e.

62. Chapter 5 - Attestation Engagements The Three Levels of Service
Realigned the chapter to place emphasis on the three levels of attestation engagements in accordance with the AICPA, and introduced separate sections for type of attestation engagement
Examination
Review
Agreed-Upon procedures
The additional requirements for government auditing relate to:
a. auditor communication;
b. previous audits and attestation engagements
c. fraud, illegal acts, violations of provisions of contracts or grant agreements, or abuse that could have a material effect on the subject matter or an assertion about the subject matter
d. developing elements of a finding; and
e. attest documentation.[1]
[1] See paragraphs 5.06 through 5.23 for additional discussion of 5.05 a-e.

63. Chapter 5 - Attestation Engagements Requirements Beyond AICPA
For examination-level engagements, clearly identified the additional GAGAS requirements beyond the AICPA. As in previous editions, the additional requirements relate to
Auditor communication
Previous audits and attestation engagements
Fraud, illegal acts, violations of provisions of contracts or grant agreements, or abuse that could have a material effect on the subject matter or an assertion about the subject matter
Developing elements of a finding
Documentation
The additional requirements for government auditing relate to:
a. auditor communication;
b. previous audits and attestation engagements
c. fraud, illegal acts, violations of provisions of contracts or grant agreements, or abuse that could have a material effect on the subject matter or an assertion about the subject matter
d. developing elements of a finding; and
e. attest documentation.[1]
[1] See paragraphs 5.06 through 5.23 for additional discussion of 5.05 a-e.

64. Chapter 5 - Attestation Engagements
For each level of service provided by attestation engagements, added language on
Additional GAGAS requirements on citing compliance with GAGAS
The importance of the required elements of AICPA reporting under each level of attestation engagements
Establishing an understanding with the entity regarding the services to be performed
The additional requirements for government auditing relate to:
a. auditor communication;
b. previous audits and attestation engagements
c. fraud, illegal acts, violations of provisions of contracts or grant agreements, or abuse that could have a material effect on the subject matter or an assertion about the subject matter
d. developing elements of a finding; and
e. attest documentation.[1]
[1] See paragraphs 5.06 through 5.23 for additional discussion of 5.05 a-e.

65. Chapter 5 - Attestation Engagements Removal of Duplication with AICPA
Removed duplicate definitions of internal control deficiencies between GAGAS and AICPA standards
Significant deficiency
Material weakness

66. Chapter 5 - Attestation Engagements Clarifications on Reporting Deficiencies
For examination engagements, added language on reporting deficiencies in internal control
Auditors should include in the examination report all deficiencies, even those communicated early, that are considered significant deficiencies or material weaknesses
Deficiencies remediated before the examination report is issued should be reported, along with notification of the remediation

67. Chapter 5 - Attestation Engagements AICPA Standards: Special Considerations for Government Engagements
Highlighted considerations for applying certain AICPA standards in a GAGAS attestation engagement (consistent with Financial Audits)
Materiality
Early communication of deficiencies

68. Chapter 5 - Attestation Engagements Deleted Requirements
Deleted GAGAS requirements that were adequately covered by AICPA or elsewhere in GAGAS
Document terminated engagements
Develop policies to address requests by outside parties to obtain access to audit documentation

69. Chapter 6 Field Work Standards for Performance Audits

70. Chapter 6 - Performance Audits: Field Work - Deletion
Deleted the requirement that the audit organization develop policies to address requests by outside parties to obtain access to audit documentation since covered by Quality Control requirements of GAGAS

71. Chapter 6 - Performance Audits: Field Work
Retained the documentation requirement pertaining to termination of an audit
(We are proposing deleting this requirement for financial audits and attestation engagements)

72. Chapter 7 Reporting Standards for Performance Audits

73. Chapter 7 - Performance Audits: Reporting - Modifications
Modified the reporting requirements
The discussion of requirements for reporting deficiencies in internal control, on noncompliance with provisions of laws, regulations, contracts, and grant agreements, and on abuse, noting that professional judgment is required in making reporting determinations
The fraud reporting requirement is now limited to occurrences that are significant within the context of the audit

74. Chapter 7 - Performance Audits: Reporting – Modifications
Modified the reporting requirements (continued)
Added a requirement that auditors obtain and report views of responsible officials concerning the findings, conclusions, and recommendations included in the auditors’ report, as well as planned corrective actions, has been added, consistent with the other GAGAS reporting standards

75. We also get lots of help from:
Yellow Book Team:
Jim Dalkin (202)
Marcia Buchanan (202)
Cheryl Clark (202)
Kristen Kociolek (202)
Gail Vallieres (202)
Michael Hrapsky (202)
Heather Keister (202)
Theresa Phipps (202)
Tom Hackney (303)
Eric Holbrook (202)
Mark Kaufman (202)
Andrew Seehusen (202)
We also get lots of help from:
Bob Dacey, GAO Chief Accountant
Jennifer Allison, Advisory Council Administrator
Contact us at
Challenges to Government and Not-For-Profit Community
Fiscal condition of government grantor organizations (federal, state, and local governments) may impact long-term grant revenues and design of programs
Need for services is increasing
Expectations for an unprecedented level of transparency and accountability
Qualified personnel needed to implement proper controls and accountability at all levels of government
Close and ongoing coordination needed among federal, state and local governments, and the grantee organizations
Evolving standards and requirements 75

76. Where to Find the Yellow Book
The Yellow Book is available on GAO’s website at:
For technical assistance, contact us at 76

77. How to provide comments on the GAO proposal
The GAQC encourages members to provide GAO with comments.
Submit your comments electronically directly to GAO at
Due date is November 22, 2010
Please submit copy to GAQC at
ACIAP/GAQC will be providing comments. 77

78. Questions ?????