1. What’s New in Government Internal Control and Auditing Standards? Houston Institute of Internal Auditors 2015 Government Auditing Conference Page 1

2. Session Objectives To discuss GAO’s revision to the Standards for Internal Control in the Federal Government (Green Book) To discuss recent developments to the Government Auditing Standards (Yellow Book) To provide a general overview of the 2011 Yellow Book Page 2

3. Standards for Internal Control in the Federal Government Page 3 Going Green

4. 1983Present Green Book Through the Years Page 4

5. What’s in Green Book for the Federal Government? Reflects federal internal control standards required per Federal Managers’ Financial Integrity Act (FMFIA) Serves as a base for OMB Circular A-123 Written for government Leverages the COSO Framework Uses government terms Page 5

6. What’s in Green Book for State and Local Governments? May be an acceptable framework for internal control on the state and local government level under proposed OMB Uniform Guidance for Federal Awards Written for government Leverages the COSO Framework Uses government terms Page 6

7. What’s in Green Book for Management and Auditors? Provides standards for management Provides criteria for auditors Can be used in conjunction with other standards, e.g. Yellow Book Page 7

8. Updated COSO Framework Released May 14, 2013 Page 8

9. The COSO Framework Relationship of Objectives and Components Direct relationship between objectives (which are what an entity strives to achieve) and the components (which represent what is needed to achieve the objectives) COSO depicts the relationship in the form of a cube: Three objectives: columns Five components: rows Organizational structure: third dimension Source: COSO Page 9

10. From COSO to Green Book: Harmonization COSO Green Book Page 10

11. Revised Green Book: Standards for Internal Control in the Federal Government Page 11 Overview Standards

12. Consists of two sections: Overview Standards Establishes: Definition of internal control Categories of objectives Components and principles of internal control Requirements for effectiveness Standards for Internal Control Page 12

13. Revised Green Book: Overview Explains fundamental concepts of internal control Addresses how components, principles, and attributes relate to an entity’s objectives Discusses management evaluation of internal control Overview Standards Page 13

14. Fundamental Concepts What is internal control in Green Book? OV1.01 Internal control is a process effected by an entity’s oversight body, management, and other personnel that provides reasonable assurance that the objectives of an entity will be achieved. What is an internal control system in Green Book? OV1.04 An internal control system is a continuous built-in component of operations, effected by people, that provides reasonable assurance, not absolute assurance, that an entity’s objectives will be achieved. Page 14

15. Overview: Components, Principles, and Attributes Achieve ObjectivesComponentsPrinciplesAttributes Overview Standards Page 15

16. Revised Green Book: Principles Page 16

17. Components and Principles Page 17

18. Component, Principle, Attribute Page 18

19. Overview: Principles and Attributes Overview Standards In general, all components and principles are required for an effective internal control system Principles and Attributes: Entity should implement relevant principles If a principle is not relevant, document the rationale of how, in the absence of that principle, the associated component could be designed, implemented, and operated effectively Attributes are considerations that can contribute to the design, implementation, and operating effectiveness of principles Page 19

20. Overview: Principles and Attributes (cont.) OV2.05: The 17 principles support the effective design, implementation, and operation of the associated components and represent requirements necessary to establish an effective internal control system. OV2.07 excerpt: The Green Book contains additional information in the form of attributes... Attributes provide further explanation of the principle and documentation requirements and may explain more precisely what a requirement means and what it is intended to cover, or include examples of procedures that may be appropriate for an entity. Page 20

21. Overview: Management Evaluation An effective internal control system requires that each of the five components are: Effectively designed, implemented, and operating Operating together in an integrated manner Management evaluates the effect of deficiencies on the internal control system A component is not effective if related principles are not effective Overview Standards Overview Standards Page 21

22. Overview: Additional Considerations The impact of service organizations on an entity’s internal control system Discussion of documentation requirements in the Green Book Applicability to state, local, and quasi-governmental entities as well as not-for-profits Cost/Benefit and Large/Small Entity Considerations Overview Standards Overview Standards Page 22

23. Revised Green Book: Standards Control Environment Risk Assessment Control Activities Information and Communication Monitoring Overview Standards Page 23

24. Revised Green Book: Standards Explains principles for each component Includes further discussion of considerations for principles in the form of attributes Overview Standards Page 24

25. Control Environment Page 25

26. Risk Assessment Page 26

27. Control Activities Page 27

28. Information & Communication Page 28

29. Monitoring Page 29

30. Controls Across Components Page 30

31. Other Key Considerations Standards vs. Framework Documentation Requirements Overview lists in OV4.08 the documentation requirements found in the principles which represent the minimum level of documentation necessary for an effective internal control system Page 31

32. Documentation Requirements Excerpt from OV2.06: If management determines a principle is not relevant, management supports that determination with documentation that includes the rationale of how, in the absence of that principle, the associated component could be designed, implemented, and operated effectively. Page 32

33. Documentation Requirements (cont.) Control Environment 3.09: Management develops and maintains documentation of its internal control system. Control Activities 12.02: Management documents in policies the internal control responsibilities of the organization. Page 33

34. Documentation Requirements (cont.) Monitoring 16.09: Management evaluates and documents the results of ongoing monitoring and separate evaluations to identify internal control issues. 17.05: Management evaluates and documents internal control issues and determines appropriate corrective actions for internal control deficiencies on a timely basis. 17.06: Management completes and documents corrective actions to remediate internal control deficiencies on a timely basis. Page 34

35. Accessibility of Green Book Comments raised during exposure identified new need: How do we make the Green Book more accessible to our user community? Page 35

36. The Green Book Layout Changed the layout of the Green Book itself to make it more user friendly: Introduced a highlights page Facsimile page Graphics throughout the overview and standards Page 36

37. Highlights Page Page 37

38. Facsimile Page Page 38

39. Cube as Navigation Aid Page 39

40. The Green Book in Action Relationship between the Green Book and Yellow Book Page 40

41. Green Book and Yellow Book Can be used by management to understand requirements Can be used by auditors to understand criteria Page 41

42. The Yellow Book: Framework for Audits Findings are composed of: Condition (What is) Criteria (What should be) Cause Effect (Result) Recommendation (as applicable) Page 42

43. Linkage Between Criteria (Yellow Book) and Internal Control (Green Book) Green Book provides criteria for the design, implementation, and operating effectiveness of an effective internal control system Page 43

44. The Yellow Book: Framework for Audits Findings are composed of: Condition (What is) Criteria (What should be) Cause Effect (Result) Recommendation (as applicable) Page 44

45. Linkage Between Findings (Yellow Book) and Internal Control (Green Book) Findings may have causes that relate to internal control deficiencies Page 45

46. Effective Date Green Book effective beginning fiscal year 2016 and for the FMFIA reports covering that year Management, at its discretion, may elect early adoption of the Green Book Page 46

47. Government Auditing Standards Yellow Book Update Page 47

48. Yellow Book Update New Interpretation Future Plans for Revision Page 48

49. New Interpretation: Peer Review Ratings GAO developed interpretive guidance on assessing and reporting on the results of peer reviews in government environment: New report ratings do not change the thresholds for deficiency reporting Matters identified during peer review that are not included in report may be communicated orally or in writing Page 49

50. Yellow Book Interpretations Same authority as Yellow Book Presented to Advisory Council Addressed with key stakeholders Posted to GAO website Page 50

51. Future Plans for Revision Plans for the next Yellow Book revision are underway Areas being considered for revision include: CPE Competence Further clarify updates Updates for ASB attest section modifications Peer review Page 51

52. Government Auditing Standards 2011 Yellow Book Page 52

53. Yellow Book = “GAGAS” GAGAS—Generally Accepted Government Auditing Standards: Broad statements of auditors’ responsibilities An overall framework for ensuring that auditors have the competence, integrity, objectivity, and independence in planning, conducting, and reporting on their work For financial audits and attestation engagements, incorporates and builds on the AICPA standards (SASs and SSAEs) Page 53

54. The 2011 Yellow Book: Applicability Chapters 1, 2, and 3 apply to all GAGAS engagements: Chapter 1: Government Auditing: Foundation and Ethical Principles Chapter 2: Standards for Use and Application of GAGAS Chapter 3: General Standards Chapter 4: Standards for Financial Audits – applies only to financial audits Chapter 5: Standards for Attestation Engagements – applies only to attestation engagements Page 54

55. The 2011 Yellow Book: Applicability (cont.) Chapters 6 and 7 apply only to performance audits: Chapter 6: Field Work Standards for Performance Audits Chapter 7: Reporting Standards for Performance Audit Appendix: Provides additional guidance (not requirements) for all GAGAS engagements Interpretations: Available on the Yellow Book web page. Provide additional guidance (not requirements) for areas of particular interest or sensitivity Page 55

56. Chapter 2: Types of GAGAS Engagements All audits begin with objectives, and those objectives determine the type of audit to be performed and the applicable standards to be followed The types of audits that are covered by GAGAS, as defined by their objectives, are classified in the Yellow Book as: Financial audits Attestation engagements Performance audits Page 56

57. Chapter 2: Use of Terminology Standardized language to define the auditor requirements Consistent with AU-C 200: Must indicates an unconditional requirement Should indicates a presumptively mandatory requirement Text not using the above conventions is considered explanatory material Page 57

58. Chapter 3: General Standar ds Independence Conceptual framework Provision of nonaudit services to auditees Professional judgment Competence Technical knowledge Continuing Professional Education Quality Assurance System of quality assurance Peer review Page 58

59. Chapter 3: Independence In all matters relating to the audit work, the audit organization and the individual auditor, whether government or public, must be independent Independence comprises: Independence of Mind Independence in Appearance Page 59

60. Applying the Framework Conceptual Framework: 1.Identify threats to independence 2.Evaluate the significance of the threats identified, both individually and in the aggregate 3.Apply safeguards as necessary to eliminate the threats or reduce them to an acceptable level 4.Evaluate whether the safeguard is effective Documentation Requirement: Para 3.24: When threats are not at an acceptable level and require application of safeguards, auditors should document the safeguards applied. Page 60

61. Independence Conceptual Framew ork Applying The Framework Threats could impair independence Do not necessarily result in an independence impairment Safeguards could mitigate threats Eliminate or reduce to an acceptable level Page 61

62. Additional Documentation Requirements 1.Auditors must document application of safeguards in place 2.Auditors must document assessment of skill, knowledge, and experience (SKE) Page 62

63. Applying the Framework: Categories of Threats 1.Management participation threat 2.Self-review threat 3.Bias threat 4.Familiarity threat 5.Undue influence threat 6.Self interest threat 7.Structural threat Page 63

64. Applying the Framework: Examples of Safeguards 1.Reassign individual staff members who may have a threat to independence 2.Have separate staff perform the non-audit and audit services 3.Have professional staff from outside of the team review the work 4.Use or consult with an independent third party 5.Involve another audit organization 6.Decline to do the requested scope of the non-audit service Page 64

65. Nonaudit Services 1.Determine if there is a specific prohibition. Unless specifically prohibited, nonaudit services MAY be permitted but should be documented 2.If not prohibited, assess the nonaudit service’s impact on independence using the conceptual framework 3.If the auditor assesses any identified threat to independence as higher than insignificant, assess the sufficiency of audited entity management’s skill, knowledge, and experience to oversee the nonaudit service 4.And… Page 65

66. Nonaudit Services (cont.) 4.If the auditor concludes that performance of the nonaudit service will not impair independence, document assessments in relation to both: Safeguards applied in accordance with the conceptual framework and The auditor’s assessment of sufficiency of audited entity managements’ skill, knowledge or experience to oversee the nonaudit service (paragraph 3.34) Page 66

67. Assessing Management’s Skill, Knowledge, and Experience Factors to document include management’s: Understanding of the nature of the nonaudit service Knowledge of the audited entity’s mission and operations General business knowledge Education Position at the audited entity Some factors may be given more weight than others GAGAS does not require that management have the ability to perform or reperform the service Page 67

68. Sufficiency of Skills, Knowledge and Experience Sufficient skills, knowledge and experience may be judged based in part on: Ability of the responsible audited entity personnel to understand the nature and results of the nonaudit service Ability of the responsible person to identify material errors or misstatements in a nonaudit service work product Ability and willingness and of the responsible person to take meaningful action in the event of identification of a problem with the nonaudit service Client prepared material in poor condition may indicate the client is not capable of taking responsibility for the service. Significant audit findings and adjustments may also be indicative of this issue. Page 68

69. Safeguards: Nonaudit Services Auditors should document safeguards when significant threats are identified: Auditor has responsibility to perform the assessment, this cannot be a management assertion Assessment should be in writing and indicate actions the auditor has taken to mitigate the threat Assessment should include a conclusion Auditor should document actions taken to mitigate the threat (safeguards) An example of safeguards for nonaudit services may include actions taken by the auditor to preserve independence such as an extra level of review or secondary review Page 69

70. Prohibited Nonaudit Services Management responsibilities (not a comprehensive list): Setting policies and strategic direction for the audited entity Directing and accepting responsibility for the actions of the audited entity’s employees in the performance of their routine, recurring activities Having custody of an audited entity’s assets Reporting to those charged with governance on behalf of management Deciding which of the auditor’s or outside third party’s recommendations to implement Page 70

71. Continuing Professional Education (CPE) No revision to overall requirements Minimum of 24 hours of CPE every 2 years Government Specific or unique environment Auditing standards and applicable accounting principles Additional 56 hours of CPE for auditors involved in Planning, directing, or reporting on GAGAS assignments or Charge 20 percent or more of time annually to GAGAS assignments Minimum of 20 hours of CPE each year Page 71

72. Chapter 3: General Standards System of Quality Control Each audit organization must document its quality control policies and procedures and communicate those policies and procedures to its personnel Page 72

73. Chapter 3: General Standards System of Quality Control Added a requirement that the quality control policies and procedures collectively address: Leadership responsibilities for quality within the audit organization Independence, legal, and ethical requirements Initiation, acceptance, and continuance of audit and attestation engagements Human resources Audit and attestation engagement performance, documentation, and reporting Monitoring of quality Page 73

74. Peer Review Ratings The peer review team uses professional judgment in deciding the type of peer review report Types of peer review ratings: Page 74

75. Chapter 4: Financial Audits Incorporate by reference AICPA Statements on Auditing Standards Additive requirements (performing and reporting) for financial audits Additional considerations for financial audits Page 75

76. Chapter 5: Attestation Engagements Separated attest requirements: Examination Review Agreed-Upon Procedures Update considerations: Clarified distinctions between engagement types Emphasized AICPA reporting requirements Page 76

77. Incorporate by reference AICPA Statements on Standards for Attestation Engagements (SSAEs) Additive requirements (performing and reporting) for financial audits Additional considerations for GAGAS attestations Chapter 5: Attestation Engagements Page 77

78. Chapter 6: Performance Audit Fieldwork Reasonable assurance Significance Audit Risk Planning Supervision Obtaining sufficient, appropriate evidence Audit documentation Page 78

79. Chapter 6: Performance Audits Level of Assurance Performance audits that comply with GAGAS provide reasonable assurance that the evidence is sufficient and appropriate to support the auditors’ findings and conclusions Page 79

80. Chapter 6: Performance Audits Sufficient, Appropriate Evidence Appropriateness is defined as a measure of quality of evidence that encompasses the relevance, validity, and reliability of evidence used for addressing the audit objectives and supporting findings and conclusions Sufficiency is defined as a measure of quantity of evidence used for addressing the audit objectives and supporting findings and conclusions Page 80

81. Chapter 6: Performance Audits Criteria Represent the laws, regulations, contracts, grant agreements, standards, measures, expected performance, defined business practices, and benchmarks against which performance is compared or evaluated Page 81

82. Chapter 6: Performance Audits Criteria Examples of criteria: Purpose or goals prescribed by law or regulation or set by officials of the audited entity Policies and procedures established by officials of the audited entity Technically developed standards or norms Expert opinions Page 82

83. Chapter 7: Performance Audits Reporting Auditors must issue audit reports communicating the results of each completed performance audit Auditors should use a form of the audit report that is appropriate for its intended use and is in writing or in some other retrievable form Page 83

84. Chapter 7: Performance Audits Report Contents Auditors should prepare audit reports that contain: Objectives, scope, and methodology of the audit Audit results, including findings, conclusions, and recommendations, as appropriate Statement about the auditors’ compliance with GAGAS Summary of the views of responsible officials Nature of any confidential or sensitive information omitted Page 84

85. Chapter 7: Performance Audits Reporting Views 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 Page 85

86. Where to Find Us The Yellow Book is available on GAO’s website at: www.gao.gov/yellowbook The Green Book is available on GAO’s website at: www.gao.gov/greenbook For technical assistance, contact us at: yellowbook@gao.govyellowbook@gao.gov or greenbook@gao.govgreenbook@gao.gov or call (202) 512-9535 Page 86

87. Thank You Questions? Page 87