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CPE for Government Auditors

Chapter 2: Types of Yellow Book Audits

As I revise my self-study book, “The Yellow Book Interpreted,” I will be sharing chapters with you.

Objectives: 

  • Conclude which standards should and must be applied to each type of audit 
  • Distinguish among the three types of Yellow Book engagements

Relationship to Other Standards

GAGAS is just one of the standards that exists to guide you as an auditor. You may also use or be subject to the IIA’s Professional Practices Framework, the AICPA’s Statements on Auditing Standards, the AICPA’s Statements on Standards for Attestation Engagements, the Public Corporation Accounting Oversight Board (PCAOB) standards, or even one of many international auditing standards. What can make compliance so difficult is that these standards sometimes conflict or even try to outdo each other.

The Yellow Book is considered the toughest standard of them all. In 2006, I had the chance to meet David Walker, the Federal Comptroller General and leader of the GAO at the time, and I asked him whether he thought the standard-setting boards would ever come to agreement on terminology and standards. He said he was working on it. Then I put my foot in my mouth and said that the PCAOB standards were the preeminent standard and that everyone was scrambling to be like them. He quickly corrected me and said that the Yellow Book was the toughest standard out there, and his goal was that the Yellow Book would remain the preeminent standard that all other standard-setting bodies would emulate.

For most of my audit career, the Yellow Book has been a superior document to the AICPA standards. But in the last ten years, the AICPA has been working to tighten up their standards. The AICPA audit standards regarding risk assessment significantly changed the way that audit planning is conducted. All revisions of the Yellow Book, all chapters, including the financial, attestation, and performance chapters, sync up with the language contained in these and all subsequent AICPA audit standards. It is important to note that the performance standards – which do not have to follow the AICPA standards – borrow heavily from and use the same language as the AICPA.

If you conduct a financial or attestation engagement under the Yellow Book standards, you also must follow the AICPA standards for audits and attestation engagements. The performance auditing standards do not adopt the AICPA standards, although they do use similar language and have similar requirements to the AICPA standards.

The Yellow Book goes on to mention other standards and says that these other standards are not incorporated into GAGAS but can be used in conjunction with GAGAS. In case of conflict, GAGAS should prevail.

2.12     Auditors may use GAGAS in conjunction with professional standards issued by other authoritative bodies.

2.13     The relationship between GAGAS and other professional standards for financial audits, attestation engagements, and reviews of financial statements is as follows:

a. The American Institute of Certified Public Accountants (AICPA) has established professional standards that apply to financial audits, attestation engagements, and reviews of financial statements for nonissuers (entities other than issuers under the Sarbanes-Oxley Act of 2002 such as privately held companies, nonprofit entities, and government entities) conducted by certified public accountants (CPA). For financial audits and attestation engagements, GAGAS incorporates by reference AICPA Statements on Auditing Standards and Statements on Standards for Attestation Engagements. For reviews of financial statements, GAGAS incorporates by reference AR-C, section 90, Review of Financial Statements.

b.The International Auditing and Assurance Standards Board (IAASB) has established professional standards that apply to financial audits and assurance engagements. Auditors may elect to use the IAASB standards and the related International Standards on Auditing and International Standards on Assurance Engagements in conjunction with GAGAS.

c.The Public Company Accounting Oversight Board (PCAOB) has established professional standards that apply to financial audits and attestation engagements for issuers. Auditors may elect to use the PCAOB standards in conjunction with GAGAS.

2.15     For performance audits, GAGAS does not incorporate other standards by reference, but recognizes that auditors may use or may be required to use other professional standards in conjunction with GAGAS, such as the following:

1.International Standards for the Professional Practice of Internal Auditing, Institute of Internal Auditors, Inc.;

2.International Standards of Supreme Audit Institutions, International Organization of Supreme Audit Institutions;

3.Guiding Principles for Evaluators, American Evaluation Association;

4. The Program Evaluation Standards, Joint Committee on Standards for Education Evaluation;

5. Standards for Educational and Psychological Testing, American Psychological Association; and

6. IT Standards, Guidelines, and Tools and Techniques for Audit and Assurance and Control Professionals, Information Systems Audit and Control Association.

Defining Government Audits and Attestation Engagements

Defining the type of audit engagement is sometimes a matter of professional judgment. In other words, it isn’t a black-and-white decision. Understanding your options and choosing well is an important step in a Yellow Book audit.

Determining which type of audit you are conducting has confused more than one auditor and the requesting client. For example, if you are tasked with ensuring compliance with state regulations regarding a state grant for a school lunch program, you could, as we will see in the audit type definitions below, do that audit as a performance audit or as an attestation engagement.

One internal audit shop I work for on a regular basis operates inside a large state agency. They are responsible for a multitude of auditing and monitoring functions. Sergio, their audit director, is not a CPA. He is a certified internal auditor (CIA), a designation awarded by the IIA. Besides being an audit director, Sergio is on the international planning committee for the IIA. And he knows nothing about AICPA standards, and he doesn’t want to know about AICPA standards!

Since he works for a Texas state agency, state law dictates that he must simultaneously use the Yellow Book and the Red Book (the IIA’s standards). He jokingly calls himself an “orange” shop (Get it? Red and yellow make orange.). He does not even factor the AICPA into his work or his thinking and, thus, calls everything he does a performance audit.

Is that okay? Yes, because the GAO says in 1.15 that some engagements may have objectives that could be met using more than one approach.

1.14      All GAGAS engagements begin with objectives, and those objectives determine the type of engagement to be conducted and the applicable standards to be followed. This document classifies financial audits, attestation engagements, reviews of financial statements, and performance audits, as defined by their objectives, as the types of engagements that are covered by GAGAS.

1.15      In some GAGAS engagements, the standards applicable to the specific objective will be apparent. For example, if the objective is to express an opinion on financial statements, the standards for financial audits apply. However, some engagements may have objectives that could be met using more than one approach. For example, if the objective is to determine the reliability of performance measures, auditors can perform this work in accordance with either the standards for attestation engagements or performance audits.

CPAs Also Have to Choose

And Sergio isn’t the only one faced with this decision. CPAs in public practice are regularly asked to help governmental entities with more than financial statement audits and single audits.

I had a long phone call with a partner from a national CPA firm who wanted to take on a project for one of her steady clients, but her technical advisors were prohibiting her from taking on the project. It seems that the client, a state agency, was unclear in their request for proposal. The request for proposal called for a performance audit of funds spent by their sub-recipients. But, to her, what she read in the request for proposal did not sound like a performance audit.

The state agency passed federal funds and state funds to not-for-profits. These not-for-profits reported their expenditures back to the state and asked for reimbursement. The state agency wanted to make sure the costs were valid but didn’t have the manpower to check for themselves. Instead, they sent out a request for proposal asking her firm and other firms to conduct a performance audit of these payments.

This simple project did not sound like a full-blown performance audit. It sounded more like a review or agreed-upon procedure to the partner and I agreed. The Yellow Book devotes two lengthy chapters to describe requirements for conducting a performance audit. A performance audit involves a lot of planning, including understanding internal controls and conducting a risk assessment.

A performance audit doesn’t simply stop at saying what is so; a good performance audit will also tell you why something is as it is. For instance, if the sub-recipient was not reporting the proper costs, the auditor would find out how this happened and then recommend something be done to keep it from happening in the future. It sounded from the request for proposal that the state agency only wanted to know if the amounts were correct, not why the amounts were not correct. What this project is called will make a huge difference in how much money is spent to get it done.

And it is not normal for a CPA firm to take on a performance audit. Not impossible, but not normal, either. Generally, legislative auditors or internal auditors, rather than CPA firms, perform performance audits because performance audit standards do not integrate or refer to AICPA requirements.

CPAs can choose among several engagement types and still apply AICPA standards. The AICPA rules the behavior of a CPA. But CPAs have a good amount of flexibility under the AICPA standards; they can perform their work under AICPA rules for financial audits, attestation engagements, or consulting engagements. It is very important for CPAs to call it the right type of engagement because the rules are different for each type of engagement. The CPAs’ choice will also impact their ability to perform other work for the government in the future.

The CPA firm partner was leaning toward calling this engagement an attestation engagement.
On an attestation engagement, a CPA would attest to the truth of a simple statement such as, “Costs reported by the sub-recipients are accurate and properly classified.” This will be a relatively inexpensive engagement. The CPA will not ask why the reports were inaccurate but will simply verify that they are or aren’t. If the reports are inaccurate, the state agency will have the responsibility to follow up to find out what happened.

How Much Is This Going to Cost?

I’m just ball-parking here (and I am sure I will get some emails on this!), but say that a performance audit costs $45,000, an attestation engagement costs $20,000, and it costs $6000 for some dude to simply check the numbers.

Who is this dude? He is so cheap! This dude is not a CPA and doesn’t follow any standards for his work. He will simply go out and verify that the numbers are OK and report back. And maybe in this case, that would be an appropriate thing for the state agency to pay for.

My CPA friend complained that these dudes are undercutting her and taking plenty of business. One dude even goes as far as to name his company using CPA-like words (like Assurance, Inc.) to imply that he does work similar to a CPA.

But my CPA friend wouldn’t touch a project without following standards with a ten-foot pole! Being a CPA, neither would I. The standards protect our clients and us by requiring that:

  • we remain independent of our subject matter,
  • we ensure professional competence regarding the subject matter,
  • we design methodologies that will yield sufficient and appropriate evidence,
  • our conclusions are based on documented fact,
  • our reports are thorough and free of exaggeration and error, and
  • our reports undergo quality review.

The dude doesn’t have to worry about standards or independence.

The dude doesn’t have to follow any of those standards. No wonder he is so cheap. And he doesn’t have to worry, as my CPA friend does, about compromising auditor and firm independence when it comes to future work.

It boils down to the question the client wants answered, whether they care about audit standards and cost.

Here is what the state agency hiring this help needs to consider:

  • Which is more important, cost or standards?
  • Is it important to the state agency that the auditor tell them that the numbers are accurate or why numbers are inaccurate or both?
  • Do they want to be sure that rigorous and thorough work was done to uncover the inaccuracies and reasons for the inaccuracies?

If the client answers yes to the second and third questions, they are right to call it a performance audit.

Is the state agency primarily interested in having a few simple questions answered about the numbers, such as accuracy or categorization of expenditures? If so, then they should choose to call this project an attestation engagement.

If the state agency doesn’t want any standards followed, then it can simply ask someone to verify the numbers for them and in this case, the dude can perform the work.

See how much more involved this decision is? I doubt the state agency really wants a performance audit, but they don’t want to take the time to think about and define what they really want. The term “performance audit” specifies what type of work is involved and selecting this term to describe a project in an RFP has its consequences. It means something specific and costly to the professionals responding to the RFP. And, in this case, it means that the state agency would spend more of the taxpayers’ money than necessary.

Four Types of Engagements

The GAO names four types of assurance engagements:

  1. financial audits
  2. attestation engagements
  3. reviews of financial statements
  4. performance audits.

The third type of engagement on this list is new to the Yellow Book as of 2018; reviews of financial statements.

1.  Financial Audit

The first type of audit is the financial audit. Financial audits are the most clearly defined type of audit.

1.17      Financial audits provide independent assessments of whether entities’ reported financial information (e.g., financial condition, results, and use of resources) is presented fairly, in all material respects, in accordance with recognized criteria. Financial audits conducted in accordance with GAGAS include financial statement audits and other related financial audits.

a.   Financial statement audits: The primary purpose of a financial statement audit is to provide financial statement users with an opinion by an auditor on whether an entity’s financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework. Reporting on financial statement audits conducted in accordance with GAGAS also includes reports on internal control over financial reporting and on compliance with provisions of laws, regulations, contracts, and grant agreements that have a material effect on the financial statements.

b.   Other types of financial audits: Other types of financial audits conducted in accordance with GAGAS entail various scopes of work, including

1. obtaining sufficient, appropriate evidence to form an opinion on a single financial statement or specified elements, accounts, or line items of a financial statement;

2.issuing letters (commonly referred to as comfort letters) for underwriters and certain other requesting parties

3.auditing applicable compliance and internal control requirements relating to one or more government programs; and

4.conducting an audit of internal control over financial reporting that is integrated with an audit of financial statements (integrated audit)

An audit concludes or opines on whether a subject matter meets criteria. In the case of a financial audit, the subject matter is either the financial statements or some component of the financial statements. And the criteria is generally accepted accounting principles (GAAP), or some other set of rules about what the financial statements should look like.

When finishing a financial audit, you conclude whether the financial statements met the criteria. This conclusion is called an opinion, and the financial auditor will say something like the following in their report: “In our opinion, the financial statements present fairly the results of operations … in accordance with generally accepted accounting principles (or GAAP).”

In order to express an opinion, a financial auditor has to do plenty of work to gather evidence that the information presented in the financial statements is valid. Opinions aren’t thrown around lightly, and these engagements take a lot of time and, therefore, cost the client a lot of money.

Why knowingly choose to have a financial audit performed when they are so costly? Because the users of financial statements cannot trust the creators of the financial statements to tell the full truth and follow rules on their own. Yes, it is a sad state of affairs that some people and organizations lie to make themselves look good. But you only have to remember the litany of corporate scandals our global economy has suffered due to those who have lied on their financial statements to see the need.

Some organizations are required to undergo financial audits by regulators or grantors. If the entity and trades stock on the US stock market, they must undergo a financial audit per SEC (Security and Exchange Commission) regulations. Or, if the entity receives federal grant funds and triggers a Single Audit, the federal government requires your auditor to express an opinion on the financial statements and verify compliance with the grant terms and conditions.

2. Attestation Engagements

But what if the client asks you to evaluate another subject matter against another criteria? Or what if the client doesn’t want to pay for an opinion? Instead, they would just like a CPA firm to check something for them because they want the CPA’s objective assessment of a situation.

In these cases, the CPA firm can perform an attestation engagement. The CPA attests to the veracity of a statement made by the client. For example, the client might assert, “We are in compliance with loan covenants.” Or, “We counted and included all inventory in our report to headquarters.” Or, “All expenditures are supported by documentation.”

In order to conduct an attestation engagement, the auditor must also apply the AICPA’s SSAEs or Statements on Standards for Attestation Engagements.

1.18      Attestation engagements can cover a broad range of financial or nonfinancial objectives about the subject matter or assertion depending on the users’ needs. In an attestation engagement, the subject matter or an assertion by a party other than the auditors is measured or evaluated in accordance with suitable criteria. The work the auditors perform and the level of assurance associated with the report vary based on the type of attestation engagement. 

Attestation engagements are divided into three subcategories depending on how much assurance the auditor provides: examinations, reviews, and agreed-upon procedures. Examinations are the most intense, reviews are less so, and agreed-upon engagements are the least intense of all three. Check out the description from the Yellow Book of these three types of engagements:

1.18a    Examination: An auditor obtains reasonable assurance by obtaining sufficient, appropriate evidence about the measurement or evaluation of subject matter against criteria in order to be able to draw reasonable conclusions on which to base the auditor’s opinion about whether the subject matter is in accordance with (or based on) the criteria or the assertion is fairly stated, in all material respects. The auditor obtains the same level of assurance in an examination as in a financial statement audit.

b.         Review: An auditor obtains limited assurance by obtaining sufficient, appropriate review evidence about the measurement or evaluation of subject matter against criteria in order to express a conclusion about whether any material modification should be made to the subject matter in order for it to be in accordance with (or based on) the criteria or to the assertion in order for it to be fairly stated. Review-level work does not include reporting on internal control or compliance with provisions of laws, regulations, contracts, and grant agreements. The auditor obtains the same level of assurance in a review engagement as in a review of financial statements.

c.         Agreed-upon procedures engagement: An auditor performs specific procedures on subject matter or an assertion and reports the findings without providing an opinion or a conclusion on it. The specified parties to the engagement agree upon and are responsible for the sufficiency of the procedures for their purposes. The specified parties are the intended users to whom use of the report is limited.

When would a client ask for an examination? When they have a subject matter on which they want an opinion that doesn’t qualify as a financial audit.

When would a client ask for a review? When they don’t want to pay for a full-blown audit but do want some sort of assurance that the subject matter is OK. Notice that you do not express an opinion on a review. Instead you say, “Nothing came to our attention that leads us to believe the subject matter does not meet the criteria.”

And when would a client ask you to perform an agreed-upon procedure? When they want to hire someone they can trust to be objective and independent to do something for them that they don’t trust themselves or those for whom they are responsible to do themselves. Please realize I am generalizing …

Levels of Assurance

Audit literature frequently uses the term “levels of assurance.” If the client wants a high level of assurance that the subject matter meets the criteria, the auditor has to do an awful lot of work. In other words, in order for the auditor to pinky-swear that the subject matter meets the criteria, the auditor must gather a lot of evidence, and gathering and documenting evidence takes a lot of work. High assurance generally equates to an opinion in CPA-land. In recent audit literature, the term ‘high assurance’ has been replaced with ‘reasonable assurance’ because the AICPA has become uncomfortable promising a high-level assurance!

chart

If the client can tolerate a moderate amount of assurance – if they are OK with the CPA telling them that “nothing came to their attention” that needs adjustment – then they can ask for a review.

If they want no assurance that something is true, the client can ask the auditor to perform an agreed-upon procedure engagement. In that case, a CPA simply says, “I did this and here is what resulted” – no opinion, no consideration of anything outside of the agreed-upon procedure itself.

For example, my church undergoes a financial audit every two years that costs them around $13,000. In the off years, they ask the CPA firm to conduct a review of controls over cash receipts, which costs them only $5,000. While it costs less, the church also receives less assurance over a more limited subject matter.

To recap the difference between a financial audit and an attestation engagement:

  • A financial audit provides the client with a reasonable (high) level of assurance that the financial statements meet GAAP.
  • An attestation engagement can provide the client with a reasonable (high) level of assurance, a moderate level of assurance, or no assurance about a wide variety of subject matters evaluated against a wide variety of criteria.

3. Performance Audits

Performance audits are wide open! The only thing a performance auditor cannot do is opine on whether the financial statements are presented in accordance with GAAP. Every other audit objective is fair game in this category.

Performance audits are generally conducted at a reasonable (high) level of assurance although technically, performance auditors can also offer a moderate level of assurance.

The GAO defines performance audits as engagements that provide assurance or conclusions based on an evaluation of sufficient, appropriate evidence against stated criteria, such as specific requirements, measures, or defined business practices.  Performance audits can include any subject that can be assessed against criteria.

1.21      Performance audits provide objective analysis, findings, and conclusions to assist management and those charged with governance and oversight with, among other things, improving program performance and operations, reducing costs, facilitating decision making by parties responsible for overseeing or initiating corrective action, and contributing to public accountability. 

The performance auditor and the auditee need to agree on several important matters. The auditor and the client must need to agree on the criteria, the objective, the level of assurance, and whether the auditor should follow any audit standard other than the Yellow Book.

This level of flexibility makes CPA firms quite nervous. They don’t like to be non-commital when comes to the promises they make; they’ve got to worry about that liability, you know.  So, AICPA standards require CPAs to get the client to agree to the audit criteria, objective, level of assurance and audit standards in writing before they begin the engagement. Performance auditors are not held to this requirement.

To summarize, financial audits express an opinion on the financial statements – some component of the financial statements – and/or add a bit of compliance work (as in the case of the single audit). Any other type of assurance engagement can either be classified as an attestation engagement or a performance audit. Performance audits can be just about anything EXCEPT opinion audits of the financial statements. And performance audits, like financial audits, require a lot of work because they usually involve working at a reasonable (high) level of assurance.

4. Reviews of Financial Statements: A New Type of Engagement

For the first time in the 2018 version of the Yellow Book, the GAO mentions a new type of engagement – a review of financial statements. The level of assurance is similar to a review conducted under the AICPA attestation standards (SSAEs), but the applicable standards are not the SSAEs but instead the SSARS. SSARS stands for Statement on Standards for Accounting and Review Services and specifically the GAO addresses SSARS No. 21, Section 90, Review of Financial Statements

SSARS 21: 90.04 The objective of the accountant when performing a review of financial statements is to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable non-financial reporting framework, primarily through the performance of inquiry and analytical procedures

The Yellow Book addresses these sorts of engagements in the attestation standards, chapter 7.

Using the Name GAGAS in Vain

The GAO has felt it necessary to spell out which standards are optional and which are mandatory because the GAO doesn’t want you following GAGAS in spirit only.  In chapter 2, the GAO defines the terms “must” and “should.” In general, “must” means mandatory and “should” means mandatory unless you have a compelling reason to deviate.

The GAO emphasizes that not every paragraph of the Yellow Book contains mandatory requirements. Here is how the differences are explained:

2.02     GAGAS uses two categories of requirements, identified by specific terms, to describe the degree of responsibility they impose on auditors and audit organizations:

1.Unconditional requirements: Auditors and audit organizations must comply with an unconditional requirement in all cases where such requirement is relevant. GAGAS uses must to indicate an unconditional requirement.

2.Presumptively mandatory requirements: Auditors and audit organizations must comply with a presumptively mandatory requirement in all cases where such a requirement is relevant except in rare circumstances discussed in paragraphs 2.03, 2.04, and 2.08. GAGAS uses should to indicate a presumptively mandatory requirement

Unconditional requirements mean that you do not have an option to follow the requirement. You must comply with these requirements. When you see the word “must,” you will have a hard time justifying a departure and will not be able refer to the GAO in your report. If you see the word “should,” then you have a little more wiggle room. You can choose not to comply with a “should” statement, but you will need to justify the departure in your working papers and disclose your non-compliance in your audit report. Ouch!

2.03     In rare circumstances, auditors and audit organizations may determine it necessary to depart from a relevant presumptively mandatory requirement. In such rare circumstances, auditors should perform alternative procedures to achieve the intent of that requirement.

2.04     If, in rare circumstances, auditors judge it necessary to depart from a relevant presumptively mandatory requirement, they must document their justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the intent of that requirement.

In the 2018 Yellow Book, the must and should statements appear in a box.

The GAO goes on to explain a third category of discussion in the standards – explanatory material. Explanatory material is introduced with the words “may,” “might,” or “could.” In the 2018 Yellow Book, the explanatory material sits outside the box.

2.07     GAGAS contains requirements together with related explanatory material in the form of application guidance. Not every paragraph of GAGAS carries a requirement. Rather, GAGAS identifies the requirements through use of specific language. GAGAS also contains introductory material that provides context relevant to a proper understanding of a GAGAS chapter or section. Having an understanding of the entire text of applicable GAGAS includes an understanding of any financial audit, attestation, and reviews of financial statement standards incorporated by reference. 

Say “GAGAS” only if you mean it!

After explaining that you need to follow every “must” and “should,” the GAO goes on to say that you can’t claim to follow the Yellow Book if you didn’t follow every “must.” If you do not follow a “should” statement, you can claim to have followed the Yellow Book in your report, but you are going to have to disclose which should statement you did not follow. The GAO calls these “modified compliance statements.”

2.17     Auditors should include one of the following types of GAGAS compliance statements in reports on GAGAS engagements, as appropriate.

1.Unmodified GAGAS compliance statement: Stating that the auditors conducted the engagement in accordance with GAGAS. Auditors should include an unmodified GAGAS compliance statement in the audit report when they have

(1) followed unconditional and applicable presumptively mandatory GAGAS requirements or (2) followed unconditional requirements, documented justification for any departures from applicable presumptively mandatory requirements, and achieved the objectives of those requirements through other means.

2.Modified GAGAS compliance statement: Stating either that (1) the auditors conducted the engagement in accordance with GAGAS, except for specific applicable requirements that were not followed, or (2) because of the significance of the departure(s) from the requirements, the auditors were unable to and did not conduct the engagement in accordance with GAGAS.

 2.18    When auditors use a modified GAGAS statement, they should disclose in the report the applicable requirement(s) not followed, the reasons for not following the requirement(s), and how not following the requirement(s) affected or could have affected the engagement and the assurance provided. 

One team of monitors who was not required under any statute, law, or policy to follow the Yellow Book decided to brag that they followed Yellow Book standards in their audit reports. It was a point of pride with the team, and the client was duly impressed with their extra professionalism. However, the monitoring team had never undergone a peer review and had no plans to suffer one. Also, the management of the team didn’t want to pay for everyone on the team to be current with the 80-hour CPE requirements. At best, the team members got 20 or so hours of education every two years. The management team reasoned that they were following the Yellow Book in spirit.

In light of the definitions of “must” and “should,” they had a choice to make. They needed to either (1) explain in their audit reports that they were following most governmental standards but were uneducated or unwilling to undergo the scrutiny that they put their clients to, or (2) drop reference to the Yellow Book in their audit reports all together. They chose the latter.

In a roundabout way, the GAO has emphasized the significance of their standards by requiring us to tell on ourselves when we do not take the standards seriously. The concepts of transparency and accountability are now being applied to us!

I should mention here that performance auditors have whole paragraph that they must add to their report.

9.03     When auditors comply with all applicable GAGAS requirements, they should use the following language, which represents an unmodified GAGAS compliance statement, in the audit report to indicate that they conducted the audit in accordance with GAGAS:

We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Chapter 13: Monitoring

Once there were parking lots
Now it’s a peaceful oasis
You’ve got it, you’ve got it

This was a Pizza Hut
Now it’s all covered with daisies
You got it, you got it

I miss the honky tonks,
Dairy Queens, and 7-Elevens
You got it, you got it

And as things fell apart
Nobody paid much attention
You got it, you got it

I dream of cherry pies,
Candy bars, and chocolate chip cookies
You got it, you got it

We used to microwave
Now we just eat nuts and berries
You got it, you got it

This was a discount store,
Now it’s turned into a cornfield
You’ve got it, you’ve got it

Don’t leave me stranded here
I can’t get used to this lifestyle

The Talking Heads: Nothing But Flowers

Atrophy – gradual decline in effectiveness or vigor due to underuse or neglect.

You can’t just “Set it and forget it” 

I love to multitask when doing household chores.  I feel very satisfied when the dishwasher and the clothes washer are running at the same time.  My satisfaction rises even more when I can get my oldest daughter to vacuum simultaneously while I tidy up the living areas.  If I can also have a sauce simmering on the stove while my youngest practices piano, I achieve domestic nirvana!

My drive to be working on several tasks at once has driven me to buy silly products. I used to use ‘Scrubbing Bubbles’ until I realized I was paying a lot of money for nothing.  It is a great idea to spray the shower and then walk away to let those little bubbles eat away the soap scum.  Nice theory, too bad it doesn’t work.

Remember the ads for Ronco Chicken Rotisserie? “Set it and forget it!”  What a great marketing spin.  I almost bought one of those.  I love to start something and then walk away from it and do something else.  This is why my husband does most of the cooking.  My repeated, unintentional ventures into Cajun style cooking – where everything is “blackened” – was getting old.

I wish we could just set our kids and work colleagues on the right path once.  I wish they would keep on the path and never wander off.  I wish people wouldn’t forget or rebel against what they were supposed to do.  But wishing ain’t gettin’!

This component of the COSO model reminds us that we can’t just set things up and forget them.  We can’t walk away from our cooking, our kids or our work processes and hope for the best. Our controls and processes have to be monitored or chaos (and burnt toast) eventually rules.

As a wise counselor once told me, life is like riding a boat headed down a winding river.  Just as you get the boat going straight, the river bends and you have to paddle, paddle, paddle to keep from hitting the shore.  And sometimes you overcorrect and end up hitting the opposite shore, and you have to moderate and change your pace.  You can’t just get on the river and hope to get to the end without any corrections. You are going to have to work really hard to keep you on the narrow path that is the middle of the river.

Design is worthless without implementation

Have you ever used the ‘set it and forget it’ method with a process or a control?  Have you ever designed a process or a control then walked away because you have other things to do? Too bad that doesn’t work.

Upon asking the athletic department staff why she stopped going out for three bids on major purchases – the staff person might say, “That was a lot of work.  No one ever checked to see if I was doing it, and I got tired of keeping all those records.  When I need to buy something, I don’t want to slow down to fill out all that paperwork!”

Here we have someone who doesn’t understand the importance of the control.  She reasons that it is too time consuming to go through the mandated steps when the result is always the same anyway.   She has a solid, logical justification for blowing off a well-designed control.

This is why we have to monitor controls.  We can’t just ask the staff person to do their job once and assume she is always going to do what we asked.

Monitoring has two layers

Some monitoring is contemporary and ongoing and some is occasional.  Which monitoring method you use depends on your control objective and the resources you have to dedicate to monitoring controls.  Monitoring is viewed by some as a luxury that their organization can’t afford and, therefore, is one of the least frequently implemented components of the COSO model/Green Book.

The Green Book describes these two types of monitoring as ongoing monitoring and separate evaluations.

16.04 Management monitors the internal control system through ongoing monitoring and separate evaluations. Ongoing monitoring is built into the entity’s operations, performed continually, and responsive to change. Separate evaluations are used periodically and may provide feedback on the effectiveness of ongoing monitoring. 

Ongoing monitoring includes reconciliations

Matching information to corresponding information from a different source is one of the best ways to make sure the information is correct.  Sometimes matching is called a reconciliation; sometimes it is called a comparison.  For instance, you might reconcile the general ledger record of purchases by the coach to the credit card statement, you might match the expense reports submitted by the coach to the credit card transactions or the general ledger, or you might match or compare the expense report to receipts.

16.05 Management performs ongoing monitoring of the design and operating effectiveness of the internal control system as part of the normal course of operations. Ongoing monitoring includes regular management and supervisory activities, comparisons, reconciliations, and other routine actions. Ongoing monitoring may include automated tools, which can increase objectivity and efficiency by electronically compiling evaluations of controls and transactions. 

Separate Evaluations

Separate evaluations are performed occasionally, not contemporarily.  Separate evaluations are best performed by someone who does not have responsibility for any of the processes or controls. It would be great if the monitor is truly independent of the subject matter and if this monitor would not suffer any negative consequences for telling the truth. For instance, the fine arts department could do a periodic review of the purchases made by the athletic department.  The arts department might actually enjoy monitoring and telling the truth about the athletic department!  A formal audit can also serve as a separate evaluation.

16.06 Management uses separate evaluations to monitor the design and operating effectiveness of the internal control system at a specific time or of a specific function or process. The scope and frequency of separate evaluations depend primarily on the assessment of risks, effectiveness of ongoing monitoring, and rate of change within the entity and its environment. Separate evaluations may take the form of self- assessments, which include cross operating unit or cross functional evaluations. 

16.07 Separate evaluations also include audits and other evaluations that may involve the review of control design and direct testing of internal control. These audits and other evaluations may be mandated by law and are performed by internal auditors, external auditors, the inspectors general, and other external reviewers. Separate evaluations provide greater objectivity when performed by reviewers who do not have responsibility for the activities being evaluated. 

Auditors beware!

Notice that auditors are not mentioned in the Green Book when discussing one of the types of monitoring – ongoing monitoring. There is a reason for that!  Auditors have to be careful NOT to get involved in the day-to-day management of programs and activities because they will compromise their auditor independence.  If an auditor helps manage a program, they will not be able to objectively evaluate the program.

The Institute of Internal Auditors encourages auditors to use a technology called ‘continuous monitoring’ to help catch errors and control breakdowns.  Continuous monitoring scans transactions continually and creates reports of outlying or unusual transactions.  Once the unusual transactions are identified, management or the auditor can follow up and resolve the outlying or unusual transactions.

The GAO is not a fan of auditors implementing continuous monitoring on behalf of management.  The GAO is much stricter about auditor independence than the Institute of Internal Auditors and expressly prohibits auditors from being involved in continuous monitoring in its Government Auditing Standards (Yellow Book).  In the GAO’s view, monitoring is the duty of management not the auditor, and when the auditor performs continuous monitoring, the auditor’s independence is impaired.

The last sentence of the following excerpt from the GAO’s Yellow Book is as firm an admonishment as the GAO can muster!

YB 2011 3.54 Accepting responsibility for designing, implementing or maintaining internal control includes accepting responsibility for designing, implementing, or maintaining monitoring procedures. Monitoring involves the use of either ongoing monitoring procedures or separate evaluations to gather and analyze persuasive information supporting conclusions about the effectiveness of the internal control system. Ongoing monitoring procedures performed on behalf of management are built into the routine, recurring operating activities of an organization. Therefore, the management participation threat created if an auditor performs or supervises ongoing monitoring procedures is so significant that no safeguards could reduce the threat to an acceptable level. 

Monitoring asks that you don’t assume, you verify

The monitoring component encourages managers not to assume that controls are working as they were designed, but instead, to put extra controls in place to ensure that controls are working as they were designed.  If you set it and forget it, a significant error or fraud can occur and go undetected because the controls you thought were in place were not actually in place.   Or you could end up wedged against the bank of the river holding a can of Scrubbing Bubbles and a piece of Cajun toast.  Neither of these is a desirable situation!

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