In this episode of THE SAMPLE, Leita Hart-Fanta, CPA discusses when to apply the GAO Yellow Book to your audit.
Welcome to The Sample, a quick discussion of auditing concepts and terms that will help you do your work. Conducting an audit in accordance with auditing standards is no small feat and I want to support you. We’ll be referring to the GAO, IIA and AICPA literature to bolster our conversations. Let’s get started.
In this episode, we answer the question, “When is the GAO Yellow Book applicable?” So I get this question most frequently from CPAs in public practice, who are auditing a governmental entity, and they wonder if they have to also apply the Yellow Book standards to their audit.
So I tell them that one clue is to look at prior audit reports and see whether there’s a statement in it that says, “We conducted this audit in accordance with Yellow Book standards.” That means the previous auditor thought it was applicable. And hopefully they’re not just going on their gut with that, and they have found a law or regulation that requires the use of the Yellow Book.
So for instance, in the state of Texas, we have a law, the Internal Audit Act, which asks that all state agencies and universities have internal audit shops and that they follow the yellow book and the red book simultaneously. The state auditor themselves is required to follow the yellow book. So that is a state law that requires the use of it.
It could also be required by contract or a grant agreement. And this is most likely how CPAs in public practice are drawn into the yellow book because they’ve been engaged to conduct something called the single audit, which is an audit of federal funds. And in the single audit requirements, it literally says you will conduct this audit in accordance with GAGAS. GAGAS is another name for the Yellow Book. So they get drawn in that way.
Or it could be a local policy. Maybe you’re auditing a city that has decided that the yellow book is something they want to pursue. That’s a little unusual, but it could happen. So you want to check these three sources: see if there’s any law applicable to your entity, contracts or grant agreements, policy. Another clue could be that it’s in their RFP (their request for proposal) for this engagement. And if it’s in there, we hope that they are aware of why it’s in there. That’s not always true. And that’s oftentimes why I get a call from a CPA in public practice. They’re not sure the client really knows what they’re asking for, but the RFP might help you decide whether you need to conduct the audit in accordance with the yellow book. If the client wants it and they’re willing to pay to have it done in accordance with a yellow book, then you should probably just play along.
The bottom line rule is: just because the GAO Yellow Book exists does not mean you actually have to use it. It’s not like the AICPA standards, when you’re doing a financial audit. In the United States, you have to follow AICPA standards. Just because you’re doing a governmental engagement does not mean you have to follow generally accepted government auditing standards. Some other law, contract, policy has to call it into play. And if this is still a little fuzzy to you, I suggest that you check out the GAOYellow Book sections 1.08 through 1.12. That gives a little bit more information that may be relevant to you.
That wraps it up for another episode of The Sample. True to the nature of a sample, we didn’t talk about everything, so you’ve probably got questions. Write to me firstname.lastname@example.org and I’ll do my best to fill in the blanks. Thanks for playing.
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