When is the yellow book applicable?

Please enjoy this post from 2012 answering an inquiring customer’s email:

Here is a question I received VIA email last week that might help you…

Leita,
I have heard you speak at some of the seminars and enjoy your newsletter. I have a question concerning City and hospital audits. (The hospitals are either hospital districts or component units of the county. The cities either receive sales taxes and/or property taxes.)

My question is do those entities have to have a Yellowbook audit? We have been doing them as Yellowbook and one of our clients was told by another accounting firm that they didn’t need a Yellowbook audit unless they received a certain amount of federal grants. I understand the criteria for the Single audit, etc. It’s plainly spelled out, but there is a gray area in the Yellowbook that doesn’t ever really explain the criteria for the requirements to have a Yellowbook audit, OR am I missing it?

I know this may seem strange to you that I’m asking, but I know you teach Yellowbook and feel you can give me some direction.

Hey X-
The yellow book used to be a lot clearer about when it was applicable. In essence, a law, regulation, or policy has to call the yellow book into play for it to be applicable. You can audit a government, but not have to use the government auditing standards.

So, for the yellow book to be applicable at your hospital or city, see if there is a local or state law requiring that audits of the hospital or city be conducted in accordance with GAGAS. If not, is it in the RFP or in county/hospital policy? If they don’t trigger the Single Audit Act, they still need an external authority to call it into play.

Here are some quotes from 2011 GAGAS:

1.06 Provisions of laws, regulations, contracts, grant agreements, or policies frequently require audits be conducted in accordance with GAGAS. In addition, many auditors and audit organizations voluntarily choose to perform their work in accordance with GAGAS. The requirements and guidance in GAGAS apply to audits of government entities, programs, activities, and functions, and of government assistance administered by contractors, nonprofit entities, and other nongovernmental entities when the use of GAGAS is required or is voluntarily followed.4

A1.02 Laws, regulations, contracts, grant agreements, or policies frequently require the use of GAGAS.176 The following are some of the laws, regulations, and or other authoritative sources that require the use of GAGAS:

a. The Inspector General Act of 1978, as amended, 5 U.S.C. App. requires that the statutorily appointed federal inspectors general comply with GAGAS for audits of federal establishments, organizations, programs, activities, and functions. The act further states that the inspectors general shall take appropriate steps to assure that any work performed by nonfederal auditors complies with GAGAS.

b. The Chief Financial Officers Act of 1990 (Public Law 101-576), as expanded by the Government Management Reform Act of 1994 (Public Law 103-356), requires that GAGAS be followed in audits of executive branch departments’ and agencies’ financial statements. The Accountability of Tax Dollars Act of 2002 (Public Law 107-289) generally extends this requirement to most executive agencies not subject to the Chief Financial Officers Act unless they are exempted for a given year by the Office of Management and Budget (OMB).

c. The Single Audit Act Amendments of 1996 (Public Law 104-156) require that GAGAS be followed in audits of state and local governments and nonprofit entities that receive federal awards. OMB Circular No. A-133, Audits of States, Local Governments, and Non-Profit Organizations, which provides the governmentwide guidelines and policies on performing audits to comply with the Single Audit Act, also requires the use of GAGAS.

A1.03 Other laws, regulations, or authoritative sources may require the use of GAGAS. For example, auditors at the state and local levels of government may be required by state and local laws and regulations to follow GAGAS. Also, auditors may be required by the terms of an agreement or contract to follow GAGAS. Auditors may also be required to follow GAGAS by federal audit guidelines pertaining to program requirements, such as those issued for Housing and Urban Development programs and Student Financial Aid programs. Being alert to such other laws, regulations, or authoritative sources may assist auditors in performing their work in accordance with the required standards.

A1.04 Even if not required to do so, auditors may find it useful to follow GAGAS in performing audits of federal, state, and local government programs as well as audits of government awards administered by contractors, nonprofit entities, and other nongovernmental entities. Many audit organizations not formally required to do so, both in the United States of America and in other countries, voluntarily follow GAGAS.