By Mary Foelster at AICPA Insights on October 22, 2018
While I’m not a good baker, when I talk to CPAs who are new to the governmental auditing area and need to understand what the “Yellow Book” is, I often explain using the analogy of a multi-layered cake. The bottom layer of the cake is the AICPA auditing standards, which are the basis for most Yellow Book audits. The second layer of the cake (let’s make it a yellow layer!) adds standards issued by the Government Accountability Office (GAO), known as the “Yellow Book” or Generally Accepted Government Auditing Standards (GAGAS) that build upon the AICPA rules. Finally, if your client gets federal funds, there may be a third layer of the cake that consists of compliance auditing requirements.
The big news for auditors right now is that the GAO has issued a 2018 revision to the Yellow Bookwhich will change the ingredients for the middle layer of the cake. If you audit federal, state or local governments, or not-for-profits, whose audits are subject to the Yellow Book, you should begin updating your recipe card so your cake turns out right.
To help you learn more about the new recipe, I talked with Brian Schebler, CPA, CGFM, National Director, Public Sector for RSM US LLP. Brian is also a member of the GAO’s Advisory Council on Government Auditing Standards and the immediate past Chair of the AICPA Governmental Audit Quality Center (GAQC) Executive Committee. He has already begun discussing some of the key Yellow Book changes with colleagues at his firm and has some good tips as you begin delving into the new standards.
- Effective date. You need to understand when the new standards are effective, so you can be ready. If you’re doing financial audits, attestation engagements or reviews of financial statements, the changes are effective for periods ending on or after June 30, 2020. If you’re doing performance audits, they’re effective for audits beginning on or after July 1, 2019.
- CPE and competency. While some clarifications were made, luckily one concern from the exposure draft wasn’t adopted— a four-hour training requirement specifically on GAGAS prior to performing engagements under the new standards. Instead, GAO is emphasizing that being competent includes possessing specific knowledge about GAGAS. GAO also incorporated relevant CPE and competency guidance from a 2005 GAO Q&A, which is something we’re focusing more attention on, and I’d advise you to do the same. Look at your CPE practices well before the effective date to make sure they’re consistent with the new standards since updating firm policies and procedures may be time and effort-intensive.
- Format. You’ll notice this significant change right away as the standards look very different. GAO has gone from embedding requirements and application guidance together within the chapters to blocking out the requirements, followed by related application guidance. In the past, people may have been confused by what has appeared to be conflicting language in the standards. Under the new standards, you’ll easily be able to identify what the requirements are, which should result in more consistency in how auditors are employing the Yellow Book. While there’s some flexibility in how we apply a requirement, we need application guidance to do it properly. This change will also improve communications with clients on why a certain stance is being taken.