Summary of Changes
The first thing you should do when you open the 2018 Yellow Book is review the opening letter from the Comptroller General which includes a summary of major changes. The following is intended is to provide members with a high-level summary of certain changes of note. The GAQC will be evaluating and analyzing the new standards in the coming weeks and months and will provide future guidance and information on key changes and their implications in the future.
- Independence: The changes made to the Yellow Book's nonaudit service independence requirements and guidance are probably the most significant made by GAO. For example, the revised standards state that auditors should conclude that preparing financial statements in their entirety from a client-provided trial balance or underlying accounting records creates significant threats to auditors' independence, and should document the threats and safeguards applied to eliminate and reduce threats to an acceptable level or decline to provide the service. The standards also state that auditors should also identify as threats to independence certain other services related to preparing accounting records and financial statements described in paragraph 3.89 of the 2018 Yellow Book (e.g., preparing line items or sections of the financial statements based on the trial balance, recording transactions for which management has determined or approved the appropriate account classification, or posting coded transactions to an audited entity's general ledger). When doing these type of services, auditors should evaluate the significance of threats to independence and should document the evaluation of the significance of such threats. Finally, two flowcharts are included at the end of chapter 3 of the standards to further illustrate the independence requirements. Figure 1 is titled, "Generally Accepted Government Auditing Standards Conceptual Framework for Independence," and Figure 2 is titled, "Independence Considerations for Preparing Accounting Records and Financial Statements." These flowcharts are a good tool to enhance auditor understanding.
- New Format and Organization: The chapters have been reorganized in a "clarified" format. Requirements are included within boxes in each chapter and related application guidance is included after each boxed requirement. Additionally, the number of chapters has increased from 7 to 9 primarily because GAO separated out certain topic areas that had been combined in the 2011 Yellow Book. Finally, certain supplemental guidance from the appendices in the 2011 Yellow Book has been incorporated into the individual chapters in the 2018 Yellow Book.
- CPE: The 2018 Yellow Book retains the same CPE hour requirement as the 2011 Yellow Book. GAO has added application guidance that emphasizes the need to obtain GAGAS-specific CPE, particularly during years in which there are revisions to the standards, to assist auditors in maintaining the competence necessary to conduct GAGAS engagements. GAO has also added clarifying guidance on CPE pertaining to specialists. Relevant guidance from the GAO document, Guidance on GAGAS Requirements for Continuing Professional Education, has been incorporated into the 2018 Yellow Book, as well.
- Peer Review: The peer review section of the standard includes a listing of recognized peer review organizations which includes the AICPA and the National State Auditors Association peer review programs and states that audit organizations affiliated with a recognized program should comply with those requirements and certain other requirements in the 2018 Yellow Book. Additional requirements are provided for audit organizations not affiliated with recognized peer review organizations.
- Waste and Abuse: The 2011 Yellow Book includes auditor requirements related to abuse when an auditor becomes aware of abuse. The 2018 Yellow Book transitions the discussion of abuse to application guidance and adds the perspective of waste, which is also defined. The new guidance states that evaluating internal control in a government environment may also include considering internal control deficiencies that result in waste or abuse but that auditors are not required to perform specific procedures to detect waste or abuse in financial audits. Auditors may consider whether and how to communicate such matters if they become aware of them. Auditors may also discover that waste or abuse are indicative of fraud or noncompliance with provisions of laws, regulations, contracts, and grant agreements. Examples of waste and abuse are also provided.
- Other Changes: The 2018 Yellow Book includes new standards for reviews of financial statements performed under Government Auditing Standards. Additionally, other changes and clarifications have been made in the performance audit chapters. For example, the performance audit standards are updated with specific considerations for when internal control is significant to the audit objectives. GAO has also clarified that management assertions are not required in performance audits.
The 2018 Yellow Book supersedes the 2011 Yellow Book and is effective for financial audits, attestation engagements, and reviews of financial statements for periods ending on or after June 30, 2020. It is effective for performance audits beginning on or after July 1, 2019. Early implementation is not permitted. While the effective date for financial audits may seem far off, keep in mind that the 2018 Yellow Book revises the independence rules and that auditors need to be independent for the entire audit period. Therefore, you will have to consider the auditor independence provisions of the 2018 Yellow Book prior to the effective date. For example, an auditor performing nonaudit services related to a June 30, 2020, financial statement audit will need to comply with the new independence requirements at the beginning of the audit period—that is, July 1, 2019.
The 2018 Yellow Book can be accessed on the GAO's Yellow Book Web page in a PDF format. The Web page indicates that hard copies of the standards can be purchased through the Government Publishing Office and provides ordering information. However, when we clicked on the purchase link it linked to ordering information for the 2011 Yellow Book. We will follow-up and provide an update when we have it. As an aside, when you visit the GAO Yellow Book Web page, you will notice that its format has been updated. The new page is easy to use and includes all related Yellow Book documents and information. It also includes a 5-minute podcast on the new standard.