GAO Issues Exposure Draft to Restructure and Revise the Government Auditing Standards

RECENT DEVELOPMENTS  APRIL 18, 2017

The Government Accountability Office issued on April 5 an Exposure Draft (ED) to restructure and revise the Government Auditing Standards, also known as the "Yellow Book".  The current Yellow Book was updated in 2011 and included significant changes to the independence rules, including adoption of a conceptual framework approach when auditors perform nonaudit services that the rules did not address.

Changes impacting the Independence rules in this ED are: 

1 - Expanding the standards, such that ALL services an auditor performs that relates to preparing financial statements or accounting records (other than those already stated to impair independence - see below) create significant threats to independence.  This change will require auditors to perform a threats and safeguards (conceptual framework) analysis whenever such bookkeeping or financial statement preparation services are performed, which should also be documented.  Services that this rule would impact are:   (a) recording transactions for which management has determined or approved the appropriate account classification, or posting coded transactions to an audited entity’s general ledger; (b) preparing financial statements based on information in the trial balance (c) posting entries that have been approved by an audited entity’s management to the entity’s trial balance, and (d) preparing account reconciliations that identify reconciling items for the audited entity management’s evaluation.

The services referred to above as automatically impairing independence under the Yellow Book are: 

(a) determining or changing journal entries, account codes or classifications for transactions, or other accounting records for the entity without obtaining management’s approval (b) authorizing or approving the entity’s transactions, and (c) preparing or making changes to source documents without management approval.

2 - A requirement that as part of applying the conceptual framework, auditors should reevaluate threats to independence whenever the audit organization becomes aware of new information or changes in facts and circumstances. 

3 - Clarification of how the independence rules apply when the engaging party differs from the responsible party (e.g., entity under audit). 

4 - Further explanation of guidance related to professional services in government, with examples. 

Comments on the ED are due July 6, 2017.