AGA Professional Development Conference

1
The New Yellow Book Achieving World-Class
Accountability
AGA Professional Development Conference June
25, 2007
2
Panel Participants

• Jeffrey C. Steinhoff Managing Director,
  Financial Management and AssuranceGovernment
  Accountability Office
• Jeanette FranzelDirector, Financial Management
  and AssuranceGovernment Accountability Office

3
The New Yellow Book

• The principles of transparency and accountability
  for the use of public resources are key to our
  nations governing processes.
• High-quality auditing is essential for government
  accountability to the public and transparency
  regarding linking resources to related program
  results.

4
The New Yellow Book

• Legislators and public officials need reliable
  information about the cost, efficiency, and
  effectiveness of government programs for the
  difficult decisions that lay ahead regarding the
  role of government and long-term fiscal
  challenges.
• The public demands results and government
  failures become the focus of extreme scrutiny.
• Credibility in government is more important than
  ever.

5
The New Yellow Book

• January 2007 revision of Government Auditing
  Standards supersedes the 2003 revision.
• January 2007 Exposure Draft of Audit Quality
  Control and Peer Review was also issued.
• July 2007 revision of Government Auditing
  Standards will incorporate the finalized Quality
  Control and peer review section.

6
The New Yellow Book

• The January 2007 revisions
• heighten the emphasis on ethical principles
• clarify and streamline the discussion of nonaudit
  services
• update the financial auditing standards based on
  recent developments

7
The New Yellow Book

• The January 2007 revisions (cont)
• enhance performance-auditing standards
• use standardized language to define the auditors
  level of responsibility and distinguish between
  auditor requirements and additional guidance
• reinforce the key role of auditing

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The New Yellow Book

• The July 2007 revision will also contain updated
  quality control and peer review sections
• Specify the elements of quality that an
  organizations policies and procedures should
  collectively address.
• require external audit organizations to their
  most recent peer review reports publicly
  available.

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THE JULY 2007 REVISION OF THE YELLOW BOOK
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Chapter 1 Use and Applicability of GAGAS

• Reinforced the key role of auditing in
  maintaining accountability and improving
  government operations
• Added guidance on citing compliance with GAGAS in
  the Auditors Report
• Clarified and expanded the standards to recognize
  other sets of standards that can be used in
  conjunction with GAGAS
• Retained the same types of government audits and
  attestation engagements, but updated/expanded
  definitions and descriptions of performance
  audits and attestation engagements

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Addition of Chapter 2 Ethical Principles

• Heightened emphasis on ethical principles
• Conducting audit work in accordance with
  ethical principles is a matter of personal and
  organizational responsibility. Ethical principles
  apply in preserving auditor independence, taking
  on only work that the auditor is competent to
  perform, performing high-quality work, and
  following the applicable standards cited in the
  audit report.
• Excerpt from paragraph 2.03

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Addition of Chapter 2 Ethical Principles

• Five principles
• Public interest
• Integrity
• Objectivity
• Proper use of government information, resources,
  and position
• Professional behavior

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Chapter 3 General Standards

• Clarified and streamlined the discussion of the
  impact of professional services other than audit
  services (nonaudit services) and their impact on
  auditor independence
• Stressed the critical role of professional
  judgment in complying with GAGAS
• Expanded competence standard to emphasize its
  importance and relate it to key steps in
  performing an audit and reporting on the
  auditors conclusions
• Updated CPE requirements to incorporate April
  2005 changes

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Chapter 3 Audit Quality Control and
Assurance

• Enhanced emphasis on quality and expanded
  description of overall objectives and elements of
  quality control
• Increased transparency on quality control systems
  by requiring external peer review reports to be
  public

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Chapters 4 Though 8Changes Common to All Types
of GAGAS Audits and Attestation Engagements

• Defined those charged with governance
• Clarified and streamlined for field work and
  reporting for
• Violations of legal and regulatory requirements,
  contact provisions or grant agreements, and fraud
• Abuse
• Added a requirement for establishing information
  systems controls concerning accessing and
  updating electronically maintained audit
  documentation
• Clarified and streamlined requirements and
  guidance for developing elements of a finding

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Chapters 4 Though 8Changes Common to All Types
of GAGAS Audits and Attestation Engagements

• Clarified reporting requirements for internal
  control deficiencies
• Clarified and streamlined
• reporting confidential or sensitive information
• the auditors responsibilities for reporting
  views of responsible officials
• the auditors responsibilities for issuing and
  distributing reports

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Chapter 4Financial Audits

• Updated GAGAS based on recent developments in
  financial auditing and internal control
• Audit documentation SAS 103
• Auditor communication during planning SAS 108
• Communicating internal control related matters --
  SAS 112
• Communication with those charged with governance
  -- SAS 114

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Chapter 4Financial Audit Field Work

• Additional GAGAS Requirements and Guidance
• Added a clear and prominent discussion on
  consideration of fraud and illegal acts
• Clarified and streamlined the auditors
  responsibilities for abuse

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Chapter 5 Financial Audit Reporting

• Additional GAGAS Requirements and Guidance
• Encouraged communicating in the auditors report
  significant concerns, uncertainties or other
  unusual events that could have a significant
  impact on the financial condition or operations
• Increased transparency surrounding reporting on
  restated financial statements.

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Chapter 6 Attestation Engagements

• Conforming changes have been made for
  thefollowing items
• Definitions of internal control deficiencies
• Description of abuse
• Audit documentation
• Use of terminology to define professional
  requirement
• Reporting views of responsible official and
  confidential and sensitive information
• Issuing and distributing reports

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Chapters 7 8Performance Audits

• Enhanced performance audit auditing standards
  that elaborate on the overall framework for
  high-quality performance audits including by
• Defining the level of assurance associated with a
  performance audit as providing reasonable
  assurance that auditors have sufficient,
  appropriate evidence to achieve the audit
  objectives and support findings and conclusions
• Adding a section on the concept of significance
• Adding a section on audit risk and specifically
  adding risk as a factor to be used in planning
  and evaluation of the evidence

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Chapters 7 8Performance Audits (cont.)

• Added a section describing the auditors overall
  assessment of the collective evidence to support
  the findings and conclusions
• Added a section on information systems controls
  for the purpose of assessing audit risk and
  planning the audit

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AppendixSupplemental Guidance

• Added an appendix to provide supplemental
  guidance to assist auditors in the implementation
  of GAGAS
• Does not establish additional GAGAS requirements
• Overall supplemental guidance includes examples
  of
• Deficiencies in internal control
• Abuse
• Fraud Risk
• Overall guidance includes guidance on determining
  whether laws, regulations, or provisions of
  contracts are significant

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January 2007 Revision Implementation Dates

• For performance audits, the standards to become
  effective for audits beginning on or after
  January 1, 2008.
• For financial audits and attestation engagements,
  the standards are proposed to become effective
  for audits of periods beginning on or after
  January 1, 2008.
• Certain standards issued by the AICPA's Auditing
  Standards Board (ASB) have earlier effective
  dates.  Effective dates of those new ASB
  standards apply to GAGAS audits.
• Until the 2007 Revision becomes effective,
  auditors should adopt the terminology and
  definitions of SAS No. 112 in reporting on
  internal control
• Early implementation is permissible and
  encouraged

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The Role of the Government Auditor

• Government auditors have a special responsibility
  for evaluating overall accountability of
  government programs and making recommendations
  for improvements.
• Government auditors are generally responsible for
  evaluating the following types of questions with
  regard to specific programs or uses of funds
• Are government services being provided
  efficiently, economically, and in compliance with
  laws and regulations?
• Are programs achieving their objectives, and at
  what cost?
• Is management financial and performance reporting
  fair and accurate?
• Are the financial statements fairly stated?
• How can management, decision making,
  accountability, and oversight be improved?

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Near-Term and Future Yellow Book Projects

• Finalize 2007 Yellow Book (July)
• Issue additional tools to assist users in
  implementation
• Continue outreach and training on the 2007
  revision
• Future Yellow Book projects
• Determine whether independence standards need
  updating/ modernizing
• Restructure, modernize, and update Independence
  QA
• Work with international convergence issues
• Incorporate public sector considerations into ASB
  standards
• Develop the following for the next Yellow Book
  revision
• Objectives-based format
• agenda and target year

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GAOs Accountability and Standards Team

• Yellow Book Team
• Jeanette Franzel [phone]
• Marcia Buchanan [phone]
• Gail Vallieres [phone]
• Michael Hrapsky [phone]
• Heather Keister [phone]
• We also get lots of help from
• Bob Dacey, GAO Chief Accountant
• Abe Akresh, GAO Senior Expert Auditing Standards
• Jennifer Allison, Advisory Council Administrator

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Where to Find the Yellow Book

• The Yellow Book is available on GAOs website
  at
• www.gao.gov/govaud/ybk01.htm
• For technical assistance, contact us at
• yellowbook_at_gao.gov