Generally Accepted Government Auditing Standards (GAGAS), commonly referred to as the “Yellow Book,” were revised and issued in July 2018 by the U.S. Government Accountability Office (GAO). For financial audits, attestation engagements, and reviews of financial statements, the changes in the 2018 Yellow Book are effective for the periods ending on or after June 30, 2020. While there were many new requirements in the 2018 Yellow Book, below is a summary of two key changes.
Independence Requirements Related to Non-Audit Services:
The 2018 Yellow Book expands independence requirements for non-audit services, such as the preparation of accounting records and year-end audited financial statements. Under the 2018 Yellow Book, auditors must conclude that preparing financial statements in their entirety from a client-provided trial balance or underlying accounting records creates a significant threat to independence. As a result, auditors must document the evaluation of the threat and implement appropriate safeguards to reduce the threat to an acceptable level. As part of reducing the threat of non-audit services the 2018 Yellow Book also provides additional guidance on defining management’s “Skills, Knowledge and Expertise” (SKE).
Under the 2018 Yellow Book management is not required to possess expertise needed to perform or reperform the non-audit service, however, auditors will have to assess management’s ability (or SKE) to recognize a material error, omission, or misstatement in the results of the non-audit services provided. This will determine whether the nonaudit service can be performed by the auditor.
Waste and Abuse
Although the phrase waste and abuse has been part of audit terminology for years the 2018 Yellow Book introduces a new concept of waste. Waste is defined in the 2018 Yellow Book as “the act of using or expending resources carelessly, extravagantly, or to no purpose. Importantly, waste can include activities that do not include abuse and does not necessarily involve a violation of law. Rather, waste relates primarily to mismanagement, inappropriate actions, and inadequate oversight.” Based on this definition examples of waste, depending on the facts and circumstances, may include:
- Making travel choices that are contrary to existing travel policies or are unnecessarily extravagant or expensive.
- Making procurement or vendor selections that are contrary to existing policies or are unnecessarily extravagant or expensive.
Because the determination of waste and abuse is subjective auditors are not required to design testing procedures to detect waste or abuse, however, if waste or abuse is discovered auditors are required to understand that this discovery may indicate that fraud or noncompliance could exist. Therefore, auditors may perform expanded audit procedures if they find any indication of waste or abuse within the audited entity and will need to consider whether and how to communicate such matters.