Proposed Yellow Book revisions.

• Author: Gathier, Stephen
• Position: Issues on Accounting

The United States General Accounting Office (GAO) recently issued an exposure draft (ED) of a proposed revision of Government Auditing Standards, also known commonly as the "Yellow Book." If approved, the new version of the Yellow Book will replace the 1988 edition currently in use. The auditing standards contained in the Yellow Book are mandatory for federally required "Single Audits" of state and local governments. Also, some states have elected to require the use of the Yellow Book standards for audits of local governments even when its use is not mandated by federal law.

The ED is proposing significant changes to existing Yellow Book standards. If approved, the changes would affect not only financial statement audits but also performance audits. This article will focus exclusively on some of the more important proposed changes that could affect financial statement audits.

Assessing Internal Controls

Generally accepted auditing standards (GAAS), which are incorporated within the current Yellow Book standards, require auditors to obtain an understanding of management's and the board of directors' attitude, awareness and actions concerning an audited entity's control environment. The ED proposes that auditors performing Yellow Book audits also be required to perform certain additional specified procedures. Based on the results of these procedures, the auditor would be required to make a judgment whether the control environment contributes to or diminishes the effectiveness of specific internal control structure policies and procedures.

Assessing Audit Risk for Certain Assets

The ED proposes that auditors be required to determine if management has placed in operation adequate control procedures for the safeguarding of assets that could affect the fair presentation of the financial statements. Specifically, auditors would be required to perform certain additional specified procedures related to material asset accounts. If the auditor judges management's control procedures for safeguarding assets to be inadequate, that fact would need to be included as a reportable condition in the auditor's report on internal controls.

Language for Auditor's Reports

The American Institute of Certified Public Accountants (AICPA) provides standardized language for use in auditor's reports. The current Yellow Book mandates the use of this standardized language in Yellow Book audits. The ED proposes to eliminate this requirement and to allow auditors to use...