State and local governments that receive federal funds and require a single audit are subject to the requirements of Government Auditing Standards, also known as the Yellow Book. While the guidance in the Yellow Book pertains to auditors, government officials should be aware of some of the proposed changes in the U.S. Government Accountability Office's April 2017 Exposure Draft (ED) that could affect their governments.
The last revision to the Government Auditing Standards (Yellow Book) was in 2011. The Yellow Book, also referred to as generally accepted government auditing standards, is a set of auditing standards developed by the Government Accountability Office for auditors and audit organizations at audit federal, state, and local governmental entities. The Yellow Book provides standards and requirements for auditors and audit organizations in the areas of independence, continuing professional education, quality control, peer reviews, and reporting.
Auditors need to be independent of the governmental agencies that they audit, regardless of whether the auditee receives federal funds or not. However, for governmental entities that are subject to the Yellow Book standards for their audits, those standards go beyond what is required for auditor independence in an audit performed in accordance with generally accepted auditing standards. Sometimes governments ask their auditors to perform services in addition to the annual financial statement and single audit. Auditors are required to evaluate the type of service that is being requested to ensure that their independence as the auditor is not impaired. The Yellow Book identifies certain nonaudit services that a government's auditor is prohibited from performing because those services would impair the auditor's independence. The ED identifies the following items as significant threats to auditor independence but does not prohibit auditors from performing these tasks or impair auditor independence, so long as the proper safeguards are in place and documented by the auditor:
Recording transactions for which management has determined or approved the appropriate account classification, or posting coded transactions to an audited entity's general ledger;
Preparing financial statements based on information in the trial balance;
Posting entries that have been approved by an audited entity's management to the entity's trial balance; and
Preparing account reconciliations that...