Encyclopedia of Business and Finance | Government Auditing Standards

Generally accepted government auditing standards (GAGAS)—informally known as the Yellow Book—are promulgated under the leadership of the comptroller general of the United States, who heads the U.S. General Accounting Office. The responsibility includes both establishing and revising these standards. The staff of the comptroller general's office is aided by the Advisory Council on Government Auditing Standards, whose members come from units of the federal and state governments, representatives of public accounting firms, and professors of accounting.

The first set of standards was issued in 1972; the second in 1988; the third in 1994. As of mid-2000, a review of the 1994 edition continues. The guidance in the 1994 edition continues to be in effect, except for changes contained in amendments. Two amendments have been issued as of early 2000. The amendments become effective once they are completed. All changes to the Yellow Book are initially presented in exposure draft so that interested parties can comment; these comments are considered in determining the adequacy of any change being proposed.

THE AUTHORITY OF GOVERNMENT AUDITING STANDARDS

The Yellow Book includes standards to guide all audits of governmental units, irrespective of the level of the unit. The standards are considered broad statements of auditors' responsibilities. The Introduction to the Yellow Book states its purpose as providing "standards for audits of government organizations, programs, activities, and functions, and of government assistance received by contractors, nonprofit organizations, and other nongovernment organizations" (Comptroller General of the United States, 1994).

Federal legislation established the requirement that all inspectors general comply with the GAGAS. Furthermore, inspectors general are responsible for assuring that nonfederal auditors also comply with these standards when they audit federal organizations, programs, activities, and functions. The Office of Management and Budget as well as the requirements of the Chief Financial Officers Act of 1990, the Single Audit Act of 1984, and other federal policies and regulations require the use of these standards in audits where federal funds are involved. The standards are recommended for use by state and local government auditors and public accountants in audits of state and local government organizations, programs, activities, and functions even though federal funds are not involved in some instances. A number of states and local audit organizations have officially adopted these standards.

THE NATURE OF AUDITS PERFORMED

GAGAS are provided for both financial and performance audits. The comprehensive guidance applies to the following:

• Financial statement audits. The statements included are the statement of financial position, results of operations, and cash flows, all of which are in conformity with generally accepted accounting principles. Financial statements audits also include audits of financial statements prepared in conformity with several other bases of accounting as established by auditing standards and related statements issued by the Auditing Standards Board of the American Institute of Certified Public Accountants.
• Financial related audits. Among such audits are those (1) involving financial information presented in accordance with established or stated criteria, (2) related to specific financial compliance requirements, (3) related to an entity's internal control over financial reporting and/or safeguarding of assets, and (4) involving compliance with laws and regulations and allegations of fraud. Also included are segments of financial statements, statement of revenue and expenses, statement of fixed assets, budget requests, and variances between estimated and actual financial performance.
• Performance audits. Such audits include systematic examination of relevant evidence to provide an independent assessment of the performance of a government organization, program, activity, or function. Also, economy and efficiency and program audits are included among performance audits. Such economy and efficiency audits may, for example, determine whether the entity is following sound procurement practices; is acquiring appropriate types of resources; is properly protecting and maintaining resources; is avoiding duplication of effort by employees; is avoiding idleness and overstaffing; is using efficient operating procedures; is using optimum amounts of resources; is complying with requirements of laws and regulations that could effect acquisition, protection, and use of resources; has an adequate management control system; and has reported measures of economy and efficiency that are reliable and valid. Program audits, for example, may assess whether the objectives of a program are proper, suitable, or relevant; and determine the extent to which a program is achieving its goals; identify factors inhibiting satisfactory performance; identify ways of making programs work better; and determine whether management has reported measures of program effectiveness that are valid and reliable.

Government audits may be a combination of financial and performance audit, as, for example, when auditors conduct audits of government contracts and grants with private-sector organizations as well as government and not-for-profit organizations where both financial and performance objectives must be audited.

GOVERNMENT AUDITING STANDARDS FOR FINANCIAL AUDITS

Standards are classified as general, field, and reporting. The GAGAS incorporate the generally accepted auditing standards as promulgated by the Auditing Standards Board of the American Institute of Certified Public Accountants. However, there are some additional standards that relate to the accountability of government units for compliance with laws and regulations. There are also more extensive reporting requirements related to such accountability.

General standards relate to qualifications of staff assigned to conduct an audit, to the need for the audit entity to be organizationally independent and the individual auditors to maintain independent in attitude and in appearance and to exercise due professional care in the work related to an audit, and to the need for the audit organization to have an appropriate internal quality control system that is externally reviewed at least every three years.

Field standards incorporate the three field standards as established by the Auditing Standards Board, which relate to planning, understanding internal control, and obtaining sufficient evidential matter. Additional standards relate to following up on known material findings and recommendations from previous audits; to designing the audit to provide reasonable assurance of detecting material misstatements related to irregularities and/or direct and material illegal acts; and to detecting noncompliance with provisions of contracts or grant agreements that have a direct and material effect on the financial statements. There is also a field standard related to the need to prepare adequate working papers.

Reporting standards incorporate the four reporting statements of the Auditing Standards Board. Additionally, there are standards that deal with communication with audit committee; disclosure of the fact that the audit was performed in accordance with generally accepted government auditing standards; and disclosures related to compliance with laws and regulations regarding on internal control, privileged and confidential information, and report distribution.

GOVERNMENT AUDITING STANDARDS FOR PERFORMANCE AUDITS

The general standards are the same for financial and performance audits as discussed earlier. Field and reporting standards for performance audits overlap to some extent with those for financial audits.

Field standards are related to (1) planning;(2) supervision; (3) design of the audit when laws, regulations, and other compliance requirements are significant to the audit objective; (4) understanding of management controls when relevant to the audit; and (5) sufficient, competent, relevant evidence.

Reporting standards are related to (1) preparation of written reports that communicate results; (2) appropriate issuance; (3) reporting audit objectives as well as scope and methodology; (4) the need for a complete, accurate, objective, convincing, and clear and concise report; and (5) report distribution.

AMENDMENTS TO GOVERNMENT AUDITING STANDARDS

As of mid-2000 there were two amendments to the Yellow Book. Amendment No. 1, "Documentation Requirements When Assessing Control Risk at Maximum for Controls Significantly Dependent upon Computerized Information Systems," and Amendment No. 2, "Auditor Communications."

Amendment No. 1 relates to an additional fieldwork standard requiring documentation in the planning of financial statements of the basis for assessing control risk at the maximum level for assertions related to material account balances, transaction classes, and disclosure components of financial statements when such assertions are significantly dependent on computerized information systems. The Advisory Council on Government Auditing Standards recommended this new standard as a way of tightening the rigor applied to an audit of the financial statements when computerized information systems are used for significant accounting applications. Prior to the implementation of this standard, auditors were not required to document their assessment of control risk at maximum; only if the assessment was below maximum was support to be included in the working papers. This new standard, Amendment No. 1, became effective for financial statement audits of periods ending on or after September 30, 1999.

Amendment No. 2 adds a fieldwork standard and amends a report standard for financial statement audits. The purpose is the improvement of auditor communication concerning the auditor's work on compliance with laws and regulations and internal control over financial reporting. In the report, the auditor is to emphasize the importance of the reports on compliance with laws and regulations and internal control over financial reporting when these reports are issued separately from the report on financial statements. This amendment is effective for financial statements audits of periods ending on or after January 1, 2000.

The review of government auditing standards continued in progress as of mid-2000. The General Accounting Office staff monitors the effectiveness of the guidance provided to auditors. Review of audits that are alleged to be defective in some respects leads to an assessment of the adequacy of guidance. Furthermore, changes in standards and statements issued by the Auditing Standards Board, changes in the structure of organizations, and the need to more sharply focus auditor responsibility lead to reconsideration of audit guidance.

Audits of financial status and of programs provided by various government agencies are critical to assuring accountability and adequate management. Those audits are reported publicly. The quality of the audits as well as of the reporting is related to the adequacy of the generally accepted government auditing standards.