The Yellow Book, which covers the Generally Accepted Government Auditing Standards (GAGAS), was revised in July 2018 and supersedes the 2011 version.  This new version is applicable for financial statement audits and attestation engagements (examinations, reviews, and agreed-upon procedures) for periods ending on or after June 30, 2020.  It is important to note early implementation is not permitted.

This revision has been in the works for years and is intended to make it easier for people to find information when researching.  Reformatted and realigned chapters make the look of the 2018 Yellow Book different than its predecessor.  For example, requirements are displayed in a box, with related application guidance underneath.  There are two categories of requirements – ones using “must” and ones using “should.”  When standards are described with “must” they are considered unconditional requirements and must be completed.  Standards using “should” are considered presumptively mandatory.  If it is determined the “should” standards cannot be met, auditors should provide documentation discussing how alternative procedures sufficiently accomplished the objective.  The “must” and “should” language existed within the 2011 Yellow Book and continue to be good reminders when determining audit procedures to be performed.

The most significant change to the Yellow Book involves the requirement for auditors to evaluate a significant threat to independence from performing non-audit services.  Non-audit services include:  preparing accounting records and financial statements, internal audit assistance, internal control monitoring, IT systems services, valuation services, etc.  The requirement to follow the conceptual framework still exists, but auditors must evaluate the safeguards to reduce the threat to an acceptable level.  This is likely an analysis that auditors have already been performing, but documentation of this specific item is key to comply with the new Yellow Book.

The revised Yellow Book modified the peer review standard to require organizations comply with their respective affiliated organization’s peer review requirements and GAGAS peer review requirements.  Organizations should comply with the peer review requirements of the applicable affiliated organizations:

  • American Institute of Certified Public Accountants
  • Council of the Inspectors General on Integrity and Efficiency
  • Association of Local Government Auditors
  • International Organization of Supreme Audit Institutions
  • National State Auditors Association

Another revision in the 2018 Yellow Book covers “waste” within fraud, waste, and abuse.  Waste was defined as “the act of using or expending resources carelessly, extravagantly, or to no purpose.”  It had been referenced in previous Yellow Books with fraud and abuse, but it had never been defined.  Waste can include activities which are not abuse and do not necessarily involve a violation of law.  If waste is detected, it must be reported as a written audit finding.

Please feel free to contact a governmental team member at Ketel Thorstenson, LLP for more specific questions regarding this topic.