In July 2018, changes and revisions were made to the Government Auditing Standards, or Yellow Book. Government Auditing Standards applies to financial audits, attestation engagements and reviews of financial statements, Single Audits under the Uniform Guidance, Housing and Urban Development (HUD) audits, performance audits, and could potentially apply to other types of engagements as well.

Here are five fast facts about the new 2018 Yellow Book:

  1. The Yellow Book is effective for engagements with periods ending on or after June 30, 2020 (performance audits beginning on or after July 1, 2019). The new standards cannot be implemented early. Even though the effective date is for periods ending in 2020, auditors must comply with the independence changes at the beginning of the period, July 1, 2019.

  2. Certain non-attest services impair independence and cannot be performed. Services that impair independence with respect to an audited entity include: a) determining or changing journal entries, account codes or classifications for transactions, or other accounting records for the entity without obtaining management’s approval; b) authorizing or approving the entity’s transactions; and c) preparing or making changes to source documents without management’s approval. The fact that these services cannot be performed for an audited entity isn’t new; rather, the 2018 Yellow Book more clearly defines that these services impair independence.

  3. Independence documentation standards surrounding the performance of non-attest services constituted the most significant change in the new Yellow Book. The 2018 Yellow Book indicates that auditors should conclude that preparing financial statements in its entirety creates significant threats to auditors’ independence. It’s important to note that while the preparation of financial statements is noted as a significant threat, auditors are still able to perform this service as long as safeguards can be applied.

  4. Management’s skills, knowledge and experience (SKE) must be documented. For a non-attest service, auditors are required to determine that management has designated an individual who possesses suitable skills, knowledge, and experience and that understands the services to be provided sufficiently, in order to approve and oversee those services. Management is not required to be able to perform or re-perform the services provided; instead, management should be able to determine if the results of the services are reasonable and should be able to recognize a material error, omission or misstatement of the results of the services provided. While it is not a new requirement for auditors to document management’s SKE, the requirements surrounding SKE are now clarified.

  5. Definition of waste, and audit requirements for addressing waste, is noted. Waste is the act of using or expending resources carelessly, extravagantly, or to no purpose. Waste can include activities that do not include abuse and does not necessarily involve a violation of law. An example of waste is making travel choices that are contrary to existing travel policies or are unnecessarily expensive. Additionally, making procurement or vendor selections that are contrary to existing policies or are unnecessarily extravagant or expensive are examples of waste. Because the determination of waste is subjective, auditors are not required to perform specific procedures to detect waste in financial audits. However, auditors may consider whether and how to communicate such matters if they become aware of them. The 2018 Yellow Book also describes definitions and audit requirements for fraud and abuse.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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