GAQC Alert No. 173 


    GAQC Alert
     
    New 2011 Yellow Book Issued by GAO (Interim Version)
           
      AICPA
    August 22, 2011
    GAQC Alert #173
     
     
    In This Alert
       
    Effective Date
    Why an Interim Revision?
    Independence is the Major Area of Change
    Other Changes
    GAQC Plans Going Forward
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    Dear Center Members
    As we informed you in an e-mail last Friday, the Government Accountability Office (GAO) released an interim version of an update to Government Auditing Standards (also referred to as the Yellow Book) titled, 2011 Internet Version of Government Auditing Standards (2011 interim revision). It is available on the Yellow Book section of the GAO Web site. The Governmental Audit Quality Center (GAQC) is issuing this GAQC Alert to inform you of the issuance of the new standards and several key matters that you should be aware of. We will likely provide additional communications and Web events on this topic in the future.
    Effective Date
    The 2011 interim revision states that the effective date for financial audits and attestation engagements is for periods ending on or after December 15, 2012. It is effective for performance audits for audits beginning on or after December 15, 2011. Early implementation is not permitted.

    As noted in the section below, the main area of change in the standards relates to the auditor independence rules. Since auditors need to be independent for the entire audit period, you will have to consider the auditor independence provisions of the new Yellow Book prior to the effective date. For example, an auditor performing a December 31, 2012, financial statement audit under Government Auditing Standards will need to comply with the new independence requirements at the beginning of the audit period—that is, January 1, 2012.
    Why an Interim Revision?
    The GAO states on its Web site that the 2011 interim revision is the intended content for the final 2011 revision of the standards. However, because of the linkage between the AICPA's auditing standards and Government Auditing Standards, the GAO is issuing the new standards in an interim "Internet" format until such time that the AICPA Auditing Standards Board (ASB) completes its clarity revisions to the AICPA's auditing standards. GAO is monitoring the ASB's progress on the clarity project and once it is complete, the GAO will formally issue the final 2011 revision. It is expected that the final issuance will occur before the end of this calendar year.
    Independence is the Major Area of Change
    The most significant changes being made by the GAO are to the Yellow Book's independence standards. Generally, the changes made by GAO are intended to more closely align the Yellow Book independence requirements to those of the AICPA. Key points for members to focus on include the following:
    The 2011 interim revision introduces a conceptual framework approach to independence using a "threats and safeguards" approach that is consistent with both the AICPA and international independence frameworks; however, there are also key differences.
    The revised standards include an identification of categories of threats that include (1) management participation threat; (2) self-review threat, (3) bias threat; (4) familiarity threat; (5) undue influence threat; (6) self-interest threat; and (7) structural threat.
    The 2011 interim revision contains certain nonaudit service prohibitions that are generally consistent with AICPA Ethics Interpretation 101-3, Performance of Nonattest Services (paragraph 3.36 of the standards includes a listing of these services).
    Nonaudit services that are not specifically prohibited in the 2011 interim revision will have to be evaluated by auditors against the conceptual framework and an assessment will need to be made of management's ability to effectively oversee the nonaudit service (see below for a related documentation requirement).
    While not prohibited, paragraph 3.40 of the standards states that activities such as financial statement preparation, cash to accrual conversions, and reconciliations are considered to be nonaudit services that would have to be evaluated using the conceptual framework (note that this is a difference from current Interpretation 101-3).
    New independence-related documentation requirements are introduced, some of which go beyond what the AICPA independence standards require. This is one of the key areas of change you will need to focus on. For example, auditors will have to document threats to independence that require the application of safeguards, along with safeguards applied. Additionally, auditors will also have to assess and document management's ability to effectively oversee nonaudit services to be performed, including whether management possesses suitable skill, knowledge or experience.
    In light of the new conceptual framework, GAO will retire the current guidance document titled, Government Auditing Standards: Questions and Answers to Independence Standard Questions.
    Other Changes
    There are a number of other changes in the 2011 interim revision. Some were finalized as proposed in the related exposure draft (ED). For example, the 2011 interim revisions finalize many updates that were proposed in the ED relating to auditing standards issued by the AICPA. Additionally, as was the case in the ED, the 2011 interim revisions identify Government Auditing Standards requirements and guidance that supplement AICPA requirements for financial audits and also consolidate the financial audit standards into a single chapter (i.e., chapter 4). The clarification in requirements for internal specialists that was previously proposed in the ED was also retained (e.g., internal specialists consulting on a GAGAS audit who are not involved in directing, performing audit procedures, or reporting on a GAGAS audit, should be qualified and competent in their areas of specialization; however, these internal specialists are not required to meet the GAGAS CPE requirements).

    However, there are also other changes made that were not included in the original ED but came about as part of the exposure process. For example, previous editions of the Yellow Book (and the ED) did not adopt the AICPA's general standards. The 2011 interim revision, paragraph 2.08, adopts all AICPA Statements on Auditing Standards (SAS) and requires auditors to comply with the additional requirements in chapters 1 - 4. The end result of this change is that the AICPA's current general standards, which will be incorporated into the upcoming clarity revision SAS, will be required to be followed in a Yellow Book audit.
    GAQC Plans Going Forward
    Due to the comprehensive nature of the 2011 interim revision, the GAQC and other teams at the AICPA will be further analyzing the new standards. We will issue future GAQC Alert communications, as necessary, summarizing any other significant matters that you should be aware of. Additionally, the AICPA Ethics team will be working to update the comparison it previously prepared that will summarize the differences between the 2011 interim revision and the AICPA independence standards (access the previous comparison). We will notify you once that comparison is available. Finally, the GAQC team will be providing GAQC members an opportunity to participate in one or more future Web events on this topic. In the meantime, we encourage our members to read the 2011 interim revision and begin becoming familiar with it.
     
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    Sincerely,

    AICPA Governmental Audit Quality Center

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