GAQC Alert No. 188 

GAQC Alert
Breaking A-133 News; New YB Independence Nonaudit Services Practice Aid Issued
February 27, 2012
GAQC Alert #188
In This Alert
GAQC Issues Yellow Book Independence - Nonaudit Services Practice Aid
The 2011 Yellow Book Independence Requirements
Description of Practice Aid
How to Access Practice Aid
Save the Date - Upcoming GAQC Web Events on the Practice Aid
Other Government Auditing Standards Resources
Breaking News!
The OMB just posted an Advance Notice of Proposed Guidance titled, Reform of Federal Policies Relating to Grants and Cooperative Agreements; cost principles and administrative requirements (including Single Audit Act), that asks for comment on reform ideas relating to Circular A-133, the cost principles, and various administrative requirements. Comments are due in 30 days and the GAQC will be commenting. The GAQC will send a separate GAQC Alert in the next few days with more information about the Advance Notice.
Additional Resources
GAQC Alerts

Archived GAQC Web Events

Audit Practice Aids and Tools

HUD Information
Dear Center Members
GAQC Issues Yellow Book Independence - Nonaudit Services Practice Aid
The Governmental Audit Quality Center (GAQC) has released a new practice aid titled, 2011 Yellow Book Independence—Nonaudit Services Documentation Practice Aid (practice aid). It was developed to assist auditors in meeting the requirements in the 2011 revision to Government Auditing Standards (the 2011 Yellow Book) for identifying and evaluating threats to independence when considering whether to provide a nonaudit service. The purpose of this GAQC Alert, is to provide you with:
A summary of the independence requirements contained in the 2011 Yellow Book, including the timing of when auditors performing nonaudit services need to consider the 2011 Yellow Book requirements;
A description of the practice aid;
Information on how to access a free PDF version of the practice aid and a for-sale version that will permit you to input responses and save it as part of your audit documentation;
A "save the date" notice for a future GAQC Web event on the new practice aid to be held on April 11, 2012 (in place of a previously scheduled GAQC Web event) and rebroadcast on Wednesday,
May 2, 2012; and
A summary of other Government Auditing Standards resources available to you.
The 2011 Yellow Book Independence Requirements
Audits performed under audit or attestation standards established by the AICPA must comply with Interpretation 101-3, Performance of Nonattest Services, under Rule 101, Independence (ET section 101.05), of the AICPA Code of Professional Conduct in determining independence when accepting an engagement to perform nonaudit services for an audit client. Audits performed under the 2011 Yellow Book have additional independence requirements.

The 2011 Yellow Book introduces a Yellow Book Conceptual Framework for independence which uses a "threats and safeguards" approach that is generally consistent with the AICPA Conceptual Framework for Independence Standards. The 2011 Yellow Book also contains certain nonaudit service prohibitions (see paragraphs 3.36, 3.50, and 3.53-3.58 of the 2011 Yellow Book for a description of these services) that are generally consistent with ET section 100-1, Conceptual Framework for AICPA Independence Standards. However, there are several key differences. Nonaudit services that are not specifically prohibited in the 2011 Yellow Book will have to be evaluated by auditors against the conceptual framework and an assessment will need to be made of management's ability (i.e., skills, knowledge, or experience, otherwise referred to as "SKE") to oversee the nonaudit service. Certain activities performed as part of the audit such as financial statement preparation, cash to accrual conversions, and reconciliations are not prohibited under the 2011 Yellow Book (see paragraph 3.40 of the 2011 Yellow Book) but they are considered to be nonaudit services that would have to be evaluated using the conceptual framework.

New independence-related documentation requirements are also introduced in the 2011 Yellow Book, some of which go beyond Interpretation No. 101-3. The 2011 Yellow Book documentation requirements include (a) documenting threats to independence that require the application of safeguards, along with the safeguards applied; (b) documenting management's ability to effectively oversee nonaudit services, including whether management possesses suitable SKE; and (c) documenting the understanding established with the audited entity regarding the nonaudit services to be performed. The 2011 Yellow Book requires documentation of the evaluation of threats and the application of safeguards whenever threats are considered significant, both individually and in the aggregate, and, therefore, requires the application of safeguards to eliminate or reduce the threats to an acceptable level.

It is important for auditors to note that the 2011 Yellow Book requires documentation of the suitability of management's SKE and the understanding established with the audited entity for all nonaudit services performed, regardless of whether threats to independence are determined to be significant.

The 2011 Yellow Book is effective for financial audits and attestation engagements for periods ending on or after December 15, 2012. Early implementation is not permitted. However, auditors performing nonaudit services need to be independent for the entire period. Therefore, those auditors may need to consider independence provisions of the 2011 Yellow Book prior to the effective date. For example, an auditor performing a calendar year end 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. For this reason, auditors considering the performance of nonaudit services should review the guidance in the practice aid now.
Description of the Practice Aid
As detailed above, the most significant change arising from the 2011 Yellow Book relates to its rules for auditor independence, particularly when performing nonaudit services (see also GAQC Alert #173). In response to these new independence requirements, the GAQC developed the practice aid to assist members in implementing the new independence rules.

The practice aid was developed via a coordinated effort of the GAQC and the AICPA ethics and peer review teams. Practitioner and federal agency input was also included as part of the development process. The practice aid will be very helpful to auditors having audit engagements of all types and sizes. However, it highlights the following nonaudit services that are frequently performed for smaller entities:
Preparing financial statements
Preparing journal entries other than proposed audit entries
Preparing reconciliations
The practice aid assumes that the threats in performing nonaudit services are those of management participation and self-review. An auditor must use his or her professional judgment when using the practice aid and should consider whether other threats exist, either due to the provision of nonaudit services or other relationships, and evaluate them using the conceptual framework.

One of the key features of the practice aid is a step-by-step questionnaire template that covers the thought process and related auditor documentation considerations when evaluating independence. The remainder of the practice aid contains detailed appendices that include, among other things, real-life examples of actual non-audit service scenarios and how an auditor might respond to them.

Additionally, the practice aid provides information on how an auditor might consider an auditee's SKE, which is a requirement for every nonaudit service provided. Finally, an illustrative completed version of the questionnaire template is provided. In addition to the questionnaire template, the various Appendices included in the practice aid are as follows:
Appendix A, "Detailed Instructions to This Practice Aid"
Appendix B, "Nonaudit Services"
Appendix C, "Prohibited Nonaudit Services"
Appendix D, "Threat Indicators"
Appendix E, "Application of Safeguards"
Appendix F, "Evaluation of Skills, Knowledge, or Experience"
Appendix G, "Completed Practice Aid Example"
Appendix H, "Yellow Book Independence Decision Flowchart"
Appendix I, "Glossary and Resources"
An auditor could use various approaches to meet the independence evaluation and documentation requirements of the 2011 Yellow Book; therefore, use of the practice aid is not required. However, the GAQC believes that audit quality will be enhanced by its use. Auditors using their own internal methodologies and documentation methods are encouraged to review the practice aid to ensure that such methodologies and documentation methods do not need to be enhanced or revised. Users of the practice aid should consult the original material referenced in the practice aid for a complete understanding of the standards, requirements, and guidance.
How to Access Practice Aid
Because of the importance of this area and to promote consistency in practice, the GAQC is releasing the practice aid in two forms as follows:

Flat PDF Version. All AICPA members, including GAQC members, are able to access a flat PDF file of the entire practice aid at no cost. Access the free PDF version of the practice aid.

Practice Aid Version Designed for Auditor Documentation Input. Because the questionnaire template contained in the practice aid will be a valuable tool for auditors, the AICPA developed an electronic version of the template that auditors can prepare and save as part of their audit documentation. That is, auditors can input their responses regarding the various independence considerations outlined in the template. The template, Yellow Book Independence—Nonaudit Services Documentation Practice Aid - Supplement, can then be easily saved and used as part of the audit documentation. There is a small cost associated with accessing this version of the practice aid, which is to be used in conjunction with the wrap-around material in the free flat PDF version (see above). The GAQC member price is $25, the AICPA member price is $28, and the non-member price is $35. GAQC members will need to provide a promotion code (access the promotion code) to obtain the GAQC member price. Note that the promotion code is entered at the final purchase. Order the 2011 Yellow Book Independence - Nonaudit Services Documentation Practice Aid - Supplement.
Save the Date - Upcoming GAQC Web Events on the Practice Aid
To assist members in getting more familiar with the practice aid and its contents, the GAQC will host a web event titled, Understanding the AICPA's Yellow Book Independence Practice Aid For Performing Nonaudit Services, on Wednesday, April 11, 2012, from 1:00pm - 3:00pm. This event will be open to all AICPA members and non-members. Additionally, because we recognize that some of our members may not be available for the live broadcast, we will also hold a rebroadcast of the live event for continuing professional education on Wednesday, May 2, 2012, from 1:00pm - 3:00pm and make a no-CPE archive of the live event available on the GAQC Web site. Watch for a future GAQC Alert that will contain registration information for both the live broadcast and the rebroadcast option. Finally, members should note that some time ago we asked you to hold the April 11th date for a GAQC Web event on Indirect Costs. Because of the importance of the 2011 Yellow Book independence requirements and consideration by auditors of the practice aid's guidance when performing nonaudit services, the GAQC is planning to reschedule the Indirect Cost event previously scheduled to later in the year. Again, a future GAQC Alert will inform you when the Indirect Cost event has been rescheduled.
Other Government Auditing Standards Resources
In addition to the practice aid described above, there are other Government Auditing Standards resources and tips that we want to ensure members are aware of. GAQC members and their staff should:
Become familiar with 2011 Yellow Book, especially its independence requirements.
Listen to an archived member Web event titled, The New 2011 Yellow Book: What You Need to Know Now. This event assists participants in understanding the key provisions of the 2011 Yellow Book, particularly its new independence requirements and how they differ from the AICPA's independence rules. The event also covers several case study examples.
Have a strong foundation in the 2007 version of Government Auditing Standards (2007 Yellow Book) for your audits still subject to that revision of the standards. An archived GAQC member Web event titled, The 2007 Yellow Book: What a Beginner Needs to Understand, will be of use to you in understanding some of the key provisions of the 2007 Yellow Book.
Review engagements performed under the 2007 Yellow Book against the peer review checklists for Yellow Book engagements as an additional quality control mechanism.
Access the illustrative Yellow Book audit reports on the GAQC Web site.
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AICPA Governmental Audit Quality Center

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