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Thomas M. Gilbert, CPA

The NEW Yellow Book What Every School District Auditor Needs to Know. Thomas M. Gilbert, CPA. Objectives. Background Summary of Major C hanges Threats to Independence Routine Activities vs. Nonaudit Services vs . Prohibited N onaudit Services Evaluating Nonaudit Services

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Thomas M. Gilbert, CPA

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  1. The NEW Yellow Book What Every School District Auditor Needs to Know Thomas M. Gilbert, CPA

  2. Objectives • Background • Summary of Major Changes • Threats to Independence • Routine Activities vs.Nonaudit Services vs. Prohibited Nonaudit Services • Evaluating Nonaudit Services • Case Study • Additional resources

  3. Background • What is the Yellow Book? • Synonymous with Government Auditing Standards • Professional standards and guidance contained in Yellow Book are called generally accepted government auditing standards (GAGAS) • Issued by the Comptroller General of the US, of the US Government Accountability Office (GAO)

  4. Background • When is an audit a Yellow Book Audit? • When the entity is required to have a single audit (could be GOV, NPO, etc.) • When required by laws, regulations, agreements, contracts, or other authoritative sources • When requested by the client

  5. Background • What are the differences in a Yellow Book Audit? • Emphasis on ethical principles • Additional fieldwork & documentation standards • Additional requirements related to competency and CPE • Required documentation of consideration of independence (separate presentation on this later today) • Additional reporting requirements • Specific ways to report internal control and compliance findings

  6. Major Changes in 2011 Yellow Book • Conceptual framework for independence • Means for the auditor to assess independence • Requirements for performing nonaudit services • Assessment of whether management possesses Suitable skills, Knowledge or Experience (SKE) to oversee the nonaudit services and document that assessment

  7. Major Changes in 2011 Yellow Book • Revisions to nonaudit services that may bepermitted under appropriate conditions • Guidance on nonaudit services that always impair independence • Added documentation requirements to support adequate consideration of audit independence

  8. Threats To Independence • Management participation threat • Self-review threat • Self-interest threat • Bias threat • Familiarity threat • Undue influence threat • Structural threat • Refer to Paragraphs 3.14 of Government Auditing Standards (2011 Yellow Book) for definitions of threats

  9. Routine Activities • Routine Activities are notnonaudit services and do not need to be evaluated • Provide advice and respond to questions as part of the audit • Educating on matters within the auditor’s technical expertise • Providing information that is readily available to auditors, such as best practices

  10. NonAudit Services • Nonaudit services that may bepermitted under appropriate conditions • Common nonaudit services for LEAs: • Preparing financial statements • Preparing journal entries other than proposed entries • Preparing reconciliations • Preparing conversion entries

  11. Prohibited NonAudit Services • Prohibited Nonaudit services that alwaysimpair independence. Some prohibited nonaudit services to look out for! • Deciding which of the auditors’ or outside 3rdparties’ recommendations to implement • Determining or changing journal entries without management approval • Preparing or making changes to source documents without management approval • Performing procedures that form part of the internal control • Refer to Paragraphs 3.36, 3.50 & 3.53-3.58 of Government Auditing Standards (2011 Yellow Book) for additional prohibited services.

  12. Evaluating NonAudit Services • Preconditions for Nonaudit Services • Evaluate Threats and Identify Significant Threats • Safeguards

  13. Preconditions for NonAudit Services • Make sure it is not a routine activity or a prohibited nonaudit service • Managementmust do all of the following: • Assume all management responsibilities • Oversee and evaluate adequacy and results

  14. Preconditions for NonAudit Services • Auditormust do all of the following: • Establish and document understanding with management • Assess and document whether there is a designated individual that possesses suitable SKE to oversee

  15. Preconditions for NonAudit Services • Assess and document whether there is a designated individual that possesses suitable SKE to oversee • Must do for ALL nonaudit services performed regardless of whether threats to independence are determined significant • If no one at the audited entity is willing and able to oversee the nonaudit service = Impaired Independence because no safeguards would be sufficient to overcome impairment • SKE is not a safeguard, but a mitigating factor in determining the safeguards to eliminate or reduce significant threats to an acceptable level SKE: Suitable Skills Knowledge Experience

  16. Preconditions for NonAudit Services • Assess the following for the SKE individual: • Understanding of the nature of the nonaudit service • Knowledge of audited entity’s business & industry • General business knowledge • Experience, education, licenses and accreditations • Can be a combination of individuals to get your SKE

  17. Examples of a Double SKE • LEA has CPA on BOD who can assist the bookkeeper assume responsibility and oversee financial statement preparation • Auditor might conclude that together they have SKE • LEA has complex debt refunding transactions. The LEA hires another CPA firm who can prepare the refunding journal entries and also assist the bookkeeper assume responsibility and oversee the financial statement preparation • Auditor might conclude that together they have SKE

  18. Evaluate Threats and ID Significant Threats • At an acceptable level OR reduced to an acceptable level by application of safeguards • Not acceptable level if either: • Could affect ability to audit without being affected by influences that compromise professional judgment, or • A reasonable informed party could conclude that integrity, objectivity, or professional skepticism has been compromised • Evaluate individually and in aggregate • Reevaluate throughout the engagement • If threat deemed significant, must apply safeguards

  19. Safeguards • Safeguards can be in place to reduce the threat to an acceptable level • Example of potential safeguards to reduce or eliminate significant threats: • Using another audit firm • Obtain 2nd review by a professional who is not a member of the audit engagement team • Educate management • Designated individual with SKE reviews the financial statements and completes the disclosure checklist

  20. Safeguards • MUST document when safeguards have been applied • Proper professional judgment is important in determining proper safeguards • Often threats require combinations of one or more safeguards • Some safeguards have higher level of mitigation than others • Safeguards that involve professionals independent of the audit process and/or audit firm are more effective

  21. Case Study Gilbert Associates Inc. has been requested to prepare the financial statementsfor Howdy School District.

  22. Case Study • Is this a routine activity? • NO (if yes, do not need to evaluate) • Is this a prohibited nonaudit service? • NO (if yes, independence impaired) • Is there a designated individual that possesses suitable SKE to oversee and did you complete the required documentation? • Yes (if no, independence impaired) Required for all nonaudit services regardless if there is a significant threat

  23. Case Study • Did you establish and document the understanding with audited entity regarding nonaudit services? • Yes – Included in the engagement letter (if no, independence impaired) • Are threats to independence identified? • Yes, management participation and self-review threat • Is this a significant threat? • Yes (if no, applied safeguards are not necessary) Required for all nonaudit services regardless if there is a significant threat

  24. Case Study • Can safeguards be established, applied and documented? • Yes, the designated individual that possesses suitable SKE will review the financial statements and complete the disclosure checklist. In addition, Peggy Vande Vooren, CPA, an audit partner with industry expertise not assigned to this engagement will do a technical review of the financial statements. (If no, independence impaired) • Will the application of the safeguard eliminate or reduce the significant threat to an acceptable level? • Yes (if no, independence impaired)

  25. Source: • Appendix II 2011 Yellow Book

  26. Additional Resources • Government Auditing Standards, December 2011 Revision (GAO-12-331G) http://www.gao.gov/products/GAO-12-331G • Summary of Major Changes/Listing of TechnicalChanges: GAO list of changes in Government Auditing Standards, December 2011 Revision http://www.gao.gov/yellowbook • Archived Web Event on the 2011 Yellow Book http://www.aicpa.org/InterestAreas/GovernmentalAuditQuality/Resources/Pages/TheNew2011YellowBook.aspx

  27. Additional Resources • Archived Web Event on the GAQC 2011 Yellow Book Independence Practice Aid http://www.aicpa.org/InterestAreas/GovernmentalAuditQuality/Resources/Pages/UnderstandingtheAICPA%27sYBPracticeAidMemberWebEvent.aspx • AICPA Member Only: 2011 Yellow Book Independence - Non audit Services Documentation Practice Aid http://www.aicpa.org/InterestAreas/GovernmentalAuditQuality/Resources/AuditPracticeToolsAids/Pages/YellowBookAuditToolsandAids.aspx

  28. For More Information: Thomas M. Gilbert, CPA Gilbert Associates, Inc. thomg@gilbertcpa.com

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