Independence safeguards safeguards are controls designed to eliminate or reduce to an acceptable level threats to independence. In terms of yellow book cpe, many of the proposed changes in this area were removed in the final version. Later that year, the professional ethics executive committee peec of the american institute of certified public. Government accountability office clarify the need for safeguards for practitioners when. Continued modernization and harmonization of auditing standards by various standardsetting bodies, including technical updates to reflect standards that have already been revised. New gao yellow book clarifies independence requirements. Government accountability office gao issued a revised version of government auditing standards gas, often referred to as the yellow book.
Independence is a state of mind that permits cpas to perform without being affected by influences that compromise professional judgment, allowing them to act with integrity and exercise objectivity. When threats are significant, firms must apply safeguards to be considered independent, for example, by using separate audit and nonaudit teams or performing an independent. Yellow book independence and providing nonaudit services. Because the new public company accounting oversight board is charged with addressing issues of auditor independence it will have to try to think conceptually about what we want from a requirement of auditor independence and what we are willing to forego in order to have it. Understanding the new independence rules related to. Understanding the aicpas yellow book independence practice aid. More detailed than yellow book requiring periodic evaluation of the organizations program taken as a whole. The double difficulty of financial statement preparation.
However, the gao requires documentation of significant threats to independence along with the related safeguards employed. The 2018 edition of the yellow book is effective for audits ending on or after june 30, 2020. Auditors who are unable to apply sufficient safeguards should not perform both the nonaudit and audit services, as independence would be. The 2011 yellow book supersedes the 2007 version and the independence guidance entitled, government auditing standards. Identifying deficiencies in single audits the cpa journal. Plus, the gao considers assistance with financial statement preparation to be a significant threat to independence that requires the employment of a safeguard. Maintaining independence with nonattest services journal of. Rather, safeguards must be put in place to eliminate the threat and these safeguards must be documented in the audit report.
Yellow book 2018 must and should statements requirements. The conceptual framework must be used to evaluate threats to independence when. Under the yellow books conceptual framework approach paragraphs 3. Yellow book includes new guidelines for independence. The 2018 yellow book can be accessed on the gao yellow book web page. The double difficulty of financial statement preparation for. Classify your ethical responsibilities in the government environment apply the conceptual framework in evaluating threats to your independence as an auditor. Auditors will be evaluating and documenting threats to independence using the generally accepted government auditing standards gagas conceptual framework for independence, which is included in the 2018 yellow book. New statements on auditing standards and the yellow book. There were many improvements and changes made to the new yellow book. Yellow book revisions update independence guidance aechile. The cpe hour requirement stays the same at 24 and 56. Safeguards to independence threats safeguards are actions or other measures, individually or in combination, that auditors and audit organizations take that effectively eliminate threats to independence or reduce them to an acceptable level. The yellow book was first published in 1972 and has been updated and revised over the years.
Ghandar says to watch out for these six threats to smsf auditor independence. The standards clarify other nonaudit services frequently performed by auditors that automatically impair independence such that no safeguard. When doing so, it is important to note that a single circumstance may give rise to more than one threat and each threat must be. Safeguards are controls designed to eliminate or reduce to an acceptable level threats to independence. Yellow book independence and preparing financial statements. The 2018 yellow book was recently updated and includes a significant change regarding auditor independence. In large firms, this threat can be addressed by separating the.
Added to the yellow book independence standards for clarification is a statement par. All personnel subject to yellow book independence requirements will need to gain a familiarity with these concepts and their practical application. However, the gao did add application guidance that emphasizes the need to obtain gagasspecific. If a threat is identified, safeguards need to be put into place to reduce the threats identified to an acceptable level. The author summarizes the most significant changes in the new yellow book, with particular focus on the new standards for evaluating threats to auditor independence. According to the yellow book, independence comprises. The generally accepted government auditing standards, also known as the yellow book, provides a framework for conducting highquality audits with competence, integrity, objectivity, and independence. In essence, auditors are no longer considered independent with respect to the audit if auditors prepare an organizations financial statements without having one or more safeguards in place.
Most cpas are aware that if they perform nonaudit services for attest clients under u. Nonaudit services are also allowed by yellow book but may require safeguards. Sep 26, 2019 if a threat is identified, safeguards need to be put into place to reduce the threats identified to an acceptable level. One of the most notable changes, and the one discussed in this article, is related to the independence requirements when an auditor provides nonattest services to the client by. There is more specific guidance regarding the significance of threats, particularly when providing nonaudit services, the yellow books term for nonattest services. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Yellow book revisions update independence guidance journal.
Threats and safeguards in the determination of auditor. Gao government auditing standards update the new yellow book c h r i s t i n e h a r d e n, m b a, c p a, c g m a f e b r u a r y 5, 2 0 1 9 2 0 1 9 g f o a a 3 5 th a n n u a l c o n f e r e n c e. In prior versions of the yellow book, the ethics, independence, and. These occur when the auditor has also prepared some of the accounting for the fund. Threats are relationships or circumstances that could impair independence. Declaring independence yellow book includes new guidelines. Feb 07, 2020 to avoid problems with independence, the gao defines significant threats and suggests safeguards to reduce the threats to an acceptable level.
Threats and safeguards approach used by both but yellow book requires it on all circumstances that may result in threats to independence. Revised gao and aicpa independence rules audit conduct. If it is not, a violation of professional standards exists. Does your team meet the 2018 yellow book independence. Heres how the yellow book defines these three key concepts. This information is from the appendix to the yellow book where it explains the threats to independence in more detail than in chapter 3. Nonaudit services are permitted by aicpa unless there are significant threats. Under the conceptual framework, the auditor applies safeguards that address the specific facts and circumstances under which threats to independence exist in some cases, multiple safeguards may be. Answers to independence standard questions gao02870g, a. Aicpa standards and yellow book standards are similar in that a conceptual framework is to be used by auditors to identify, evaluate, and apply safeguards to address threats to independence. Government auditing standards yellow book practice aids and tools the aicpas governmental audit quality center gaqc web site section provide links to practice aids and tools that will assist auditors in understanding the requirements of government auditing standards, issued by the comptroller general of the united states also referred. Independence is a critical concern for cpas and is the very foundation of attest services. Threats are circumstances that couldbut do not automaticallyimpair independence.
Two primary factors are driving the current yellow book update. In june of 1997, the securities and exchange commission sec. Does the yellow book provide any examples of safeguards. While similar in spirit to earlier guidance, this new framework represents a significant shift from a more rulesbased approach to auditor independence to a more principlesbased approach. The 2018 yellow book makes it clear that preparing the yearend audited financial statements in its entirety is always considered a significant threat to the auditors independence. The following from the 2007 yellow book has been removed from the 2011 revision. Case studies and reallife examples will be used to assist you in gaining an understanding of how to assess threats to independence and apply safeguards to. Safeguards can help prevent impairments to independence. Gaos conceptual framework approach to independence remains, but with tweaks. Sep 14, 2011 this information is from the appendix to the yellow book where it explains the threats to independence in more detail than in chapter 3. The yellow book requires that your independence be documented. The state of mind that permits the performance of an attest service without being affected by influences that compromise professional judgment, thereby. Definition of common terms used in the yellow book are expanded.
The yellow book is used by auditors of government entities, entities that receive. Mar 20, 2019 gaos conceptual framework approach to independence remains, but with tweaks. New gao yellow book clarifies independence requirements for. So, document the ske of the client and the safeguards used to address significant threats.
As such, the auditor is responsible for documenting the evaluation of the threat and implementing the appropriate safeguards to reduce it to an acceptable level. Guidance on gagas requirements for continuing professional education gao05568g, april 2005, and the 2014 government auditing standards. Because even though technically the new yellow book is not yet effective, if you are performing a calendar yearend audit under the 2011 yellow book, and also considering performance of nonaudit services, you need to be in compliance with the new independence requirements at the beginning of the audit periodthat is, january 1, 2012. Under the conceptual framework, the auditor applies safeguards that address the specific facts and circumstances under which threats to independence exist. Government accountability office gao issued a revised version of the government auditing standards also known as the yellow book, which updated the independence rules. Last revised in 2011, the yellow book is designed to help government auditors at the federal, state, and local levels produce highquality audits that reflect competence, integrity, objectivity, and independence. Yellow book revisions update independence guidance journal of. To avoid problems with independence, the gao defines significant threats and suggests safeguards to reduce the threats to an acceptable level. As i revise my selfstudy book, the yellow book interpreted, i will be sharing chapters with you.
In some cases, multiple safeguards may be necessary to address a threat. The 2018 revision of government auditing standards supersedes the 2011 revision gao12331g, december 2011, the 2005 government auditing standards. The new yellow book clearly informs firms which services create threats and may require application of safeguards and which create significant threats to independence. And if you prepare financial statements in a yellow book audit, you need to be aware of the independence rules. The yellow book establishes a conceptual framework that auditors use to identify, evaluate, and apply safeguards to address threats to independence. Per the 2018 yellow book, auditors must be independent from an audited. How the yellow books new independence standards impact. The yellow book standards on auditor independence require that, in all matters relating to the audit work, the audit organization and the individual auditor must be independent. Update on the developments in government auditing standards.
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