What’s New in Government Internal Control and Auditing Standards? Houston Institute of Internal...

What’s New in Government Internal Control and Auditing Standards?

Houston Institute of Internal Auditors

2015 Government Auditing Conference

Session Objectives

• To discuss GAO’s revision to the Standards for Internal

Control in the Federal Government (Green Book)

• To discuss recent developments to the Government Auditing

Standards (Yellow Book)

• To provide a general overview of the 2011 Yellow Book

Standards for Internal Control in the Federal Government

Going Green

1983 Present

Green Book Through the Years

What’s in Green Book for the Federal Government?

• Reflects federal internal control standards required per

Federal Managers’ Financial Integrity Act (FMFIA)

• Serves as a base for OMB Circular A-123

• Written for government

• Leverages the COSO Framework

• Uses government terms

What’s in Green Book for State and Local Governments?

• May be an acceptable framework for internal control on the

state and local government level under proposed OMB

Uniform Guidance for Federal Awards

• Written for government

• Leverages the COSO Framework

• Uses government terms

What’s in Green Book for Management and Auditors?

• Provides standards for management

• Provides criteria for auditors

• Can be used in conjunction with other standards, e.g.

Yellow Book

Updated COSO Framework

ReleasedMay 14, 2013

The COSO Framework

• Relationship of Objectives and Components

• Direct relationship between objectives (which are what an entity strives to achieve) and the components (which represent what is needed to achieve the objectives)

• COSO depicts the relationship

in the form of a cube:

• Three objectives: columns

• Five components: rows

• Organizational structure: third dimensionSource: COSO

From COSO to Green Book: Harmonization

COSO Green Book

Revised Green Book: Standards for Internal Control in the Federal Government

Overview

Standards

•Consists of two sections:• Overview• Standards

•Establishes:• Definition of internal control • Categories of objectives• Components and principles of

internal control• Requirements for effectiveness

Standards for Internal Control

Revised Green Book: Overview

• Explains fundamental concepts of internal control

• Addresses how components, principles, and attributes relate

to an entity’s objectives

• Discusses management evaluation of internal control

Overview

Standards

Fundamental Concepts

• What is internal control in Green Book?• OV1.01 Internal control is a process effected by an entity’s

oversight body, management, and other personnel that provides reasonable assurance that the objectives of an entity will be achieved.

• What is an internal control system in Green Book?• OV1.04 An internal control system is a continuous built-in

component of operations, effected by people, that provides reasonable assurance, not absolute assurance, that an entity’s objectives will be achieved.

Overview: Components, Principles, and Attributes

Achieve Objectives

Components

Principles

Attributes

Overview

Standards

Revised Green Book: Principles

Components and Principles

Component, Principle, Attribute

Overview: Principles and Attributes

Overview

Standards

• In general, all components and principles are required for an effective internal control system

• Principles and Attributes:• Entity should implement relevant principles• If a principle is not relevant, document the rationale of how,

in the absence of that principle, the associated component could be designed, implemented, and operated effectively

• Attributes are considerations that can contribute to the design, implementation, and operating effectiveness of principles

Overview: Principles and Attributes (cont.)

• OV2.05: The 17 principles support the effective design, implementation, and operation of the associated components and represent requirements necessary to establish an effective internal control system.

• OV2.07 excerpt: The Green Book contains additional information in the form of attributes. . . Attributes provide further explanation of the principle and documentation requirements and may explain more precisely what a requirement means and what it is intended to cover, or include examples of procedures that may be appropriate for an entity.

Overview: Management Evaluation

An effective internal control system requires that each of the five components are:

• Effectively designed, implemented, and operating

• Operating together in an integrated manner

Management evaluates the effect of deficiencies on the internal control system

A component is not effective if related principles are not effective

Overview

StandardsOverview

Standards

Overview: Additional Considerations

The impact of service organizations on an entity’s internal control system

Discussion of documentation requirements in the Green Book

Applicability to state, local, and quasi-governmental entities as well as not-for-profits

Cost/Benefit and Large/Small Entity Considerations

Overview

StandardsOverview

Standards

Revised Green Book: Standards

• Control Environment

• Risk Assessment

• Control Activities

• Information and Communication

• Monitoring

Overview

Standards

Revised Green Book: Standards

• Explains principles for each component

• Includes further discussion of considerations for principles in the form of attributes

Overview

Standards

Control Environment

Risk Assessment

Control Activities

Information & Communication

Monitoring

Controls Across Components

Other Key Considerations

• Standards vs. Framework

• Documentation Requirements• Overview lists in OV4.08 the documentation requirements

found in the principles which represent the minimum level of documentation necessary for an effective internal control system

Documentation Requirements

• Excerpt from OV2.06: If management determines a principle is not relevant, management supports that determination with documentation that includes the rationale of how, in the absence of that principle, the associated component could be designed, implemented, and operated effectively.

Documentation Requirements (cont.)

• Control Environment• 3.09: Management develops and maintains documentation

of its internal control system.

• Control Activities• 12.02: Management documents in policies the internal

control responsibilities of the organization.

Documentation Requirements (cont.)

• Monitoring• 16.09: Management evaluates and documents the results

of ongoing monitoring and separate evaluations to identify internal control issues.

• 17.05: Management evaluates and documents internal control issues and determines appropriate corrective actions for internal control deficiencies on a timely basis.

• 17.06: Management completes and documents corrective actions to remediate internal control deficiencies on a timely basis.

Accessibility of Green Book

• Comments raised during exposure identified new need:

• How do we make the Green Book more accessible to our user community?

The Green Book Layout

• Changed the layout of the Green Book itself to make it more

user friendly:

• Introduced a highlights page

• Facsimile page

• Graphics throughout the overview and standards

Highlights Page

Facsimile Page

Cube as Navigation Aid

The Green Book in Action

• Relationship between the Green Book and Yellow Book

Green Book and Yellow Book

• Can be used by management to understand requirements

• Can be used by auditors to understand criteria

The Yellow Book: Framework for Audits

• Findings are composed of: • Condition (What is)

• Criteria (What should be)

• Cause

• Effect (Result)

• Recommendation (as applicable)

Linkage Between Criteria (Yellow Book) and Internal Control (Green Book)

• Green Book provides criteria for the design, implementation, and operating effectiveness of an effective internal control system

The Yellow Book: Framework for Audits

• Findings are composed of: • Condition (What is)

• Criteria (What should be)

• Cause

• Effect (Result)

• Recommendation (as applicable)

Linkage Between Findings (Yellow Book) and Internal Control (Green Book)

• Findings may have causes that relate to internal control deficiencies

Effective Date

• Green Book effective beginning fiscal year 2016 and for the FMFIA reports covering that year

• Management, at its discretion, may elect early adoption of the Green Book

Government Auditing Standards

Yellow Book Update

Yellow Book Update

• New Interpretation

• Future Plans for Revision

New Interpretation: Peer Review Ratings

GAO developed interpretive guidance on assessing and reporting on the results of peer reviews in government environment:

• New report ratings do not change the thresholds for deficiency

reporting

• Matters identified during peer review that are not included in

report may be communicated orally or in writing

Yellow Book Interpretations

• Same authority as Yellow Book

• Presented to Advisory Council

• Addressed with key stakeholders

• Posted to GAO website

Future Plans for Revision

• Plans for the next Yellow Book revision are underway

• Areas being considered for revision include:

• CPE

• Competence

• Further clarify updates

• Updates for ASB attest section modifications

• Peer review

Government Auditing Standards

2011 Yellow Book

Yellow Book = “GAGAS”

GAGAS—Generally Accepted Government Auditing Standards:

• Broad statements of auditors’ responsibilities

• An overall framework for ensuring that auditors have the

competence, integrity, objectivity, and independence in

planning, conducting, and reporting on their work

• For financial audits and attestation engagements, incorporates

and builds on the AICPA standards (SASs and SSAEs)

The 2011 Yellow Book: Applicability

• Chapters 1, 2, and 3 apply to all GAGAS engagements:• Chapter 1: Government Auditing: Foundation and Ethical

Principles • Chapter 2: Standards for Use and Application of GAGAS• Chapter 3: General Standards

• Chapter 4: Standards for Financial Audits – applies only to financial audits

• Chapter 5: Standards for Attestation Engagements – applies only to attestation engagements

The 2011 Yellow Book: Applicability (cont.)

• Chapters 6 and 7 apply only to performance audits:• Chapter 6: Field Work Standards for Performance Audits• Chapter 7: Reporting Standards for Performance Audit

• Appendix: Provides additional guidance (not requirements) for all GAGAS engagements

• Interpretations: Available on the Yellow Book web page. Provide additional guidance (not requirements) for areas of particular interest or sensitivity

Chapter 2: Types of GAGAS Engagements

• All audits begin with objectives, and those objectives determine the type of audit to be performed and the applicable standards to be followed

• The types of audits that are covered by GAGAS, as defined by their objectives, are classified in the Yellow Book as: • Financial audits• Attestation engagements• Performance audits

Chapter 2: Use of Terminology

Standardized language to define the auditor requirements• Consistent with AU-C 200:

• Must indicates an unconditional requirement• Should indicates a presumptively mandatory requirement• Text not using the above conventions is considered

explanatory material

Chapter 3: General Standards

• Independence• Conceptual framework• Provision of nonaudit services to auditees

• Professional judgment• Competence

• Technical knowledge• Continuing Professional Education

• Quality Assurance• System of quality assurance• Peer review

Chapter 3: Independence

• In all matters relating to the audit work, the audit organization and the individual auditor, whether government or public, must be independent

• Independence comprises:• Independence of Mind • Independence in Appearance

Applying the Framework

Conceptual Framework:

1. Identify threats to independence

2. Evaluate the significance of the threats identified, both individually and in the aggregate

3. Apply safeguards as necessary to eliminate the threats or reduce them to an acceptable level

4. Evaluate whether the safeguard is effective

Documentation Requirement: Para 3.24: When threats are not at an acceptable level and require application of safeguards, auditors should document the safeguards applied.

Independence Conceptual Framework

Applying The Framework

Threats could impair independence

• Do not necessarily result in an independence impairment

Safeguards could mitigate threats

• Eliminate or reduce to an acceptable level

Additional Documentation Requirements

1. Auditors must document application of safeguards in place

2. Auditors must document assessment of skill, knowledge, and experience (SKE)

Applying the Framework: Categories of Threats

1. Management participation threat

2. Self-review threat

3. Bias threat

4. Familiarity threat

5. Undue influence threat

6. Self interest threat

7. Structural threat

Applying the Framework: Examples of Safeguards

1. Reassign individual staff members who may have a threat to independence

2. Have separate staff perform the non-audit and audit services

3. Have professional staff from outside of the team review the work

4. Use or consult with an independent third party

5. Involve another audit organization

6. Decline to do the requested scope of the non-audit service

Nonaudit Services

1. Determine if there is a specific prohibition. Unless specifically prohibited, nonaudit services MAY be permitted but should be documented

2. If not prohibited, assess the nonaudit service’s impact on independence using the conceptual framework

3. If the auditor assesses any identified threat to independence as higher than insignificant, assess the sufficiency of audited entity management’s skill, knowledge, and experience to oversee the nonaudit service

4. And…

Nonaudit Services (cont.)

4. If the auditor concludes that performance of the nonaudit service will not impair independence, document assessments in relation to both:• Safeguards applied in accordance with the conceptual

framework and• The auditor’s assessment of sufficiency of audited entity

managements’ skill, knowledge or experience to oversee the nonaudit service (paragraph 3.34)

Assessing Management’s Skill, Knowledge, and Experience

• Factors to document include management’s:• Understanding of the nature of the nonaudit service• Knowledge of the audited entity’s mission and operations• General business knowledge• Education• Position at the audited entity

• Some factors may be given more weight than others

• GAGAS does not require that management have the ability to perform or reperform the service

Sufficiency of Skills, Knowledge and Experience

• Sufficient skills, knowledge and experience may be judged based in part on:• Ability of the responsible audited entity personnel to

understand the nature and results of the nonaudit service• Ability of the responsible person to identify material errors or

misstatements in a nonaudit service work product• Ability and willingness and of the responsible person to take

meaningful action in the event of identification of a problem with the nonaudit service

• Client prepared material in poor condition may indicate the client is not capable of taking responsibility for the service. Significant audit findings and adjustments may also be indicative of this issue.

Safeguards: Nonaudit Services

Auditors should document safeguards when significant threats are identified:

• Auditor has responsibility to perform the assessment, this cannot be a management assertion

• Assessment should be in writing and indicate actions the auditor has taken to mitigate the threat

• Assessment should include a conclusion

• Auditor should document actions taken to mitigate the threat (safeguards)

• An example of safeguards for nonaudit services may include actions taken by the auditor to preserve independence such as an extra level of review or secondary review

Prohibited Nonaudit Services

Management responsibilities (not a comprehensive list):

• Setting policies and strategic direction for the audited entity

• Directing and accepting responsibility for the actions of the audited entity’s employees in the performance of their routine, recurring activities

• Having custody of an audited entity’s assets

• Reporting to those charged with governance on behalf of management

• Deciding which of the auditor’s or outside third party’s recommendations to implement

Continuing Professional Education (CPE)

No revision to overall requirements• Minimum of 24 hours of CPE every 2 years

• Government• Specific or unique environment• Auditing standards and applicable accounting principles

• Additional 56 hours of CPE for auditors involved in • Planning, directing, or reporting on GAGAS assignments

or • Charge 20 percent or more of time annually to GAGAS

assignments• Minimum of 20 hours of CPE each year

Chapter 3: General Standards System of Quality Control

Each audit organization must document its quality control policies and procedures and communicate those policies and procedures to its personnel

Chapter 3: General Standards System of Quality Control

Added a requirement that the quality control policies and procedures collectively address:

• Leadership responsibilities for quality within the audit organization

• Independence, legal, and ethical requirements

• Initiation, acceptance, and continuance of audit and attestation engagements

• Human resources

• Audit and attestation engagement performance, documentation, and reporting

• Monitoring of quality

Peer Review Ratings

The peer review team uses professional judgment in deciding the type of peer review report

Types of peer review ratings:

Pass

Pass with deficiencies

Fail

Chapter 4: Financial Audits

• Incorporate by reference AICPA Statements on Auditing

Standards

• Additive requirements (performing and reporting) for financial

audits

• Additional considerations for financial audits

Chapter 5: Attestation Engagements

• Separated attest requirements: • Examination• Review• Agreed-Upon Procedures

• Update considerations:• Clarified distinctions between engagement types• Emphasized AICPA reporting requirements

• Incorporate by reference AICPA Statements on Standards for

Attestation Engagements (SSAEs)

• Additive requirements (performing and reporting) for financial

audits

• Additional considerations for GAGAS attestations

Chapter 5: Attestation Engagements

Chapter 6: Performance Audit Fieldwork

• Reasonable assurance

• Significance

• Audit Risk

• Planning

• Supervision

• Obtaining sufficient, appropriate evidence

• Audit documentation

Chapter 6: Performance AuditsLevel of Assurance

Performance audits that comply with GAGAS provide reasonable assurance that the evidence is sufficient and appropriate to support the auditors’ findings and conclusions

Chapter 6: Performance Audits Sufficient, Appropriate Evidence

• Appropriateness is defined as a measure of quality of evidence that encompasses the relevance, validity, and reliability of evidence used for addressing the audit objectives and supporting findings and conclusions

• Sufficiency is defined as a measure of quantity of evidence used for addressing the audit objectives and supporting findings and conclusions

Chapter 6: Performance Audits Criteria

Represent the laws, regulations, contracts, grant agreements, standards, measures, expected performance, defined business practices, and benchmarks against which performance is compared or evaluated

Chapter 6: Performance Audits Criteria

Examples of criteria:

• Purpose or goals prescribed by law or regulation or set by

officials of the audited entity

• Policies and procedures established by officials of the audited

entity

• Technically developed standards or norms

• Expert opinions

Chapter 7: Performance Audits Reporting

• Auditors must issue audit reports communicating the results of each completed performance audit

• Auditors should use a form of the audit report that is appropriate for its intended use and is in writing or in some other retrievable form

Chapter 7: Performance Audits Report Contents

Auditors should prepare audit reports that contain:

• Objectives, scope, and methodology of the audit

• Audit results, including findings, conclusions, and

recommendations, as appropriate

• Statement about the auditors’ compliance with GAGAS

• Summary of the views of responsible officials

• Nature of any confidential or sensitive information omitted

Chapter 7: Performance Audits Reporting Views of Responsible Officials

Auditors should:

• Obtain and report views of responsible officials concerning

findings, conclusions, recommendations, and planned

corrective actions

• Include in report an evaluation of the comments, as

appropriate

Where to Find Us

• The Yellow Book is available on GAO’s website at:

www.gao.gov/yellowbook

• The Green Book is available on GAO’s website at:

www.gao.gov/greenbook

• For technical assistance, contact us at:

[email protected] or [email protected]

or call (202) 512-9535

http://www.gao.gov/yellowbook

http://www.gao.gov/greenbook

mailto:[email protected]

mailto:[email protected]

Thank You

Questions?

What’s New in Government Internal Control and Auditing Standards? Houston Institute of Internal...

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