Does the Yellow Book change your audit approach?
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Steven Covey, author of The Seven Habits of Highly Effective People, tells us when planning life, begin with the end in mind – then work backwards to create present goals. I know an audit is not your life (or even close to it), but the same logic makes sense. Begin with the Yellow Book report and work backwards to plan appropriately.
The Yellow Book report states “the purpose of the report is solely to describe the scope of our testing of internal controls and compliance and the results of the testing, and not to provide an opinion.”
The two main components of a Yellow Book report are as follows:
1. Internal Control Over Financial Reporting
2. Compliance and Other Matters
Internal Control Over Financial Reporting
Goal – Report significant deficiencies and material weaknesses noted during the audit
Is the auditor required to design tests related to internal controls? No.
The Yellow Book report states “In planning and performing our audit…we considered…internal control…to determine the audit procedures.” There’s no goal to look for control deficiencies, but if we note significant deficiencies or material weaknesses, we are to report them.
Control deficiencies are normally noted in the planning stages of the audit, usually as we perform walkthroughs and fraud inquiries. Control deficiencies may also be noted as we audit balance sheet accounts and make journal entries – significant misstatements often result from control weaknesses.
Compliance and Other Matters
Goal – To report on material noncompliance with laws, regulations, grants, and contracts
Is the auditor required to design tests related to material noncompliance? Yes.
Government Auditing Standards require that transactions be tested for compliance with laws and regulations that may have a material effect on the financial statements.
The Yellow Book requires reporting on the following:
- Instances of fraud and noncompliance with provisions of laws or regulations that have a material effect on the financial statements or other financial data significant to the audit objectives and any other instances that warrant the attention of those charged with governance
- Noncompliance with provisions of contracts or grant agreements that has a material effect on the financial statements or other financial data significant to the audit objectives
- Abuse that is either quantitatively or qualitatively material
End in Mind
Now with this basic understanding, we can plan our Yellow Book audit.
As we note significant or material control weaknesses, we will capture those for reporting.
Also we will design audit procedures to test for potential material noncompliance with laws, regulations, grant, and contracts. Any material (or other significant) noncompliance will be captured and reported.
Now let’s follow the Yellow Brick (that is… Book) Road.