CHANGES TOGOVERNMENT AUDITING STANDARDS

(THE “YELLOW BOOK”)

Proposed Changes to the Yellow Book (GAGAS)

On April 5, 2017, the Government Accountability Office (GAO) issued PROPOSED revisions to the 2011 edition of Government Auditing Standards (the “Yellow Book”)

Objectives of the revisions Reinforce the principles of transparency and

accountability Provide an improved framework for high-quality audits

Comment period ended July 6, 2017

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Proposed Revisions to the Yellow Book Codification format

Authoritative requirements Application guidance

Chapters restructured Ethics & Independence

ANY services performed by auditors relating to preparing accounting records and financial statements create significant threats to independence

Document these threats and the safeguards applied to eliminate or reduce threats to an acceptable level

Competence & CPE New CPE requirement = a 4 hour session every time a new version of the

Yellow Book is issued Partner must have taken this new CPE class BEFORE signing reports. Application guidance will be provided concerning topics required under the

80-hour CPE rule. Proficiencies by staff level are outlined

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Proposed Revisions to the Yellow Book, continued

Internal control will reflect COSO and the Green Book Quality Control changes include –

Annual WRITTEN representations of compliance with QC policies and procedures on independence from all audit organization personnel that are required to be independent.

Additional requirements for engagement performance, documentation and reporting, including requirements to have QC policies and procedures pertaining to review and supervision of work performed by the engagement team engagement

Cannot accept engagement if firm has no proficiency Reporting requirements will be expanded to address WASTE

Auditors will be required to perform audit procedures to ascertain the potential effect on audit objectives if they become aware of waste that could be quantitatively or qualitatively significant.

Reporting requirements if certain conditions are present Financial statements Communication to those charged with governance

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Proposed Revisions to the Yellow Book, continued

Fraud Abuse Waste Expanded peer review requirements

Slide 8 (below) Wording of YB report to verbiage to indicate whether the

firm’s peer review report was either a Pass with deficiency Fail

Yellow Book requirements will be expanded to cover Attestation Engagements under SSAE No. 18 SSARS No. 21 (Section 90) Review of financial statements

The draft revision of the 2017 Yellow Book does not mention an effective date Most likely be effective upon issuance

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WATCH WORDS FROM THEPEER REVIEW PROCESS

(CHANGES EFFECTIVE 1 MAY 2017)

Peer Review NOT DOCUMENTED = NOT PERFORMED

Automatic finding which ends up as Finding for Further Consideration (FFC) Report = pass with deficiency Report = Fail

Vendor-obtained practice aids, checklists and forms are NOT audit evidence

Sources of audit evidence Books, records, data, etc. generated by the entity being audited Information obtained from third parties who do business with

the entity Direct auditor knowledge

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Audit Documentation

AU-C 230 Audit Documentation Requires auditors to document the nature, timing, and

extent of all audit procedures performed by recording The identifying characteristics of the specific items or matters

tested; Who performed the audit work and the date such work was

completed; and Who reviewed the audit work performed and the date and

extent of such review.

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Audit Documentation, continued

Factors to consider in determining the nature (what kind – internal or external evidence) and extent (how much) of documentation: Risk of material misstatement associated with the account or class

of transaction Extent of judgment involved in performing the work and evaluating

the results Nature of the auditing procedures Significance of the evidence to the assertion being tested nature

and extent of exceptions What’s necessary to document auditor conclusions

Assertion Evidence Audit procedures performed on the audit evidence

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Audit Documentation, continued

Requires audit documentation to include abstracts or copies of significant contracts & agreements (as needed) to aid an experienced auditor to understand the work performed & conclusions reached

Requires that documentation specifically identify items tested (replication)

Requires documentation of– Any departures from auditing standards The sufficiency of alternative procedures used to

compensate for the objectives of the requirement

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Audit Documentation, continued

AU-C section 230, Audit Documentation Audit documentation MUST include audit programs, and

COULD include various forms, checklists, or other practice aids.

The existence of an adequately documented audit plan demonstrates that the auditor has appropriately addressed audit risk. Tailoring of canned audit programs, forms, checklists and practice

aids is mandatory The audit program ONLY supports the fact that the audit was

properly planned, and does NOT serve as evidence that specific procedures were performed.

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Audit Documentation, continued

Checklists and forms can be used to facilitate audit procedures, but, using them correctly requires that they be appropriately tailored for the specific audit. However, they are NOT audit evidence.

Signing off a step in an audit program or filling out a checklist does not provide sufficient documentation about the nature, timing, and extent of audit procedures performed or the identifying characteristics of the specific items or matters tested.

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GOING CONCERNFASB ASU 2014-15

NEW GAAP (NEVER EXISTED BEFORE)EFFECTIVE FOR FISCAL YEARS ENDING AFTER

DECEMBER 15, 2016

ASU 2014-15

Ability to Continue as a Going Concern Presentation (face) of financial statements Disclosure (footnotes) of uncertainties

New Definition = entity can meet all obligations coming due within 12 months of the release date of the F/S

Effective for ALL reporting periods ending AFTER DECEMBER 15, 2016

Since this is GAAP, it applies to ALL compiled, reviewed and audited financial statements for both annual and interim periods.

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Prior vs. New Requirements 16NEW GAAP = ASU 2014-15

Management is responsible to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern

For a reasonable period of time not to exceed one year beyond the date that the financial statements are issued, or are available to be issued

Management makes an assertion which must be audited (SAS 132) based on evidence pertaining to relevant conditions and events that are known or knowable at the date that the F/S are issued or available to be issued

Management drafts the footnote

GAAP (per FASB statements) = NONE------------------------------------------------------------- GAAS (per AU-C 570, pre SAS 132)

Auditor evaluated whether there was substantial doubt about an entity’s ability to continue as a going concern

For a reasonable period of time not to exceed one year beyond the balance sheet date of the financial statements being issued.

Auditor considered the possible financial statement effects, including drafting footnote disclosures on uncertainties about an entity’s ability to continue as a going concern for a reasonable period of time after the balance sheet date.

Differences are Significant

Auditor no longer performs the going concern evaluation / assessment

Auditor no longer determines whether or not to include footnote disclosures in the F/S

Management develops an assertion, based on evidence (which has to be auditable) that the entity is or isn’t a going concern

Management develops the appropriate footnote disclosure Determination date is when the F/S are issued, NOT the

balance sheet date! If the auditor performs management’s activities, a significant

threat to independence exists and must be addressed using Ethics principles and the Yellow Book

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Evidence to be Developed by Management

QUANTITATIVE Month-by-month schedules of all unconditional and

conditional obligations due or anticipated to be due within 1 year after the date that the F/S are issued, regardless of whether those obligations are currently recognized in the F/S about to be issued

Current statement of financial condition (B/S) including its liquidity sources at the date the F/S are issued

Projected (most likely course of action, not “what-if” scenarios) monthly income and cash flows

The funds necessary to maintain operations Current financial condition (B/S) Obligations Other cash flows

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Evidence to be Developed by Management, continued

QUALITATIVE Other conditions / events when considered in conjunction with the

Quantitative data listed in Slide #18, which may adversely affect the entity’s ability to meet its obligations within 1 year after the date that the F/S are issued.

Management’s analysis and evaluation of Negative financial trends Financial difficulties Internal matters External matters

See FASB ASC 205-45-55-2 For profit and not-for-profit entities

GASB No. 56, para. 17 Governmental entities

Appendix A of SAS 132 All entities

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Evidence to be Developed by Management, continued

Plans to dispose of assets or segment(s) Plans to borrow money or restructure debt

Must be demonstrated in writing by a source with both the intent and ability

Plans to reduce or delay expenditures Plans to increase owner’s equity

Must be demonstrated in writing by owners with both the intent and ability

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SAS 132AUDIT REQUIREMENT = FYEA 12-15-17

GAAP REQUIREMENT = FYEA 12-15-16

GAAS (pre-SAS 132) vs. ASU 2014-15 22

Issue Current AuditingStandard (pre – 132)

GAAP = FASB ASU 2014-15 & GASB

No. 56 Assessment Period Reasonable Period of Time:

Defined as a period not to exceed one year from the balance sheet date

One year from the date the financial statements are issued (Note – GASB 56 is 15 months from B/S date)

Definition of Substantial Doubt

Undefined Probable that the entity will be unable to meet its obligations as they become due

Assessment Annually Annual and interim periods

Current GAAS (pre-SAS 132) vs. ASU 2014-15 23

Disclosure Current AuditingStandard (pre 132)

ASU 2014-15 & GASB 56

Disclosures: Substantialdoubt alleviated by management’s plans

Considered (but not required) Required

Disclosures: Substantialdoubt NOT alleviated by management’s plans

Required statement that there is “substantial doubt about the entity’s ability to continue as a going concern”

Applies to compiled, reviewed and audited financial statements

SAS 132: The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern

Auditor MUST – CONCLUDE (see Slide 25 below) whether or not management’s

assertion as to the ability to continue as a going concern for a reasonable period of time (defined as the period of time required by the applicable financial reporting framework) is in accordance with GAAP, is fairly presented on the B/S, and disclosed in the F/N’s.

FASB = 12 months from the date of issuance or, the date that the financial statements were available to be issued

GASB = 15 months from the balance sheet date EVALUATE the financial statement effects, including the adequacy of

disclosure (face and footnotes) regarding the entity’s ability to continue as a going concern for a reasonable period of time.

DOCUMENT conclusion and the basis for that conclusion in the work papers.

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What does it mean to “Conclude?”

There must be an ASSERTION from management or those charged with governance

There must be AUDIT EVIDENCE (not forms, checklists, and practice aids) provided by The entity Third parties Direct auditor knowledge

Appropriate, necessary, and sufficient AUDIT PROCEDURES must have been performed on the audit evidence to form a basis for a conclusion If these 3 items are not in work papers, peer reviewers

have to prepare a finding that will be in their report.

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SAS 132: The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern

Issued in response to ASU 2014-15 & GASB No. 56. Applies to all audits of a complete set of financial

statements GAAP Special Purpose Frameworks

Effective for audits of financial statements covering reporting periods ending on or after December 15, 2017.

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Summary of the Guidance: Auditor’s Requirements

The auditor should consider whether there are conditions or events, considered in the aggregate, which raise substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. The auditor should determine whether management has performed an evaluation of whether such conditions or events exist.

If such an evaluation has been performed by management, then the auditor should discuss the evaluation with management, determine whether management has identified relevant conditions or events, perform appropriate audit procedures on evidence prepared by management and, if needed, gain an understanding of the plans to alleviate the situation.

If such an evaluation has NOT been performed by management, then the auditor should discuss with management the justification for the intended use of the going concern basis of accounting, and inquire of management as to whether conditions or events exist that raise substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time.

GAAP departure Independence threat if auditor performs the evaluation

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Auditor Requirements

Audit management’s assertion & evidence Checking the box on a practice aid IS NOT auditing, nor is it

documentation Inquiry of management is necessary BUT it is not sufficient audit

evidence It is information needed to assess the risk that management’s assertion

re going concern could be materially misstated. Obtain schedules, calculations, worksheets and interim financial

statements, cash flow analysis, and schedule of monthly debt obligations from the date the F/S are issued to 1 year later. Audit the integrity of management’s evidentiary materials Audit the completeness of evidence provided by management Audit the mathematical accuracy Evaluate the reasonableness & feasibility of management’s plan

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Auditor Requirements, continued

Audit management’s assertion & evidence, continued

Work paper Documentation must contain Evidence prepared by management Draft of the footnote disclosure written by management

Work paper documentation must show what audit procedures and testing were performed and by whom

Work paper documentation must show who reviewed and approved the audit procedures performed

Conclusions reached by the auditor

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Example of Audit Documentation Management’s Assertion = Entity XYZ Co. IS a going concern [handout] Positive Evidence Provided by Management

Schedule of monthly obligations Budgeted or projected monthly income statement Budgeted or projected monthly cash flow statement Other analysis

Auditing procedures performed Ascertain the reasonableness and feasibility of the assumptions

underlying the budgeted/projected information Determine that assumptions are properly built into the spreadsheets Check the mathematical accuracy and completeness of all calculations Evaluate any other data provided by the client

Document in the audit work program the audit work paper reference where the above-listed evidence and procedures are located

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REMEMBER1. NO DOCUMENTATION (or inappropriate documentation) MEANS THAT AUDIT WORK WAS NOT PERFORMED

2. FORMS, CHECKLISTS & PRACTICE AIDS ARE NOT AUDIT EVIDENCE

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Summary of the Guidance Auditor’s Requirements

The auditor’s procedures should (1) address management’s assertion of whether there are

conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern,

(2) cover the same period as that used by management in its evaluation, as required by the applicable financial reporting framework, &

(3) consider whether management’s evaluation includes all relevant information of which the auditor is aware.

(4) test the audit evidence

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Summary of the Guidance Auditor’s Requirements, continued The auditor should also inquire of management as to its

knowledge of conditions or events beyond the period of management’s evaluation that may have an effect on the entity’s ability to continue as a going concern.

When events or conditions have been identified, the auditor should obtain sufficient appropriate audit evidence to determine whether such conditions and events, when considered in the aggregate, raise substantial doubt about an entity’s ability to continue as a going concern by performing additional audit procedures, including consideration of mitigating factors.

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Summary of the GuidanceAuditor’s Requirements, continued When management’s plans include financial support by third parties

or the entity’s owner-manager (the supporting parties) and such support is necessary to support management’s assertions about the entity’s ability to continue as a going concern, the auditor should obtain sufficient appropriate audit evidence regarding

(1) the intent of the supporting parties to provide the necessary financial support, including written evidence of such intent, and

(2) the ability of the supporting parties to provide the necessary financial support.

Failure to obtain the written evidence of the intentions of the supporting parties to provide financial support constitutes a lack of sufficient appropriate audit evidence, in which case the auditor should conclude that management’s plans are insufficient to alleviate the determination that substantial doubt exists about the entity’s ability to continue as a going concern.

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Summary of the Guidance Auditor’s Requirements, continued If the auditor concludes that management’s use of the going concern

basis of accounting is appropriate in the circumstances, but substantial doubt exists about the entity’s ability to continue as a going concern, then the auditor should evaluate the adequacy of the financial statement disclosures, as required by the applicable financial reporting framework.

If conditions or events, considered in the aggregate, have been identified that raise substantial doubt about the entity’s ability to continue as a going concern, but, based on the audit evidence obtained, the auditor concludes that substantial doubt has been alleviated by management’s plans, then the auditor should evaluate the adequacy of the financial statement disclosures required by the applicable financial reporting framework.

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Summary of the Guidance Auditor’s Report

If the financial statements have been prepared using the going concern basis of accounting, but, in the auditor’s judgment, management’s use of the going concern basis is inappropriate, then the auditor should express an adverse opinion.

If, after considering identified conditions or events and management’s plans, the auditor concludes that substantial doubt about the entity’s ability to continue as a going concern remains, the auditor should include an emphasis-of-matter paragraph in the auditor’s report, which should be expressed in terms consistent with those included in the applicable financial reporting framework.

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Summary of the Guidance Auditor’s Report, continued

If adequate disclosure about an entity’s ability to continue as a going concern is NOT made in the financial statements, then the auditor should express a qualified opinion, or an adverse opinion, as appropriate.

If substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time existed at the date of prior-period financial statements that are presented for comparative purposes and that doubt has been removed in the current period, then the emphasis-of-matter paragraph included in the auditor’s report on the financial statements of the previous period should not be repeated.

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Summary of the Guidance Auditor’s Report, continued

Management may request that the auditor reissue an auditor’s report and eliminate a going concern emphasis-of-matter paragraph contained therein.

Although an auditor has no obligation to reissue the report, if the auditor decides to reissue the report, then the auditor should reassess the going concern status of the entity.

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Summary of the Guidance Other Matters

Unless such individuals are involved in managing the entity, the auditor should communicate with those charged with governance regarding conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time.

If there is significant delay in the expected issuance of the financial statements by management or those charged with governance, and the auditor believes that the delay could be related to the evaluation of whether there is substantial doubt about the entity’s ability to continue as a going concern, then the auditor should perform additional audit procedures as necessary.

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Summary of the Guidance Other Matters, continued

Documentation requirements when there is substantial doubt about the entity’s ability to continue as a going concern:

(1) the conditions or events that led the auditor to conclude that substantial doubt exists based on mgt.’s assertion & evidence

(2) the elements of management’s plans that the auditor considers to be particularly significant in overcoming conditions or events that raised doubts about the entity’s ability to continue as a going concern,

(3) the audit procedures performed to evaluate the significant elements of management’s plans and the evidence obtained,

(4) the auditor’s conclusion regarding whether substantial doubt about the entity’s ability to continue as a going concern remains or is alleviated, and

(5) the effect of the auditor’s conclusion on the auditor’s report.

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Example Emphasis-of-Matter ParagraphManagement’s Plans Do Not Alleviate Substantial Doubt

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note X to the financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note X. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

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Example Emphasis-of-Matter Paragraph Management’s Plans Alleviate the Substantial Doubt

As discussed in Note X to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency. Management’s evaluation of the events and conditions and management’s plans to mitigate these matters are also described in Note X. Our opinion is not modified with respect to this matter.

(This paragraph is OPTIONAL as to inclusion in the auditor’s report; HOWEVER, inclusion of “Note X” is NOT OPTIONAL)

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REMEMBER1. NO DOCUMENTATION (or inappropriate documentation) MEANS THAT AUDIT WORK WAS NOT PERFORMED

2. FORMS, CHECKLISTS & PRACTICE AIDS ARE NOT AUDIT EVIDENCE

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Let’s Get Ready to Roll! 44