What the 1994 yellow book means for auditors.

After three years of review--and for the first time since 1988--the U.S. General Accounting Office revised Government Auditing Standards, commonly known as the yellow book, in June 1994. This article highlights significant changes the 1994 yellow book made in field work and reporting standards to be used for financial statement audits. (See the exhibit on page 55 for a summary.) It also provides practical advice to CPAs as they implement the yellow book revisions. (This article does not address the 1994 changes to performance audit standards, which are effective beginning on or after January 1, 1995.

Auditors must use the revised standards when performing

* Single audits under Office of Management and Budget (OMB) Circulars A-128, Audits of State and Local Governments, and A-133, Audits of Institutions of Higher Education and Other Nonprofit Organizations.

* Audits under guides issued by fed agencies such as the Department of Housing and Urban Development and the Department of Education.

* Financial statement audits of federal departments and agencies under the Chief Financial Officers Act of 1990.

For financial audits, the effective date is audits of periods ending on or after January 1, 1995.

FIELD WORK REQUIREMENTS

The 1994 yellow book continues to incorporate American Institute of CPAs field work standards by reference. In doing so, it emphasizes parts of Statement on Auditing Standards no. 55, Consideration of the Internal Control Structure in a Financial Statement Audit, that are important in applying the internal control standard in audits subject to the yellow book. The 1994 yellow book also prescribes three additional field work standards that, while perhaps part of today's audit practice, are not explicitly stated in AICPA standards. The additional standards require auditors to

* Follow up on known material findings and recommendations from previous audits.

* Design the audit to detect material noncompliance with provisions of contracts or grant agreements.

* Document in their working papers sufficient information to enable an experienced auditor to ascertain the evidence supporting significant conclusions and judgments.

Aspects of the internal control structure. Unlike the exposure draft, (see JofA, Oct. 93) the 1994 yellow book does not prescribe additional internal control standards for financial statement audits. However, it does provide guidance on four aspects of internal controls that may affect the auditor's work.

1. Control environment is the overall tone set by top management to reflect its attitude, awareness and actions relative to internal controls. Judgments about the control environment may positively or negatively influence judgments about specific control procedures.

2. Safeguarding controls are controls that prevent or detect on a timely basis unauthorized transactions and unauthorized access to assets resulting in possible losses material to the financial statements. Understanding such controls helps auditors plan the audit to detect material misappropriations as well as to assess other risks that the financial statements could be materially misstated.

3. Controls over compliance with laws and regulations are important to auditors in identifying the types of potential misstatements that could occur and the factors that could affect the risk of material misstatement. Such information can help provide reasonable assurance the financial statements are free of material misstatements resulting from violations of laws and regulations with a direct and material effect on determining financial statement amounts.

4. Control risk assessments are critical in determining the nature, timing and extent of audit tests to be performed. Auditors are not required to assess control risk below the maximum. However, auditors may find it efficient to rely on controls for larger clients or those with complex operations. Auditors' ability to rely on controls is directly related to the evidence they obtain to show the controls work. Auditors may find it necessary to reconsider their assessments of control risk when substantive tests detect misstatements.

The above guidance is intended to help auditors apply the provisions of SAS no. 55 that are important to the judgments they make about audit risk and the evidence needed to support their opinion on the financial statements.

Follow up on findings and recommendations. Auditors are required to follow up on material findings and recommendations from prior audits. This requirement was a general standard in the 1988 yellow book. Auditors must report the status of uncorrected material findings and recommendations.

Designing the audit to detect noncompliance with contracts or grant agreements. An additional standard expands the auditor's responsibility under SAS no. 53, The Auditor's Responsibility to Detect and Report Errors and Irregularities, and SAS no. 54, Illegal Acts by Clients, by requiring auditors to design the audit to detect noncompliance with provisions of contracts or grant agreements with a direct and material effect on determining financial statement amounts. This was added because neither SAS no. 53 nor SAS no. 54 specifically refers to noncompliance with provisions of contracts or grant agreements.

Working paper requirements. The 1994 yellow book says working papers must be sufficient to enable an experienced auditor with no previous connection with an audit to ascertain from them the evidence supporting the auditor's significant conclusions and judgments. Auditors are not expected to copy all documents reviewed during an audit nor to list detailed information from those documents. Auditors should include in the working papers descriptions of transactions and records examined that would enable an experienced auditor to examine the same transactions and records. Auditors may meet this requirement by listing voucher or check numbers or by providing other means of identifying specific documents examined.

COMMUNICATIONS AND OTHER REPORTING ON FINANCIAL STATEMENT AUDITS

As with the field work standards, the 1994 yellow book continues to incorporate by reference AICPA reporting standards. It also prescribes additional standards for auditor's communications with individuals they have contracted with for the audit and for reporting on the financial statement audit. These additional standards require auditors to

* Communicate to the audit committee or the individuals with whom they have contracted for the audit the auditor's responsibilities in a financial statement audit, including responsibilities for testing and reporting on internal controls and compliance with laws and regulations and the nature of any additional testing of these areas required by laws and regulations.

* Report irregularities, illegal acts and other material noncompliance with provisions of contracts or grant agreements in the financial statement audit and related reports and, in certain circumstances, report irregularities or illegal acts directly to parties external to the audited entity.

* Provide a copy of their audit organization's most recent external quality control review report to the party contracting for the audit.

* Include a reference to the yellow book in the auditor's report on the financial statements.

* Link reporting on the auditor's testing of compliance with laws and regulations and internal controls to the report on the financial statements.

Communicating with audit committees or others. Auditors must communicate their responsibilities for compliance and internal controls in a financial statement audit to the audit committee or the individuals they have contracted with for the audit. They must communicate their responsibilities for testing and reporting on these areas and any additional responsibilities they may have for testing internal controls and compliance under laws and regulations, such as the Single Audit Act.

To help audit committees and other responsible parties understand the limitations of auditors' responsibilities in a financial audit, auditors must contrast those responsibilities with other financial related audits of controls and of compliance with laws and regulations. For example, auditors can contrast their responsibilities in a financial statement audit to the additional procedures they would perform in either an examination or an agreed-upon procedure engagement related to management's assertion about the effectiveness of internal controls or compliance with laws and regulations. While the yellow book allows this communication to be oral or written, it suggests auditors use an engagement letter. (See the COMMUNICATION WITH AUDIT COMMITTEES OR OTHER RESPONSIBLE INDIVIDUALS for suggested language to communicate this information to clients.)

Reporting on compliance. The 1994 yellow book changes the threshold auditors apply in reporting compliance findings and requires them, in certain circumstances, to report irregularities or illegal acts directly to parties external to the audited entity. When auditors conclude an irregularity or illegal act either has occurred or is likely to have occurred, they must report those findings unless they clearly are inconsequential. Thus, for yellow book audits, auditors should present in a report the same types of irregularities and illegal acts they report to audit committees under AICPA standards. Auditors also must report other noncompliance, such as violations of grant or contract provisions, when it is material to the financial statements.

Auditors must report irregularities or illegal acts directly to external parties in two instances:

* When a client fails to meet a legal requirement in reporting irregularities or illegal acts to a specified external party, auditors must report the irregularities or illegal acts directly to the specified external parties (for example, to a federal inspector general or state attorney general).

* When the irregularities or illegal acts involve government assistance and the client's failure to remedy the irregularity or illegal act is so significant auditors decide either to modify the report on the financial statements or to resign from the audit. The auditors must inform the client's governing body of that conclusion. If the client does not report the irregularity or illegal act to the party whose funds are involved, the auditors are required to report to that party. Auditors are not relieved from this responsibility because they resign or are dismissed from an audit.

External quality control review report. The requirement to provide the audit organization's latest external quality control review report to parties seeking to contract for a yellow book audit is new. The 1988 yellow book established a requirement for auditors to have an external quality control review every three years as a means of improving audit quality. However, this requirement was not linked to audit procurement.

To integrate the quality review process into the audit procurement process, the 1994 yellow book requires audit organizations seeking to enter into a contract to perform a yellow book audit to provide its most recent external quality control review report to the party contracting for the audit. Auditors have this responsibility even if the request for proposals does not ask for a copy of the report. Auditors do not have to provide copies of any "detailed comment letters" that may be issued.

Reference to yellow book in auditors' report. Auditors' reports must state the audit was made in accordance with generally accepted government auditing standards when the reports are submitted to comply with a legal, regulatory or contractual requirement for a yellow book audit. This additional standard changes the current practice of doing financial statement audits in accordance with yellow book standards and issuing opinions that cite compliance only with generally accepted auditing standards. Since the 1994 yellow book prescribes field work standards beyond those required by GAAS, this required reference will allow report users to know that additional standards were followed.

What if clients need financial statement audits for other purposes? Auditors are not prohibited from issuing a separate report on the financial statements that conforms only to GAAS. For example, clients may need a financial statement audit to facilitate a bond issue. In these cases, it is acceptable to issue a separate report that cites compliance only with GAAS. However, auditors may want to use the yellow book report because it provides information on compliance with laws and regulations and internal controls not usually contained in a GAAS report.

Linking compliance and internal control reporting to the report on the financial statements. The 1994 yellow book also requires linking reporting on compliance and on internal controls to the auditor's opinion on the financial statements. Auditors can provide this linkage in two ways.

* Issue a combined report on financial statements, compliance and controls. The report should start with a summary of the auditors' findings and later describe the scope of internal control and compliance work and its results.

* Issue separate reports on controls and compliance. However, the report on the financial statements must refer to the separate reports.

Compliance and internal control reporting has been simplified to more directly address significant findings. The requirement to report positive and negative assurances on compliance with laws and regulations has been eliminated. Likewise, auditors no longer have to list categories of internal controls in their reports on internal controls. However, the requirements of the Single Audit Act, Circular A-128 and Circular A-133 do not reflect this simplified reporting on compliance and internal controls. Accordingly, auditors should continue to use positive and negative assurances in reporting on compliance and list categories of internal controls in reporting on those controls when conducting single audits.

Given these changes, what report language should auditors use? Auditors should obtain revised illustrative auditors' reports on a government entity's financial statement audit that modifies the "boilerplate" opinion from SAS no. 58, Reports on Audited Financial Statements, to include a reference to

* Yellow book standards.

* The auditors' internal control work.

* The auditors' compliance work.

COMPLYING WITH THE NEW YELLOW BOOK

With all the changes to the yellow book, how can auditors be confident of complying with its requirements? Auditors can use the implementation guidance in the sidebar on page 60 as a checklist in planning implementation of the yellow book. Auditors also should use common sense in applying these standards to their work and communicating with report users. With this approach, auditors can implement the 1994 yellow book with relative ease.

RELATED ARTICLE: EXECUTIVE SUMMARY

* THE U.S. GENERAL ACCOUNTING Office has revised Government Auditing Standards, commonly known as the yellow book. For financial audits, the effective date is audits of periods ending on or after January 1, 1995. For performance audits, the new standards are effective beginning on or after January 1, 1995.

* THE 1994 YELLOW BOOK REVISION continues to incorporate American Institute of CPAs field work standards by reference, while adding three additional standards: Follow up known material findings and recommendations from previous audits, design the audit to detect material noncompliance with contracts or grant agreements and document in working papers enough information so an experienced auditor could find the evidence supporting significant conclusions and judgments.

* AICPA REPORTING STANDARDS also are incorporated in the 1994 yellow book by reference. The revision prescribes additional standards for auditor communications with audit committees or individuals they have contracted with for the audit.

* AUDITORS REPORT irregularities, illegal acts and other material noncompliance with contracts or grant agreements, provide a copy of their most recent external quality control review report, include a reference to the yellow book in the auditor's report on the financial statements and link reporting on testing of compliance with laws and regulations and internal controls to the report on the financial statements.

* AN IMPLEMENTATION CHECKLIST and sample of required communications can help auditors as they comply with the requirements of the 1994 yellow book revision.

RELATED ARTICLE: Summary of 1994 changes to the financial audit standards

of Government Auditing Standards

Standard or topic Changes in 1994 revision Field work standards Supplemental standard to design The audit should be designed to provide reasonable assurance that the audit the audit to detect noncompliance will detect material misstatements from noncompliance with provisions of with provisions of contracts or contracts or grant agreements that have a direct material effect on the grant agreements. determination of financial statements amounts. (1994 revision, paragraph 4.13)

Includes guidance, but not a Guidance is provided on the auditor's consideration of the internal control supplemental standard, on aspects structure in an audit of an entity with public accountability. (1994 revision of the internal control structure. paragraphs 4.21 through 4.33)

Limiting the auditor's consideration Deleted guidance in the 1988 revision on when the auditor's consideration of the internal control structure. of internal control could be limited. (1988 revision, paragraph 5.19)

Revised the supplemental standard Changed the 1988 revision working paper standard to require working papers relating to working paper

to include sufficient information so an experienced auditor with no previous requirements. connection to the audit is able to ascertain that the procedures performed support

the conclusion. (1994 revision, paragraph 4.35)

Supplemental standard on audit Previously a general standard, the audit follow-up standard requires auditors to follow-up.

follow-up on known material findings and recommendations from previous audits

that could affect the financial statement audit. Auditors are to report the status of

uncorrected material findings and recommendations from prior audits that affect the

financial statement audit. (1994 revision, paragraphs 4.10 and 4.11)

Reporting standards Requires communication of the The auditor is required to communicate the responsibilities for consideration of auditor's responsibilities.

internal controls and compliance with laws and regulations under the 1994

revision and contrast those to additional procedures that could be performed resulting

in additional assurances or opinions on the internal control structure or on compliance

with laws and regulations. Communication is to be with audit committee or

party contracting for the audit. (1994 revision, paragraphs 5.5 through 5.10)

Reference to generally accepted Reference to GAGAS is required when report(s) are being submitted to comply with government auditing standards.

a law or regulation requiring the GAGAS audit. (1994 revision, paragraph 5.10)

Reference to reports on internal Auditor reports may be combined or issued separately. If combined, the report control structure and compliance with should start with a summary of the auditor's findings. If not combined, the laws and regulations in auditor's auditor's report on the financial statements should refer to separate reports report on the financial audit.

on compliance and on internal controls. (1994 revision, paragraph 5.16)

Reporting on compliance with laws Removed the 1988 revision requirement to express positive-negative assurance and regulations. on compliance with laws and regulations. (1988 revision, paragraph 5.5)

Reporting on the consideration of Removed the 1988 revision requirement to identify the categories of controls the internal control structure. considered significant in the auditors report on the internal control structure.

(1988 revision, paragraphs 5.17)

Reporting irregularities and illegal Changed the requirement on reporting to outsiders illegal acts involving financial acts to parties outside the entity. assistance if the top official is believed to be a party to such acts or otherwise

implicated. The 1994 revision requires reporting to outsiders when the client has not

reported to the funding agency if auditors conclude the client failed to take remedial 

steps and such failure is likely to cause them to depart from the standard report.

(1994 revision, paragraphs 5.21 through 5.23)

Other External quality control review A copy of the most recent external quality control review report is to be provided to report.

those contracting for the audit. (1994 revision, paragraph 3.36)

Added guidance to prohibit reciprocal An audit organization is not permitted to review the organization that conducted external quality control reviews.

its most recent review. (1994 revision, paragraph 3.34b)

RELATED ARTICLE: ORDERING 1994 YELLOW BOOK

To order copies of the 1994 revision of the yellow book, write to U.S. Government Bookstore, Room 118, Federal Building, 1000 Liberty Avenue, Pittsburgh, Pennsylvania 15222. The bookstore's phone number is [phone], and its fax number is [phone]. Ask for Government Auditing Standards: 1994 Revision, stock number 020-000-00-265-4. The cost per copy is $4.00.

For information on how the 1994 yellow book can be downloaded from the General Accounting Office's policy bulletin board, call [phone].

RELATED ARTICLE: COMMUNICATION WITH AUDIT COMMITTEES OR OTHER RESPONSIBLE INDIVUDUALS

The 1994 revision to Government Auditing Standards (the yellow book) includes an additional reporting standard for financial statement audits. Auditors must communicate certain information related to the conduct and reporting of the audit to the audit committee or to the individuals with whom they have contracted for the audit.

This communication should include

* The auditor's responsibilities in a financial statement audit, including responsibilities for testing and reporting on internal controls and compliance with laws and regulations.

* The nature of any additional testing of internal controls and compliance required by laws and regulations.

The new reporting standard also requires auditors to contrast the above responsibilities with other financial related audits of controls and compliance.

Practitioners may find the following examples helpful in meeting the new communication standard. (This illustration does not address communication required by Statement on Auditing Standards no. 61, Communication with Audit Committees.

HOMETOWN, USA

Assume the auditor has been engaged to audit the government of Hometown, Any State, USA, in accordance with generally accepted auditing standards, the yellow book, the Single Audit Act of 1984 and Office of Management and Budget Circular A-128, Audits of State and Local Governments. The auditor's responsibility in a GAAS audit for consideration of the internal control structure and compliance with laws and regulations, the additional responsibilities under the yellow book and the added testing of internal controls and compliance required by the Single Audit Act and Circular A-128 must be communicated to the auditee orally or in writing.

The responsibilities must be contrasted with those the auditor would have if engaged to perform other financial related audits of controls and compliance--that is, the responsibilities of an auditor conducting an engagement in accordance with American Institute of CPAs standards for attestation engagements: Statement on Standards for Attestation Engagements no. 2, Reporting on an Entity's Internal Control Structure Over Financial Reporting, and SSAE no. 3, Compliance Attestation. Sample wording for such a communication appears below.

INTERNAL CONTROL STRUCTURE

Responsibility under GAAS. We will obtain an understanding of the internal control structure sufficient to plan the audit and to determine the nature, timing and extent of tests to be performed. In obtaining an understanding of the internal control structure, we perform procedures to understand the design of policies and procedures relevant to planning the audit and whether those policies and procedures have been put in operation.

After this understanding is obtained, we assess control risk--the risk a material misstatement could occur in an assertion that will not be prevented or detected on a timely basis by Hometown's internal control structure--for the financial statement assertions. The knowledge our understanding provides of the internal control structure and the assessed level of control risk enables us to determine the nature, timing and extent of substantive tests for financial statement assertions.

The procedures we perform under GAAS do not provide sufficient evidence to enable us to express an opinion or any other assurance relative to the internal control structure's design or effectiveness. The purpose of our consideration of the internal control structure is to plan the audit and to determine the nature, timing and extent of the substantive tests necessary to enable us to form an opinion as to the fairness of Hometown's financial statements.

Responsibility under Government Auditing Standards. Government Auditing Standards does not require us to perform any procedures with respect to the internal control structure beyond those required by GAAS. However, we are required to issue a written report (either as a part of our report on the financial statements or separately) on our consideration of the internal control structure. Our report must disclose reportable conditions and material weaknesses, if any, we identify as a result of the procedures we performed. The report does not provide any assurance on the internal control structure's design or effectiveness.

Responsibility under the Single Audit Act and Circular A-128. In addition to the procedures performed to meet GAAS and Government Auditing Standards requirements, the Single Audit Act and Circular A-128 require that we specifically consider the internal control structure over federal financial assistance programs and perform tests of those controls. The tests of controls must cover the controls used to administer at least 50% of the expenditures under all federal financial assistance programs. We are required to issue a report (in addition to the report required by Government Auditing Standards) on our consideration of the internal control structure over federal financial assistance programs, including tests of those controls. Our report must disclose any reportable conditions and material weaknesses we identify as a result of the procedures we performed. This report does not provide any assurance on the design or the effectiveness of the internal control structure used to administer federal financial assistance programs.

Supplemental responsibilities. While the work described above is not intended to result in the expression of assurance or an opinion on the design and operating effectiveness of the internal control structure, you could engage us to perform agreed-upon procedures or examine and report on a written assertion from Hometown's management as to the design and, if desired, the operating effectiveness of the internal control structure or a segment of that structure. The examination would be conducted in accordance with AICPA standards for attestation engagements.

COMPLIANCE WITH LAWS AND REGULATIONS

Responsibility under GAAS. We are required to design the audit to provide reasonable assurance of detecting irregularities material to the financial statements and illegal acts with a direct and material effect on financial statement amounts.

With respect to illegal acts that could have a material indirect effect on the financial statements, if information comes to our attention that provides evidence of the existence of possible indirect effect illegal acts, we must apply procedures directed to ascertaining whether an illegal act has occurred. The results of these procedures are considered by us in forming an opinion on the financial statements.

Responsibility under Government Auditing Standards. In addition to the responsibilities under GAAS, we are required to design the audit to provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements with a direct and material effect on the determination of financial statement amounts. Government Auditing Standards requires that if specific information comes to our attention providing evidence of possible noncompliance that could have a material indirect effect on the financial statements, we must apply audit procedures directed to ascertaining whether that noncompliance has occurred.

We are required to issue a written report, separately or as a part of the report on the financial statements, on the results of the procedures performed with respect to compliance with applicable laws and regulations.

Responsibility under the Single Audit Act and Circular A-128. In addition to the requirements of GAAS and Government Auditing Standards, the Single Audit Act and Circular A-128 require auditors to perform procedures sufficient to provide positive and negative assurance on the general requirements and to perform procedures to provide sufficient evidence to express an opinion on whether Hometown has administered its major federal financial assistance programs in compliance with applicable laws and regulations. For fiscal year 1995, Hometown has one major program, low-income housing assistance from the U.S. Department of Housing and Urban Development. We will perform sufficient procedures to express an opinion on whether the program has been administered in compliance with applicable laws and regulations.

Supplemental responsibilities. We could also assume additional responsibilities regarding compliance.

* Financial statements. If Hometown asserts it complied, in all material respects, with specified laws and regulations, we could perform agreed-upon procedures or an examination engagement in accordance with AICPA attestation standards. The procedures we will perform, as required by GAAS and Government Auditing Standards, are more limited than if we were to express an opinion on management's assertion.

* Federal financial assistance. Hometown has a second federal financial assistance program, which is considered non major. Neither the Single Audit Act nor Circular A-128 requires us to perform procedures to determine whether that program has been administered in compliance with applicable laws and regulations. However, we could perform additional procedures that would enable us to determine if Hometown has administered the program in accordance with applicable laws and regulations. If we perform those procedures, we would issue a report expressing our opinion as to that program's compliance with laws and regulations.

RELATED ARTICLE: YELLOW BOOK IMPLEMENTATION GUIDANCE

Adequate planning is key to successful implementation of the 1994 revision to Government Auditing Standards (the yellow book). The suggestions below focus on changes to the yellow book and may be used by practitioners to develop a "to do" list in planning for fiscal 1995 audits.

* Obtain a copy of the 1994 yellow book revision and guidance available from the American Institute of CPAs, including

1. The auditing interpretation, Providing Access to or Photocopies of Working Papers to a Regulator.

2. Statement on Auditing Standards no. 74, Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance.

3. Revised illustrative reports under the 1994 revision.

* Provide the auditee with a copy of the firm's most recent external quality control review report. If an external review was not conducted within the required three-year period, arrange for such a review.

* Ensure those assigned to the audit meet (or will meet) the 1994 yellow book's continuing professional education requirements.

* Prepare for and schedule. a planning meeting with appropriate personnel. Several meetings with auditee management and the audit committee or other oversight entity may be required. However, the audit committee or its equivalent should be involved in discussions of audit scope. Items on the agenda should include

1. Asking the auditee to identify laws, regulations, grant agreements and contracts that if not complied with could have a material effect on the financial statements.

2. The scope of the audit engagement, including responsibilities for testing and reporting on internal controls and compliance. Contrast those responsibilities with other financial related audits such as performing additional tests of internal controls or compliance that could result in expression of an opinion on the internal control structure or on compliance or a written report on the results of performing supplemental or agreed-upon procedures.

3. Inform the auditee of your responsibilities to report to external parties if an irregularity or illegal act is discovered.

4. Inquire about, and obtain a copy of, the results of audits or reviews conducted by others, including oversight organizations, grantor agencies and departments.

* Consider the new yellow book's expanded guidance on these four aspects of the internal control structure and revise audit plan as necessary to address them.

1. Control environment.

2. Safeguarding controls.

3. Controls over compliance with laws and regulations.

4. Control risk assessments.

* Review (or develop) audit programs to ensure steps are designed to detect material noncompliance.

* Include steps in audit programs to follow up on findings from prior audits.

* Review working paper documentation policies to ensure compliance with revised supplemental standard.

* Consider whether a combined report or separate reports will be issued on the financial statements, the consideration of the internal control structure and on compliance with laws, regulations, contracts and grant agreements.

* Include steps in the audit program to consider appropriate communication if an irregularity or illegal act is discovered.

* Report deficiencies in internal controls considered to be reportable conditions and identify those reportable conditions that are individually or cumulatively considered to be material weaknesses.

RELATED ARTICLE: CPE REQUIREMENTS DID NOT CHANGE

The 1994 revision to Government Auditing Standards (the yellow book) did change the continuing professional education requirements first established by the 1988 yellow book. The standards require each auditor responsible for planning, directing, conducting or reporting on audits under these standards to complete, every two years, at least 80 hours of continuing education and training that contributes to the auditor's professional proficiency. At least 20 hours should be completed in any one year of the two-year period.

Individuals responsible for planning or directing an audit, conducting substantial portions of the field work or reporting on the audit under these standards should complete at least 24 of the 80 hours in subjects directly related to the government environment and to government auditing. If the audited entity operates in a specific or unique environment, auditors should receive training related to that environment.

The staff assigned to perform yellow book audits should collectively possess adequate professional proficiency before starting the audit and satisfy the CPE requirements within two years of the date they start audits in accordance with the yellow book.

MARCIA B. BUCHANAN, CPA, is assistant director of the U.S. General Accounting Office's accounting and information management division in Washington, D.C. DEBORAH A. KOEBELE, CPA, is a principal Ernst & Young in New York City responsible for public sector accounting and auditing. She previously served as a member of the American Institute of CPAs governmental technical standards subcommittee.