A school district receives $2.4 million in federal grants and hires you for the audit. A 401(k) plan covers 1,200 employees and needs an ERISA audit. The AICPA Code does not get you to the finish line on either engagement. Yellow Book and DOL rules sit on top of it, and the exam tests where they bite harder.
KEY: A city government audit is GAGAS. A nonprofit that spent $900,000 in federal grants is a Single Audit (which incorporates GAGAS). A 401(k) plan audit is DOL. Ask "what is being audited?" before picking the rule set.
The Yellow Book uses a conceptual framework structurally similar to AICPA threats-and-safeguards, but stricter. The five steps: identify threats, evaluate significance, apply safeguards, decline if no safeguard works, document the analysis.
HIGH-FREQUENCY: Yellow Book recognizes three impairment categories: - Personal: financial interests, family, biases (overlaps with AICPA) - External: outside pressure on the audit organization (legislative interference, funding threats, restrictions on records, intimidation) - Organizational: the audit organization's structural relationship to the audited entity (e.g., a state auditor reporting...
Common mistakes
- Treating Yellow Book as identical to AICPA. Candidates assume the same threats-and-safeguards framework yields the same answer. Yellow Book uses a stricter threshold and adds external and organizational impairments. A government auditor facing legislative pressure to limit scope has an external impairment with no AICPA equivalent.
- Forgetting the SKE requirement under Yellow Book. Candidates apply the AICPA "competent employee" bar to a Yellow Book engagement. Yellow Book requires skills, knowledge, AND experience: the client representative must actually understand the substance of the nonaudit service.
- Missing the 20-hour annual CPE minimum. Candidates remember 80 hours / 24 government-specific over two years but forget the 20-hour minimum per year. An auditor who completes 60 hours in year 1 and 18 in year 2 satisfies the 80-hour total but fails the year-2 minimum and is GAGAS-noncompliant.
Bottom line
- Yellow Book (GAO Government Auditing Standards) applies to government entities and entities receiving federal awards, using a conceptual framework like AICPA but adding external and organizational impairments and stricter nonaudit-service rules.
- Yellow Book identifies seven specific nonaudit services that create heightened threats; financial-statement preparation, bookkeeping, and account determinations require SKE oversight or independence is impaired.
- Yellow Book CPE: 80 hours every 2 years, 24 hours government-specific, 20 hours minimum each year.
- DOL ERISA covered persons cannot hold direct or material indirect financial interests in the plan or the plan sponsor; the firm cannot serve as plan actuary, investment manager, or recordkeeper to the plan being audited.
Exam shortcut
When a question describes a federal-funds entity, ask three questions in order: (1) Government entity or required-by-law GAGAS? → Yellow Book. (2) Federal awards $750K+? → Single Audit, which incorporates Yellow Book. (3) Plan filing Form 5500? → DOL. AICPA layers underneath all three. For Yellow Book CPE, memorize 80 / 24 / 20: 80 over 2 years, 24 government-specific, 20 minimum each year.
The full lesson (about 2,493 words, 17 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.A3
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