A regional transit authority spends $48 million in federal grants on a treatment plant upgrade. Your firm completes the financial statement audit and signs an unmodified opinion. The board chair calls expecting one report. You explain there are two, and a third set is coming after the single audit. The exam question is which report says what, who gets it, and why GAGAS made the standard auditor's report alone insufficient.
HIGH-FREQUENCY: GAGAS is issued by the U.S. Government Accountability Office. It applies when a Yellow Book audit is required by law, regulation, agreement, or policy, most commonly for federal-award recipients under the Single Audit Act, state and local governments whose statutes require it, not-for-profits passing through federal funds, and contracts or grant agreements that mandate GAGAS by reference.
GAGAS builds on GAAS rather than replacing it. The Yellow Book auditor follows AU-C standards for the financial statement audit, then layers on GAGAS-specific requirements: enhanced independence using a conceptual framework, CPE in government topics, peer review, and the additional reporting described below.
Common mistakes
- Treating the Yellow Book report as an opinion on ICFR. It describes scope and lists findings, explicitly not designed to express an opinion. An answer choice saying GAGAS requires an "opinion on internal control" is wrong. Distinguish from the single audit, which does require an opinion on internal control over compliance for major programs.
- Confusing the Yellow Book report with the AU-C 935 compliance audit report. The Yellow Book report addresses compliance with laws, regulations, contracts, and grant agreements that have a material effect on the financial statements. AU-C 935 is a separate engagement issuing an opinion on compliance with specified requirements, with restricted distribution.
- Suppressing findings because management disagrees. GAGAS requires findings and management's response to coexist. Withdrawing a finding because management challenges it violates the standard.
Bottom line
- GAGAS, issued by the GAO in the Yellow Book, applies on top of GAAS whenever required by law, regulation, contract, or grant agreement (commonly federal-award recipients, state and local governments, certain not-for-profits).
- GAGAS incorporates GAAS and adds requirements: stricter independence, CPE, peer review, and for financial audits two extra subjects beyond the standard auditor's report.
- The Yellow Book report covers internal control over financial reporting (ICFR) and compliance with provisions of laws, regulations, contracts, and grant agreements that have a material effect on the financial statements. Issued separately or combined.
- The Yellow Book report is not an opinion. It describes scope and reports findings.
Exam shortcut
When a question describes a federal grant and asks what extra report is required beyond the auditor's report on the financial statements, the answer is the Yellow Book report on ICFR and compliance and, if the entity is above the single audit threshold, the single audit reports on top of that. Two layers, both required.
The full lesson (about 2,132 words, 14 min read) adds 1 worked example, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- IV.E5
Browse all free CPA AUD lessons or jump into free CPA AUD practice questions.