Certified public accountants, like other professionals, use a lot of acronyms. The meaning of these acronyms is not always clear, even to the members of the profession that use them.
Three of the acronyms that are confusing to CPAs – because they are related in form and in substance – are those for generally accepted accounting principles (GAAP); generally accepted auditing standards (GAAS), and generally accepted government auditing standards (GAGAS).
Generally accepted accounting principles or GAAP are the minimum standards and guidelines for financial accounting and reporting. Reporting in accordance with GAAP ensures consistency and comparability among like entities. The audit report of a department store should include the same types of information as the audit report of another department store; and the audit report of a city should include the same types of information as the audit report of another city.
Different standards setting bodies establish GAAP for different types of entities. The Governmental Accounting Standards Board or GASB sets GAAP for state and local governmental entities. The Financial Accounting Standards Board or FASB sets GAAP for all non-governmental entities, including nonprofit organizations.
The audit law (Louisiana Revised Statute (R.S.) 24:514) requires the reports of local auditees to be prepared in accordance with GAAP. There is an exception in the law for local auditees that, under Louisiana law, cannot issue bonded debt (R.S. 24:514 B. (2)).
Generally accepted auditing standards or GAAS are the minimum standards certified public accountants (CPAs) must follow when they perform audits. Auditing standards have evolved over the last four decades to ensure consistency and uniformity in the performance of audits.
The American Institute of Certified Public Accountants (AICPA) establishes the standards for all audits that are performed in the United States. These standards are promulgated through the AICPA’s Statements on Auditing Standards or SAS’s; and are referred to as generally accepted auditing standards or GAAS.
The difference between generally accepted accounting principles and generally accepted auditing standards is that generally accepted accounting principles pertain to how a local auditee’s financial statements are prepared; and generally accepted auditing standards pertain to how those financial statements are audited by a CPA.
Generally accepted government auditing standards or GAGAS are the additional standards, over and above GAAS, that CPAs must follow when auditing state and local governments, and non-governmental organizations that receive government funds. GAGAS are promulgated by the US Government Accountability Office (GAO) in the publication Government Auditing Standards. The book in which these standards are contained has a bright yellow cover, so Government Auditing Standards are often referred to as “Yellow Book standards.” A CPA that performs an audit of these organizations must follow GAGAS in addition to the standards promulgated by the AICPA. A copy of the Yellow Book is available on the GAO website.
The difference between generally accepted auditing standards (GAAS) and generally accepted government auditing standards (GAGAS) is the additional requirements that the auditor must follow when performing an audit in accordance with GAGAS. An auditor who performs an audit in accordance with GAGAS prepares a report regarding his or her consideration of the agency’s internal control over financial reporting, and the results of the auditor’s tests of the agency’s compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. This report is called the Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and is usually issued with the audited financial statements; although it may be issued as a separate document. It is also referred to as the Yellow Book report. If findings are noted, a schedule of findings accompanies the report. The Yellow Book report and the schedule of findings are not included in an audit report if the engagement was performed under generally accepted auditing standards or GAAS.
Most audits of local auditees in Louisiana are performed in accordance with both generally accepted auditing standards or GAAS, and generally accepted government auditing standards or GAGAS.
If the local auditee expended federal funds of $750,000 or more, the audit must also be performed in accordance with the US Office of Management and Budget publication Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Additional procedures are performed during a Uniform Guidance audit to determine whether the expenditure of federal funds was done in accordance with federal law.
- Are there minimum procedures that the Legislative Auditor requires an auditor to use?
- Do audits that are performed under Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards also include a Yellow Book report?
- Are any of the audits submitted to LLA performed under GAAS, and not GAGAS?
- What would happen if the local auditee does not adopt GAAP?