I. Requirements of GAO and DOL

Question 1

Who MUST comply with the ethical and professional requirements of the GAO’s Yellowbook?

Answer 1

Those that conduct GAGAS audits of:

• Government Entities
• Entities that receive government awards (e.g. college, trade school, charities, local government)

Question 2

What does the Yellow Book require?

Answer 2

Those that audit pursuant to the GAGAS are expected to audit:

1. Independently
2. In accordance with these key ethical principles:

• The public interest
• Integrity
• Objectivity

3. Proper use of government information, resources, and positions.
   * Government info, resources, or positions are to be used for official purposes and not for an auditor’s personal gain.
4. Professional behavior, including:

• Complying with all relevant legal, regulatory, and professional obligations
• Avoiding conflicts of interest
• Sensitivity to appearance of impropriety, and
• Putting forth an honest effort to meet technical and professional standards.

Question 3

What are the four key parts of the Yellow Book’s provisions on ethics and independence?

Answer 3

1. Conceptual framework for making independence determination

Requirements for and guidance on:

2. Independence for audit organization (AOs) structurally located within the entities they audit;
3. Independence for performing non-audit services (NAS); and
4. Documentation of the auditor’s independence

Question 4

What does GAO mean by independence?

Answer 4

Independence of Mind

• Ability to act with integrity, objectivity, and professional skepticism

Independence in Appearance

• Objective third parties should have no reason to question integrity, objectivity, and/or professional skepticism

Question 5

What are some of the threats to independence does the GAO recognize?

Answer 5

1. self- interest threat

Ex: Auditor has a financial or other interest in the audited entity or program

2. Self-Review Threat

Ex: Auditor has source documents she prepared

3. Bias Threat

Ex: Auditor has political, ideological, or social convictions that could bias the audit

4. Familiarity Threat

Ex: A close friend or family member is an official in the audited entity

5. Undue influence Threat

Ex: External party’s threat undermine auditor objectivity

6. Management Participation Threat

Ex: Auditor takes management role in audited entity

7. Structural Threat

Ex: Threat resulting from AO’s placement within a government entity, in combination with structure of the entity being audited.

• In circumstances create a structural threat may also create undue influence and/or management participation threat.
• Mitigation: by constitutional or statutory safeguards may mitigate the effects.

Question 6

What are the rules behind the independence of an internal auditor?

Answer 6

Internal Auditors working under the direction of the audited entity management are considered independent if the head of the audit organization meets all the following:

• Accountability to the head of the government or to those charge with governance
• Reports audit results both to the head of the government entity and to those charged with governance.
• Locate organizationally outside the staff of line management has access to those charged with governance sufficient
• removed from political pressure to conduct audits and report findings without fear or political reprisal.

Question 7

Is documentation important to est. independence and if so what should be documented?

Answer 7

• Threats to independence that requires the application of safeguard
• Safeguard required if an audit organization is structually located within a government entity and considered independent based on that safeguards
• Consideration of audited entity management ability to effectively oversee a NAS to be provided by the auditor
• The auditor understanding with an audited entity for which the auditor will perform a NAS.

Question 8

Who is the Employee Benefit Plans broadly regulated by?

Answer 8

The Employee Benefits Security Administration (EBSA) pursuant to the Employee Income Retirement Security Act (ERISA).

Question 9

What are some of the rules of DOL that would impair independence?

Answer 9

1. Financial Ties - Time: during the period of the engagement, at the date of the opinion, or during the period covered by the financial statements

• the accountant or his or her firm or a member thereof had or was committed to acquire any direct financial interest or any material indirect financial interest in such plan, or the plan sponsor
  
  • Remember only: Indirect and Immaterial is okay
• This provision covers the “MEMBERS” of an accountant firms
  
  • What they mean by this is “all partners or shareholder employees in the firm” and “all professional employees participating in the audit or located in an office of the firm participating in a significant portion of the audit.”

2. Employment Ties - During the same period, the same entities may not be connected to a plan or plan sponsor as a:

Promoter;

Underwriter;

Investment advisor;

Voting trustee;

Director;

Officer; or

Employee of the plan or plan sponsor.

DOL does not prohibit NAS, however, they do prohibit and transaction pursuant to 29 U.S.C. 1106(a)(1)(C), which prohibits certain transactions between a plan and a party in interest

Question 10

What two things must be done in order not to impair independence under the DOL rules?

Answer 10

As long as that person dissociate herself and not participate in an audit covering in any period of time that person works for the company.

Question 11

What are some of the things that DOL allow and do not allow?

Answer 11

Allow/Permits: Performing acturial services and audit services to the same company is okay with DOL but not okay with SOX

Not Allowed:

Maintaining financial records that one work on is prohibited and would destroy independence.