Auditor Independe

New GAGAS Independence 

Jeffrey C. Steinhoff

Managing Director

Financial Management and Assu

U.S. General Accounting Offi

GAO-02-767SP
GAGAS Amendment 3:IndependenceIn all matters relating to the aud

audit organization and the indivauditor, whether government oshould be free both in fact and from personal, external, and orimpairments to independence.
David M. WalkerComptroller General of the U “The focus of the changes to th

independence standard is to the public interest and to maindegree of integrity, objectivityindependence for audits of goentities.”
Independence Standard

• Issued January 25, 2002• Deals with a range of auditor inde

issues; most significant change renonaudit, or consulting services

• Indicated further guidance would b

question and answer form; many qreceived from those the new stand
Affect on AuditorsRequired to Use GAGAS• Sometimes not appropriate to pe

audit and nonaudit services for t

• May need to choose which of the

an audit organization will provide
Questions Cover Broad A• Implementation and transition • Underlying concepts• Applying the standard in spec

circumstances
Extending the Effective DOriginal effective date:

• Applicable to all audits for p beginning on or after Octob

Extended effective date:

• Applicable to all audits for p beginning on or after Janua
Grandfathering

In cases where nonaudit services wviolated pre-existing professional staexemptions are allowed for:

• Nonaudit services performed be

25, 2002

• Contracts for nonaudit services s

January 25, 2002, if the nonaudcompleted no later than June 30
Addressing Other PertineImplementation Matters

• For exempted contracts, extension

orders are considered new contraoverarching principles and safegu

• The passage of time may or may n

impact on relieving an impairment
Questions Concerning UnConcepts• Overarching principles and safeg• Significance/materiality• Audit and nonaudit services• Subject matter of the audit• Routine advice
Overarching Principles• Auditors should not perform m

functions or make manageme

• Auditors should not audit thei

or provide nonaudit services iwhere the amounts or serviceare significant/material to the matter of the audit
Supplemental Safeguards

• Personnel who perform certain nonaud

would be precluded from performing rework

• The auditor’s work could not be reduce

level that would be appropriate if the nwas performed by another unrelated p

• Certain documentation and quality ass

requirements must be met
Substance Over Form Doc

• Use reasonable judgment and con

• The nature of the nonaudit serv• The significance/materiality to t

 subject matter of the audit

• The totality of services provided 

 audited entity

• Cannot 

“unbundle

” services to circ

 independence impairment
Deminimis Criteria• Personnel providing nonaudit se

perform related audit work if the services total

• 40 hours or fewer for govern

organizations, or

• fees of $5,000 or less for non

audit organizations

• The overarching principles must 

with and the other safeguards wo
Taking a Holistic Approach

• Nonaudit services provided by one off

audit organization affects the entire auorganization’s independence as it rela

audited entity

• Nonaudit services provided to one ag

affect independence for audits of othe

• Except when the subject matter of 

involves an area where one of the performs work for, or provides a seother
Determining Significance/

These terms are used synonym

• Performance audits: Mea

significance against the proactivity under review

• Financial statement audits

materiality based on the finastatements taken as a whol
Distinguishing Audit and Services

Audit Services

• Financial audits, attestation engageme

performance audits

Nonaudit Services

• Requested by management and direc

operations

• Generally performed for the sole use a

requesting entity

• Data provided without verification, ana

conclusions, recommendations, or opi
Meaning of “Subject MatteAudit”

Financial audits:

• The financial statements as 

Performance audits:

• Defined by the audit objectiv

generally limited to the progactivity under review
Routine Activities Based oTechnical Expertise and K

Paragraph 3.23 allows certain routine acan independence impairment or applying 

• Providing routine advice to assist in ac

establishing internal controls or implemrecommendations

• Answering technical questions• Providing training• Participating on committees in an advi

as an observer or ex-officio member (n
Routine Activities (cont

’d

• Developing best practices guides• Developing internal control assessme• Performing investigative services• Developing professional standards• Undertaking benchmarking studies• Developing audit methodologies• Providing legal/accounting opinions to • Developing questions for hearings and • Preparing routine tax filings (discusse
Questions About Applying Standard in Specific Circu• Basic accounting services• Internal audit services• Tax services• Information technology services• Work of specialists• Budget work• Human resource services
Providing Basic AccountiServices

An audit organization’s independenc

audits is impaired if it:

• maintains or prepares the audit

basic accounting records,

• maintains or takes responsibilit

financial or other records that thorganization will audit, or

• posts transactions to the entity’

records or to other records that provide data to the entity’s fina
Developing Draft FinanciaStatements and Notes

• Viewed as technical assistance and part • Auditor must be careful not to be, in ess

constructing the records

• Must be based on a trial balance:

• provided by management using appro

and records that balance, or

• prepared by auditors when their work 

trail balance is technical formatting in management’s chart of accounts.
Developing Draft FinanciaStatements and Notes (co

• Must be reviewed and approved by aud

management, who must have adequate evaluate and take responsibility for the r

• Management representation letter shoul

auditor’s role and management’s review

responsibility for the financial statements 

• Independence would not be impaired if t

not make management decisions. Must other safeguards except that which precpersonnel from providing the service and 
Providing Accounting AssEmergency Situations

• An emergency situation is a rare and po

cataclysmic event on the audited entity accountant suddenly dies, or contracts a 

• Under the independence standard, an a

could provide accounting assistance for of time (no more than 1 month) but the s

• Audit organization must advise the audi

exhaust all other viable options, documeand disclose in its audit report
Performing Internal Audit 

• External audit organizations would 

overarching principles if they provaudit services because such serviconsidered a management functio

• Section 3.30.5 covers independen

audits
Providing Tax Services

• Some tax services are routine under pa

• Preparing tax returns or assisting wit

deposits, for example, would be routnot violate the overarching principles

• Audit organizations may represent au

IRS matters (under 5USC500) withouimpairment for financial statement au

• An impairment could arise for a perform

compliance
Providing Information TecServices

• Limit to advice on system design

installation, and system security

• Apply the safeguards and have m

acknowledge responsibility

• Should not operate or supervise 

of the entity’s information techno
Applying the IndependencStandard to Specialists

Using the work of specialists contracted entity:

• Paragraph 3.14 applies• Determine professional standards the 

be required to follow

• Obtain an understanding of the meth

significant assumptions the specialist 

• Obtain from the specialist a represen

are independent of the audited entity
Applying the IndependencStandard to Specialists (c

Using the work of specialists employed 

entity:

• Paragraph 3.14 would not apply• Audit organization would have to as

the specialist’s qualifications

• Specialist’s work would be consider

information gathered from the entity

• Determine the validity and reliability 

tests of the data
Applying the IndependencStandard to Specialists (c

Using the work of specialists employed borganization:

• Paragraph 3.14 per se would not apply• Independence requirement is the same • An audit organization’s internal quality 

requirements to identify personal impacompliance with GAGAS should extenwho are specialists

For specialists contracted by an audit or

paragraph 3.14 would apply (see footnote 
Assisting With Budget Wo

• Certain budget work could be perform

GAGAS performance audit standards:

• Analyzing budget proposals or bud• Assessing program or policy altern• Identifying ways to improve service

• Depending on the nature of the assista

independence would be impaired for:

• Preparing annual budgets• Preparing strategic plans
Providing Human ResourcServices

• Limit to activities such as:

• Serving on an evaluation panel to r

applications to provide input to manarriving at a listing of best qualified 

• Auditor independence would be impai

• Recommending a single individual 

position

• Conducting an executive search or 

program for a significant position
Stopping Short of the Line

• Avoid situations that could lead re

third parties with knowledge of thfacts and circumstances to conclauditor is not able to maintain indconducting audits

• Remember: The independence 

principles-based and should be a substance over form approac
Looking Ahead

• Input is being provided by the Comptroller G

Standards Advisory Council

• Major concepts discussed with other interes• This presentation is being made available t

website at www.gao.gov

• AGA/NASACT national teleseminar -- May • Issuance of independence standard Q&As 

to late June 2002