GAO 

United States General Accounting Office 

Exposure Draft 

May2001 Government 

‘Auditing Standards 

Independence 

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United States 

Washington, I 

General Accounting Office 

N-J 20648 

May 4,200l 

TO AUDI? OFtiCIALS !&D OT&RS INTERESTEO IN 

G6VERNMkh?AUDITING STANDARDS : 

GAP invites your comments on the accompanying proposed changes to Goverknent ~ 

Auditing kzdu~ds (GAGAS), ‘commonly known ‘as the “yellow book.” These changes 

propose revising the second general standard, independence, to expand the definition of. 

personal impairments:, highlight the distinction’between extemal’and,internal reporting, and 

acknowledge the ways that organizations can be free from’organi,zational impairments to 

1 ! 

independence. This letter describes the process followed in .revising the standards, I. 

summarizes comments received on an earlier preliminary views document, discusses the I 

proposed changes from the preliminary views document to this, exposure draft, outlines the 

format of this exposure draft, and requests comments from interested parties on these . 

proposed revisions.’ 

-. I” I ,I 1 

To help ensure that the standards,continue to‘meet’ the needs,of the audit, community and the 

public it.serv”es, the Comptroller General of the United States appointed the Advisory 

Council on Government Auditing Standards to review the standards and recommend 

necessary changes. The ‘council includes experts in financial and performance auditing 

drawn from all levels of government, private enterprise, public accounting, and academia. 

Public comment is requested on all’ draft revisions to the standards. 

1’ 

In February 2000, the councii recommended to the Comptroller General that a .preliminary 

views draft be’issued rather than an exposure draft to reflect the complexity and diverse 

views associated with the auditor independence issues. The council suggested reaching out 

to all users of the standards to help formulate possible solutions. The preliminary views 

document, issued on April 14,2000, primarily focused on issues .associated with ’ 

organizational independence.and identified one possible solution. However, the council 

acknowledged that there could be additional views and issues to consider and invited 

respondents to identify and comment to assist the council and GAO in their deliberations: 

GAO received 101 comment letters on the preliminary views document from all levels of 

government and other organizations. Most of the comment letters did not support the 

preliminary views draft approach to independence issues, but at the same time offered a 

wealth of ‘information to assist the council and GAO staff in formulating other possible 

solutions and in considering additional issues. Each comment letter was reviewed and 

carefully considered. 

The comment letters on the preliminary views document raised several major points 

associated with the proposal. First, most of the federal inspectors general and many of the 

a 
state inspectors general commented that the preliminary views document conflicted with 

their enabling legislation that established independent audit organizations. ,“These ,. 

respondents expressed their belief that since legislation created them to be ‘independent and .’ 

provided a range of safeguards to independence, the auditing standards, should’recognize ‘, 

legislative provisions. Second, internal auditors commented that the.pre1irninar-y views 

document disenfranchised this function from recognition under these standards. The internal 

auditors also noted the lack of compatibility between the preliminary views document and 

the Institute of Internal Auditors (IIA) standards, concluding that many would elect to use the 

IIA standards instead. ,Third,,state auditors and,others did not.agree with the preliminary 

viewsdocument that allowed’audit organizations that are not independent to issue opinions 

on the financial statements when required, by statute and with an accompanying disclosure of 

the circumstances. Fourth, many comments were received that pointed out’that the’ 

preliminary views document did not consider that a broad range of safeguards may be in 

place to collectively ensure the’independence of the audit organization. Lastly, the comment 

” 

., letters also noted that the issue of independence is’broader than’organizational indep’endence 

as ‘described by the preliminary ‘vi&v; ‘document. ‘As ‘such, a number of respondents 

suggested,that the’council should recommend that the exposure draft expand its focus to 

address independence issues associated with auditors providing nonaudit services to the 

audited entity. ., .,~,‘? 

’ In addressing these ,and other concerns raised by ‘the individual comment letters, the council 

recommended, to GAO that substantive changes be made to the preliminary views document 

and focused on three primary areas for possible revision. First, the council, agreed with the 

comments received that noted the ambiguity of the sections on personal impairments and 

’ suggested that GAO expand the examples of personal impairments and add criteria,to help 

~audit~organiz,ations understand whether the provision of the nonaudit service affects the 

subject matter of the audit. The recent debate regarding the Securities and Exchange 

Commission’s ruling on’auditor independence provided valuable information that was used 

in’considering the types of nonaudit’services that could impair an audit organizationJs 

independence. This exposure draft emphasizes that auditors and audit organizations have an 

obligation to evaluate circumstances and relationships on each assignment to identify 

situations that.could result in an actual or perceived impairment’to independence, including 

whether the performance of nonaudit services affects the subject matter being audited. 

Second, the council suggested that a distinction be made between external and internal 

reporting. The council’s advice is that internal auditors play a vital role in government 

auditing and can be free from organizational impairments to independence. However, the 

council emphasized to GAO that fundamental differences exist in auditor responsibilities, 

when audit work is performed to report externally to third parties outside the audited entity 

and when audit work is performed to report internally to management within the audited 

‘entity. Accordingly, this exposure draft incorporates the sections on internal audit in the 1994 

revision of Government Auditing Standards but refocuses the discussion to organizational 

impairment considerations when reporting internally to management. The internal audit 

organization would be required to document the conditions in place that allow it to be 

considered free of organizational impairments to report internally and have the 

documentation available for review during the external quality assurance review to ensure 

that all necessary safeguards have been met. The council also recommended that an internal 

audit organization could be organizationally independent to report externally if auditing an 

entity that is external to the one they are assigned, such as a contractor. 

Page 2 
Third, .the council recommended expanding the criteria that define organizationti‘ that can 

report externally. Based on the comment letters received on the prelimit&y views 

document, the council advised GAO that there are a number of ways audit organizations can 

be free from organizational impairments to report externally. Specifically, this exposure 

draft proposes expanding the presumptive criteria to include audit organizat@ns for,which 

the heads are appointed by, are accountable to, repart to, and can be removed by’ a statutorily 

created governing body. The exposure draft also adds to the presumptive chteria to include 

an audit organization that is assigned to the same branch of government as the a&ted entity 

but a different agency within that branch, such as an executive branch auditor auditing a 

different executive branch agency’s program. 

In addition, this exposure draft recognizes that there may be other organizational structures 

under which a government audit organization could be considered to be free. from 

organizational impairments, and thereby considered organizationally independent to report 

externally. These other structures provide sufficient safeguards to prevent the audited entity 

from interfering with the audit organization’s ability to perform the work and report the 

results impartially. For the audit organization to be considered free from organizational 

impairments to report externally, the audit organization needs to have all of the statutory 

protections listed in the exposure draft. In these situations, the audit organization is required 

to document the statutory provisions in place and have the documentation available for 

review during the external quality assurance review to ensure that a third party agrees that the 

necessary safeguards have been met. 

I- LThis draft is being sent to financial management and audit officials at all levels of 

government, the public accounting profession, academia, professional organizations, and 

public interest groups. We encourage you to send your comments, whether you wish to 

comment on the entire document or only a portion of it. All comments will be distributed to 

the entire council and will be considered during further deliberations. 

In the exposure draft, italicizing and bolding are used to identify potential added language 

and striking-out is used to identify potential deleted language from the 1994 revision of 

Government Auditing Stuhdurds. To facilitate review of the exposure draft, it is located on 

the Internet on GAO’s Home Page (www.gao.@). Additional copies of this exposure draft 

can be obtained from the U.S. General Accounting Office, Room 1100,700 4’ Street, NW, 

Washington, DC 20548, or by calling (202) 5 12-6000. 

To facilitate analysis of your comments, it would be helpful if you sent them both in writing 

and on diskette (in Word or ASCII format). To ensure that your comments are considered by 

the council in their deliberations, please submit them by July 30,2001, to the following 

address: 

Government Auditing Standards Comment 

Independence Exposure Draft 

U.S. General Accounting Office 

Room 5X16 (FMA) 

441 G Street, NW 

Washington, DC 20548 
If you need additional information, please call Marcia B. Buchanan, Assistant Director, 

Financial Management and Assurance, at (202) 5 12-9321; 

lg birector 

Fiwial Management 

and Assurance 

:’ 

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INDEPENDENCE 

3.11 The second general standard is: 

In all matters relating to the audit work, the audit organization and the 

individual auditors, whether government or public, should be pee both in fact 

. and appearance from personal, an&external, ti 9 

sh+wu-k~ a&organizational- ‘-’ impairments to independence and 

should maintain an independent attitude and appearance. I ‘.; 

I 

, ii 

3.12 This standard places responsibility on each auditor and audit organization to 

I 

maintain independence, so that opinions,, conclusio&, judgments, and 

re6ommendations’will be impartial and will be viewed as impartial by 

knowledgeable third parties. 3.13 F { 

An auditor should avoid situations that could lead reasonable u 

third parties with knowledge of the relevant facts and circumstances to conclude 

that the auditor is not able to maintain independence and, thus, is not capable of 

exercising objective and impartial judgment on all issues associated with 

conducting and reporting on the work. W . 
3.13 Government auditors9 

spe&a&+ need to consider three general classes of impairments to 

independence-personal, external, and organizational. If one or more of these 

impairments affects anaauditor’s capability to,&perform the work and report 

1 

results impartially, that auditor should either decline to perform the work, or in 

.: ,~ 

those situations +vhere in which that auditor cannot decline to perform the audit * ., 

work, the impairment(s) should be reported in the scope section of the audit report.’ 

/, ‘.. 

3.14 Nongovernment auditors also need to consider those personal and external 

impairments that might affect their &z&i-&~ capability to &-t&&perform the 

work and report their results impartially. If their m 

independence is impaired, they should decline to perform the &work. In 

addition to the guidance on personal qnd external impairments in GAGAS, 

public accountants2 should follow the American Institute of Certified Public 

Accountants (AICPA) code of professional conduct and the code of professional 

conduct and the regulations of the state board with jurisdiction over the practice 

‘In the disclosure, auditors should consider addressing the following issues in the scope section: (1) the 

cause of the impairment, (2) the mandate to do the audit, and (3) any compensating actions taken to 

minimize the impairment. 

2Public accountants are certified public accountants, persons working for licensed certified public 

accounting firms, or public! accountants licensed on or before December 341970, or persons working 

forpublic accounting firms licensed on or before December 31,197O. 

/ 2 
of the public accountant and the audit organization.3i 

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; 

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3.15 In using the work of specialists,4 auditors need to assess whether any of the three 

general classes of impairments to independence affect these individuals ‘tiapability 

to perform the work and report results’ impartially. In conducting this assessment, 

auditors should obtain representations from the specialists regarding their 

independence from the activity or program under audit. lif the specialist, has ‘an 

impairment to independence, the auditor should use the work of anotherspecialist. 

If the specialist has an appearance of impairment to independence, the auditor 

should consider using the work of another specialist who does not have an 

impairment. If the auditor decide to continue to use the work of specialists whose 

independence may be impaired, the auditor should perform additional procedures 

.with respect to some or all of the specialists! assumptions and methods to Idetermine whether the results are reasonable, ’ or engage another specialist for this 

purpose. 

3Public accountants also may be subject to other rules and regulations in addition to GAGAS and those 

listed above. Such rules may include requirements issued by various levels of government, such as 

specific requirements for auditors to be engaged to conduct work for the Department of Labor. Auditors 

should exercise sound professional judgment to ensure they meet any additional rules and regulations. 

“Specialists to whom this section applies include, but are not limited to, actuaries, appraisers, attorneys, 

engineers, environmental consultants, medical professionals, statisticians, and geologists. This section 

also applies to external consultants and firms performing work for the audit organization. 

‘Auditors need to assess their own qualifications to perform this work. 

should engage another specialist for this purpose. 

If they are not qualified, they 

3 

E 
Personal Impairments 

3.161 

, 

BThe,audit organization should e havekg 

. . * an internal quality assurance system to help 

determine if auditors have,any personal impairments to independence that could 

affect their impartiality or the appearance of impartiality. v 

m The audit organization needs to be alert for personal impairments to 

independence of their its staff members. Personal,impairments,of staff members 

are relationships that might cause an auditor to limit the”extent of the inquiry, 

limit disclosure, or weaken or slant auditfindings in any way. Auditors are ’ 

responsible for notifying the appropriate officials within their audit organizations if 

they have any personal impairments to independence. w 

. . . * . a. , Examples of 

personal impairments of individual auditors include, but are not limited to, the 

following: i. 

” 

a. preconceived ideas toward individuals, groups, organizations, or objectives of 

a particular program that could bias the audit, 

4 
b. prwkw-responsibility for managing an entity or decision-making or 

-that cwuld affect eu333Soperations of the.entity or 

program being audited, for example as a director, officer, or employee of the 

entity, activity, or program being audited, or as a member of management in 

any decision-making, supervisory, or ongoing monitoring function for the 

entity; activity, orprogram under audit,” ’ s 

c. biases, including those induced by political or social convictions, that result 

from employment in, or loyalty to, a particular group, organization, or level of 

government, 

,d. concurrent or subsequent performance of an audit,by the same individual 

,whoWmaintained 3 the official accounting records when such 

services involved preparing s,ource documents or originating data, in 

electronic or other form; authorizing, executing, or consummating 

transactions Cfor example, approving invoices, payrolls, claims, or other 

payments of the entity or program being audited), maintaining an entity’s 

. 

“If the auditor has performed other nonaudit services for a client that affect information that is the 

subject of the audit and management is unable or univilling to take responsibihty for this information, 

the risk that the auditor may be perceived to have a personal impairment to independence is increased. 

See paragraphs 3.17 and 3.18 for additional guidance on impairments to independence associated with 

;he scope of services that may be provided by audit organizations to entities they audit. 

The auditor needs to be free from this personal impairment for the period covered by the activity under 

audit, including any financial statements being audited, and for the period in which the audit is being 

Q erformed and reported. 

Serving as a member of the governing board of the entity under audit creates a personal impairment to 

independence. However; serving on an advisory board for the audited entity, in of itself, does not impair 

the auditor’s independence, unless that advice directly relates to the activity orprogram under audit. 

5 
bank account or otherwise having custody of the audited entity’s funds; or 

otherwise exercising authority on behalf the entity9 or having authority to do 

. . so, ’ and J 9 7 9 

. . e* 

. . * . s;%-and 

e. fi&ncial interest that is direct, or is substantial though indirect, in the audited 

entity or program. 

3.17 Given the evolving nature of services provided by audit organizations, care needs 

to be taken to avoid situ,ations that can impair independence. Situations in which 

an audit organization provides certain nonaudit services to an entity and also 

performs the audit of that entity could create an impairment for the audit 

organization. Audit organizations need to consider whether the provision of the 

nonaudit services affects the subject matter of the audit. I0 Specific examples of the 

types of nonaudit services under the above circumstances that ifan audit 

organization provides them, with certain exceptions as specified below, create 

personal impairments to independence include the following: 

‘See footnote 7. 

6 
a. Providing bookkeeping or other similar services” related to the,audited entity9s 

accounting records,Jinancial statements, or other records subject to audit. The 

audit organization cannot maintain orprepare the audited entity’s basic 

accounting records or maintain or take the responsibility for basic financial or 

other records that the audit organization will audit.” 

b. Designing or implementing information systems.r3 The audit,organization 

I, 

cannot design the information technology system that supports the program or 

.activity being audited or that generates the other records that Will be audited, or 

provide the primary basis for determining the adequacy of the system. 

However, the audit organization can provide information technology services 

to design ,or implement systems if management (1). acknowledges responsibility 

for the entity’s system of internal control, (2) identifies a person within 

F 

I 

management to make all management decisions with respect to- the project, (3) 

makes all significant decisions with respect to the project, (4) evaluates the 

adequacy and results of the project, and (5) does not rely on the auditor’s work 

as the primary basis for determining the adequacy of its system. In addition, 

“See footnote 7. 

“Other similar services would include maintaining, preparing, or taking responsibility for the audited 

y~tity ‘s other records on an outsourcing basis if these other records affect the subject matter of the audit. 

The auditor can assist the audited entity in preparing financial statements based on information in the 

entity’s records. However, care should be taken not to perform management functions or make 

management decisions for the entity under audit; these responsibilities remain with the entity’s 

ganagement- Design or implementation of a information system includes making decisions concerning the systems 

to be evaluated and selected; the controls and system procedures to be implemented; the scope and 

timetable of system implementation; or the testing, training, and conversion plans. It also includes 

evaluating the adequacy and the results of the information system. 

7 

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i 
the audit organization cannot operate or supervise the operation of the entity’s 

information technology systems. 

c. Providing appraisal or valuation services. The audit ,organization cannot 

perform appraisal or valuation services if it is reasonably likely that the results 

of any valuation or appraisal would be material’to the financial statement 

amounts or other information that will be audited by the audit organization. 

However, the audit organization can provide appraisal or valuation s&&es if 

(1) the audit organization is reviewing the work of the audited entity or’s’ 

specialist employed by the audited entity and the audited entity or specialist 

provides the primary support for the balances recorded in the financial 

statements or other information that will be audited;(2) the’audit 

organization’s actuaries value the audited entity’s pension, other 

postemployment benefit, or similar liabilities, provided’that the audited entity 

has determined and taken responsibility for all significant assumptions and 

data, or (3) the valuation is performed in the context of the planning and 

implementation of a tax-planning strategy or for tax compliance services. 

d. Providing actuarial services. The audit organization cannot perform actuarial 

services when they involve the determination of amounts that are material to 

the financial statements or other information that will be audited by the audit 

organization unless (I) the audited entity uses its own actuaries or third-party 

actuaries to provide management with the primary actuarial capabilities, (2) 
I’ 

management accepts responsibility for any significant actuarial methods and 

assumptions, and (3),the, audit organization% involvement is not continual. 

However, the a,udit organization can provide actuarial services if they (1) assist 

management in developing appropriate methods, assumptions, and amounts 

for policy and loss reserves and other actuarial items presented in financial 

reports based on the audited entity9 historical experience, current praktice, 

and future plans, (2) assist management in the conversion of financial ; 

statements from a statutory basis to one conforming with generally accepted 

accounting principles, (3) analyze actuarial, considerations and alternatives in 

federal income tax planning, or (4) assist management in the financial.analysis 

of various matters, such as proposed new policies, new markets, business 

acquisitions, and reinsurance needs. 

e. Performing management functions. For example, the audit organization 

would be. impaired when an auditor of the organization functions as a member 

of management in any decision-making, supervisory, or ongoing monitoring 

function for the audited entity, program, activity, or function, or acts, 

temporarily or permanently, as a director or officer of the audited entity. 

f Performing human resources services. For example, the audit organization 

cannot search for or seek out prospective candidates for executive, director, or 

key managerial positions;r4 perform psychological testing, or other formal 

14A key managerial position has a direct impact on the program or management function subject to 

audit. 

9 
testing or evaluation programs of such prospective candidates; undertake 

reference checks of prospective candidates; act as a negotiator with‘ the 

prospective candidate on the audited entity’s behau; or make any related hiring 

decisions regarding a specific candidate for such a specific job. The audit 

organization may, upon the request of the audited entity, interview candidates 

and advise the audited entity on the candidate’s competence forfinancial 

accounting, administrative, or control positions. ! 

g. Providing broker-dealer services. For example, the audit organization cannot 

! E 

I: 

serve as a broker-dealer, promoter, or underwriter of the audited entity’s 

securities. ’ 

h. Preparing indirect cost proposals. For example, the audit organization cannot 1 k 

prepare the indirect cost proposal or cost allocation plan when indirect costs 

recovered by the audited entity are material to its financial statements or the 

subject matter of the audit. 

3.18 Auditors and audit organizations may encounter many different circumstances or 

combinations of circumstances; therefore, it is impossible to define every 

situation that could result in an impairment. Auditors and audit organizations 

have an obligation to evaluate circumstances and relationships on each 

assignment to identify situations that could result in an actual orperceived 

impairment to independence, including whether performing nonaudit services 

10 

t 
affects the subject matter being audited. The audit organization may need to 

assess whether multiple situations or circumstances that individually are not 

personal impairments to independence may become impairments when 

I_ considered in the aggregate; 

3.19 Situations may occur in which the auditor or the audit organization has an 

inadvertent violation of the independence standard that is discovered during the 

conduct of the audit, such as those situations that ‘could result in an actual or 

perceived impairment to independence. An inadvertent violation would not 

,., impair the independence of the audit organization or the assignment team 

provided that the audit organization has an internal quality control sys‘tem in 

place that identifies an actual or perceived violation before the report is issued. 

This internal quality control system should, at a minimum, require the auditor to 

promptly report any inadvertent violations resulting from any changes in 

relationships to the audit organization. Once discovered, inadvertent violations 

need to be mitigated promptly. To mitigate inadvertent violations, (I) the audit 

organization promptly removes the auditor from the assignment and (2) the audit 

organization gives additional care to reviewing the work of the auditor. If 

mitigating actions cannot be taken, the auditor and the audit organization should 

withdraw from performing the audit, or in situations in which government 

auditors cannot withdraw, they should follow the guidance in paragraph 3.13. 
External Imnairments ‘, .’ 

3.20 Factors external to the audit organization may restrict the audit work or interfere 

with’an auditor’s ability to form independent and objective opinions and 

, 

conclusions. For ,example,,under the following conditions,‘an auditor may not 

have complete freedom to make an independent and objective judgment and an 

audit may be adversely affected: ” 

” 

a. external interference or influence that could improperly or imprudently limits’ 

or .modifyies the scope of an audit or threbten to do so, 

b. external interference with the selection or application of audit procedures or in 

the selection of transactions to be examined, 

1 

c. unreasonable restrictions on the time allowed to complete ‘an audit 01 issue the 

report, 

,’ 

d. interference external to the audit organization in the assignment, appointment, 

and promotion of audit personnelj 

e. restrictions on funds or other resources provided to the audit organization that 

adversely affect the audit organization’s ability to carry out its responsibilities, 

12 
II 

f. authority to overrule or to inappropriately influence the auditor’s judgment as 

to the appropriate content of the report, and 

I 

g. ,influences that jeopardize the auditor’s ,continued employment for rekofis I 

other than competencye or the need for audit services. 

Organizational Impairments 

3.21 Government auditors’ capability to perform the work and report the results 

: 

impartially w can be affected by their place within government and 

the structure of the government entity which they are assigned to audit. 

j ,‘. s ,( 

Whether they are performing work to report externally to third parties outside 

the audited entity or internally to top management within the audited entity, 

auditors need to be free from organizational impairments to independence. by 

:,, 

Organizational Impairment Considerations 

When Reporting Externally to Third Parties 

.) 
3.22 Government auditors can be presumed to be free from organizational j 

impairments. to. independence when reporting externally to third parties if their 

audit organization is organizationally independent from the audited entity. 

Government audit organizations can meet the requirement for organizational 

independence in a number of ways. 

3.23 First, a government audit organization may be presumed to be v 

* . *free , from 

j 

organizational impairments to independence from the audited entity to report 

externally, if the e&&+&-audit organization is 

a. assigned to a level of government tither than the one to which the audited 

entity is I assigned (federal, state, or local), for example, a federal 

auditor auditing a state government program, w 

b. assigned to a different branch of government within the same level of 

government $e+~&& as the audited entity, for example, a legislative auditor 

* . auditing an executive branch program w 

, 

. . . 

m , or 
c. assigned to the same level of government as the audited entity but a different 

entity within that level, for example, an executive branch auditor auditing a 

different executive branch agency’s program. 

3.24 Second, a government audit,organization may also be presumed to be w 

, 

. . @free from ‘organizational 

impairments for external reporting if the audit organization’s head k-meets any of 

the following criteria: 

1: 

a. is directly elected by voters of -the& jurisdiction being I 

I 

audited, ;< 

~ I 

b. is elected or appbitited by a legislative body C\C 

pm subject to removal by a legislative body, and 

reports the results of audits to and is= accountable to a legislative body, 

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c. is appointed by m someone other than a legislative body, 

B , so long as the appointment is confirmed by a legislative 

body and removal from the position is subject to oversight or approval by a 

legislative body, I5 and reports the results of audits to and -is accountable 

‘5Legisliztive bodies may exercise their confirmation powers through a variety of means as long as they 

are involved in the approval of the individual to head the audit office. This involvement can be 

demonstrated by approving the individual after the appointment or by initially selecting or nominating 

an individual or individuals for appointment by the appropriate authority. 

15 

1 
to a legislative body < ‘9 

or .._.I 

d. is appointed by, accountable to, reports to, and can only be removed by a 

statutorily created governing body, the majority of whose members.are / 

independently elected or appointed and come from outside the 

organization being audited. , i , 

’ 

3.25 In addition to the presumptive criteria in paragraphs 3.23 and 3.24, GAGAS 

recognize that there may, be other organizational structures under which a : 

government audit organization could be considered to be free from organizational 

impairments, and thereby be considered organizationally independent to report 

externally. These other structures should provide sufficient safeguards to prevent 

the audited entity from interfering with the audit organization’s, ability to perform 

the work and report the results impartially. For the audit organization to be 

considered free porn organizational impairments to report externally under a 

structure different from the ones listed in paragraphs 3.23 and 3.24, the audit 

organization should have all of the following safeguards: 

a. statutory protections thatprevent the abolishment bf the audit organization by 

the audited entity, 
b., statutoryrequirements that if the head of the audit organization is removed 

from office, the head ,of the agency should report this fact and the reasons for 

i 

the removal to the.legislative body, !: 

c. statutory protections thatprevent the audited entity from interfering with the 

initiation, scope, timing, and completion of any audit, ” ’ 

: I 

d. statutory protections that prevent the audited entity from interfering with the 

i 

reporting on any audit, including the findings, conclusions, and 

recommendations, or the manner, means, or timing of the audit 

organization’s reports, 

e. statutory requirements that the audit organization report to a legislative body 1 

i 

or other independent go.verning body on a recurring basis, 

f statutory protections that give the audit organization sole authority over the 

selection, retention, and dismissal of its staff, and 

g. statutory access to records and documents that relate to the agency, program, 

or function being audited.16 

%tatutory authority to issue a supoena to obtain the needed records is one way to meet the requirement 

for access to records. 

17 
3.26 If the head ofthe audit organization concludes that the organization meets all the 

safeguards listed in paragraph 3.25, the audit organization should,be considered 

free from organizational impairments to independence when reporting the results 

of its audits externally to thirdparties. The audit organization should document 

the statutory provisions in place that allow it to meet these safeguards. Those 

provisions should be reviewed during the external quality assurance review to 

ensure that all the necessary safeguards have been met. 4 

.; I I , (.’ I 

Organizational Impairment Considerations ). : 1 

When Reporting Internallv to Management, j. 1 

3.27 Certain federal, state, or local government audit organizations, or artaudit 

organizations within other government entities, such as a: public colleges, 

universityies, or hospitalsj employ auditors to work for management of the audited 

entities. These auditors may be subject to administrative direction from persons 

involved in the government management process: Such audit organizations are 

internal audit organizations. 

. e A government 

internal audit organization can be presumed to be pee porn organizational 

impairments to independence when reporting internally to management if the head 

of the audit organization meets all of the following criteria: 

18 
a. is accountable to the head or deputy head of the government entity, 

b. is required to report the results of the audit organization’s work to the head 

or deputy head of the government entity, and 

c. is, located organizationally outside the staff or line management function of 

the unit under audit. , : 

3.28 If the conditions of paragraph 3.27 are met, the audit organization should be 

considered free of organizational impairments to independence to audit internally 

and report objectively to the entity’s management. Further distribution of reports 

outside the ,organization ,should only be made in accordance with applicable law, 

rule, regulation, or policy. In these situations, the fact that.the auditors are 

auditing in their employing organizations should be cbarly reflected in the 

auditors’ reports. / 

3.29 Auditors slx&&&o need to be sufficiently removed from political pressures to 

ensure that they can conduct their audits objectively and can report their findings, 

opinions, and conclusions objectively without fear of political repercussions. 

Whenever feasible, auditors within internal audit organizations should be under a 

personnel system in which compensation, training, job tenure, and advancement are 

based on merit. 

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3.30 The audit organizationrs independence is enhanced when it also reports regularly to 

the entity’s independent audit committee and/or the appropriate government 

oversight body. 

231 Tf -r.“l 11 

* 3.31When 7 internal audit 

organizations that.are free of organizational impairments to independence perform 

eendaet audits external to the government entitges to which they are directly 

assigned, such as auditing contractors or outside party agreements, and no 

personal or external impairments exist, they may be considered independent of the 

audited entityies and free to report objectively to the heads or deputy heads of the 

government entity& to which they are assigned and to parties outside the 

organizations in accordance with applicable law, rule, regulation, or policy. 

3.32 The audit organization should document the conditions in place that allow it to be 

i 

considered free,of organizational impairments to independence to report 

internally. Those conditions, should bereviewed during the external quality 

assurance review to ensure,that all the necessary safeguards have been met. 

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