In some me Yellow Book audits, you need to apply safeguards to lessen threats to independence. This article provides you with guidance about those safeguards.
When I was a kid living in Donalsonville, Georgia, my mother would drive into our open garage, leave the keys in the ignition (where they remained for the evening), and then would walk into our home (which had not been locked all day).
Over time, I noticed that she left the keys in the car less and less, and we began to lock the doors of our home. At one point we even bought deadlocks.
It seems our neighbors were, from time to time, having small thefts, and one even had a burglar in the home as they returned one afternoon.
My parents were responding to risks. The greater the thefts and burglaries, the greater the safeguards.
Whenever an external auditor performs nonattest services (e.g., preparation of financial statements), then the auditor should consider whether the nonattest service adversely affects his independence.
The Government Auditing Standards (known as the Yellow Book) requires that safeguards be applied whenever independence threats are significant – but only if they are significant – in order to eliminate or reduce such threats to an acceptable level.
Examples of safeguards that may eliminate or reduce significant threats to an acceptable level include the following:
Not all safeguards listed would be appropriate for all significant threats identified and, often, may require combinations of more than one safeguard. When determining the type and number of safeguards to be applied, the auditor should consider the significance of the threats, both individually and in the aggregate.
Some safeguards have a higher level of mitigation of threats than others. Also safeguards that involve personnel who are independent of the audit process are generally more effective than those who are not independent.
Determining which safeguards to apply involves professional judgment and is dependent on the facts and circumstances of each specific situation.
Finally remember that safeguards cannot be used to ameliorate risk related to prohibited services (e.g., the external audit firm signs checks for the client); if the external auditor performs prohibited services, then safeguards cannot remedy the lack of independence. Examples of prohibited services follow:
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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