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2002-7 Independence Standards

2002-7 Independence Standards

October 7, 2002

TO:    CPAs, City, Villages, Townships and Counties

FROM:    Richard L. Baldermann, CPA, CGFM
                 Administrator, Local Audit and Finance Division

Subject:    New GAO Independence Standards versus AICPA Independence Standards

The required audit standards that must be followed to satisfy the requirements of Act 2 PA 1968, as amended, are stated in section 7 of the act.

Sec. 7 (1) The state treasurer shall prescribe minimum auditing procedures and standards and these shall conform as nearly as practicable to generally accepted auditing standards established by the American Institute of Certified Public Accountants.

The required audit standards that must be followed to satisfy the requirements of audits of Federal financial assistance are contained in Government Auditing Standards (Yellow Book) issued by the United States General Accounting Office (GAO). The independence standards in the Yellow Book are currently more restrictive than the AICPA independence standards, particularly as they relate to the provision of audit and non-audit services.

EXAMPLES

A local CPA in a rural area (or any other area) of Michigan provides bookkeeping as well as audit services for nearby township, city or village governments.

  • If the local government does NOT receive federal financial assistance or receives less than the threshold amount requiring a single audit, the CPA may follow the AICPA audit standards and may continue to provide both services. The audit will satisfy the requirements of Act 2 PA 1968, as amended.
  • If the local government receives more than the threshold amount requiring a single audit, the CPA must comply with GAO’s Government Audit Standards. Under the new independence rules, the CPA could no longer provide non audit services as defined by GAO. The CPA and/or local government will have to make a choice as to which of these services the CPA will continue to provide. The remaining services will need to be provided by another CPA firm (audit services) or other vendor (non-audit services).