Detecting a finding provides information. Detecting what caused the finding leads to transformation. Under the 2018 Yellow Book, findings may involve:
(1) a deficiency in internal control
(2) noncompliance with provisions of laws, regulations, contracts, or grant agreements; or
(3) instances of fraud.
Regardless of the type of finding identified, the root cause of a finding often stems from one or more underlying internal control deficiencies. This only makes sense as controls are essentially the policies and procedures, designed and implemented by management and those charged with governance, to prevent or detect and correct misstatements or noncompliance.
The 2018 Yellow Book (which is effective for financial audits for periods ending on or after June 30, 2020) contains a new requirement related to considering internal control deficiencies in evaluating identified findings. Auditors will be required to consider internal control deficiencies in their evaluation of identified findings when developing the cause element of the identified findings. Properly identifying internal control deficiencies (i.e., solving what caused the finding) can help in providing the basis for developing meaningful recommendations for corrective actions which can lead to transformation.
Interested in learning more? Sign up for The 2018 Yellow Book Revision.
Charlie Blanton, CPA is the Senior Director of Governmental and Nonprofit Content for Surgent CPE, where he authors Surgent’s government and not-for-profit CPE courses and is a frequent webinar instructor. Charlie has over 25 years of experience in auditing and industry having worked at KPMG, the Texas Society of CPAs, Taylor Publishing, Texas Wesleyan University, and the AICPA.