Not all audits are created equal. If your organization is preparing for a financial audit, understanding whether it falls under Generally Accepted Accounting Principles (GAAP) or Generally Accepted Government Auditing Standards (GAGAS) is critical. While both aim to ensure financial accuracy, one digs deeper into compliance and internal controls.

Here’s what sets them apart and what you need to be ready for.

1. GAAP Audit (Generally Accepted Accounting Principles)

• Framework: A GAAP audit is conducted in accordance with Generally Accepted Accounting Principles (GAAP), which are the accounting standards followed by private companies, nonprofit organizations, and other entities in the U.S.
  • Note: While GAAP governs accounting, the audit itself is conducted under Generally Accepted Auditing Standards (GAAS).
• Purpose: To provide assurance that the financial statements fairly represent the entity’s financial position and performance.
• Who Performs the Audit: This type of audit is generally performed by independent Certified Public Accountants (CPAs) or audit firms.
• Focus: The auditor examines financial statements (statement of financial position, statement of activities, statement of cash flows, etc.) to ensure compliance with GAAP. A GAAP audit has a limited review of internal controls (unless risk or scope requires more)
• Expected Outcome: An audit opinion on whether the financial statements are free of material misstatements and fairly presented under GAAP.

What to Expect in a GAAP Audit:

In a GAAP audit, you can expect a thorough review of the organization’s financial records and transactions. Auditors will perform detailed procedures to test transactions and evaluate accounting estimates and disclosures. Following this process, the auditor will issue an opinion on the financial statements. This could be unmodified (clean), qualified, adverse, or a disclaimer, depending on the findings.

2. GAGAS Audit (Generally Accepted Government Auditing Standards)

• Framework: A GAGAS audit is performed under the Yellow Book standards, issued by the U.S. Government Accountability Office (GAO). These standards are designed for audits of government entities and organizations receiving federal funding.
• Purpose: GAGAS audits not only evaluate the financial statements but also assess compliance with laws and regulations, internal controls, and the effectiveness of programs.
• Who Performs the Audit: GAGAS audits are typically conducted by independent firms experienced in government and nonprofit audits.
• Focus: These audits go beyond financial reporting and focus on:
  • Financial statements (similar to GAAP).
  • Compliance with grant terms, laws and regulations.
  • Internal controls over financial reporting and program operations.
• Expected Outcome: An opinion on financial statements, along with additional reports on compliance and internal controls. Auditors are required to report any findings of non-compliance or weaknesses in internal controls.

What to Expect in a GAGAS Audit:

In a GAGAS audit, you can expect detailed testing of the organization’s internal controls, and an evaluation of compliance with federal grant requirements. In addition to the standard audit opinion on the financial statements, a separate report will be issued outlining any findings related to non-compliance or weaknesses in internal controls, along with recommendations for improvement. If issues are identified, the audit will also include suggested corrective actions to help the organization strengthen its processes and meet required standards.

FAQ- GAAP vs. GAGAS

1. What is the Yellow Book in auditing?
   The Yellow Book is the common name for GAGAS standards, published by the U.S. Government Accountability Office, guiding audits of entities receiving public funds.
2. Can a nonprofit be required to have a GAGAS audit?
   Yes, if the nonprofit receives federal funding, a GAGAS audit may be mandatory under grant terms or compliance requirements.
3. Is a GAAP audit less rigorous than a GAGAS audit?
   Not necessarily, it’s just different. GAAP audits focus on financial accuracy, while GAGAS audits add layers of compliance and internal control evaluation.
4. How do I know which audit my organization needs?
   Start by reviewing your funding sources. If federal grants are involved, GAGAS may be required. Consulting with your auditor is the best first step.