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GOVERNMENT AUDITING STANDARDS. A publication of the U.S. General Accounting Of- fice, often known simply as the "Yellow Book," that sets generally accepted government audit- ing standards. INDEPENDENT AUDITOR. An external audi- tor (typically in the contest of a financial state- ment audit). INTERNAL AUDITORS. Auditors who work directly for management, at some level, and are primarily responsible for helping management to fulfill its duties as effectively and efficiently as possible. INTERNAL CONTROL FRAMEWORK. In the context of a financial statement audit, the policies and procedures that management uses to protect assets and ensure the integrity and com- prehensiveness of the data collected by the ac- counting system. LAWYER'S LETTER. A letter obtained by the auditor from a government's legal counsel to cor- roborate management's treatment of pending lit- igation in the financial statements and in the notes to the financial statements. MANAGEMENT LETTER. A letter from the auditor to management describing reportable conditions, including material weaknesses, dis- closed during the financial statement audit. It also may contain recommendations to manage- ment on how to improve operations. MANAGEMENT REPRESENTATION LETTER. A letter obtained by the auditor from management acknowledging management's re- sponsibility for the financial statements and as- serting that the information they contain is complete. MATERIALITY. The quantitative or qualitative characteristic of a potential error in the financial statements that could cause it to have the effect of changing a reader's assessment of the govern- ment's finances. SS AN ELECTED OFFICIAL'S GUIDE C'®1~TTEN~'~' vii Foreword ix Preface xi Introduction AUDITING BASICS What is an audit? What are the different types of audits? Who performs audits? What standards are used to guide the auditor? What is auditor independence? Are there limitations on the types of services that independent auditors can perform for their audit clients without impairing their independence? FINANCIAL STATEMENT AUDITS What is a financial statement audit? How does the independent auditor's responsibility for the financial statements differ from that of management? How do auditors obtain the information they need? What degree of assurance do auditors seek to provide? What is materiality? What is the basis for judging quantitative materiality? What are internal controls? What is the relationship of a government's framework of internal controls to the financial statement audit? What is a reportable condition? What is a material weakness? What is a management representation letter? What is a lawyer's letter? 22 YELLOW BOOK AUDITS What is a Yellow Book audit? How do Yellow Book audits differ from regular financial statement audits? iii