What Is a Yellow Book Audit & When Is It Necessary?

Federal funding comes with responsibilities. For example, organizations that receive government funds must demonstrate proper financial management and compliance through specialized audits. In this article, our team at SSL Associates, Ltd. will take a closer look at one of those audits, the Yellow Book Audit, and its requirements.

What Is a Yellow Book Audit?

A Yellow Book Audit, also known as an audit under Generally Accepted Government Auditing Standards (GAGAS), is an independent assessment of how an organization manages federal funds. These audits evaluate both financial statements and internal controls to ensure compliance with federal regulations and grant agreements.

Types of Audits Defined in the Yellow Book

The Yellow Book provides guidance on how to conduct three different kinds of audits:

• Performance audits look at how well an organization is doing its job and find areas of improvement. This could include things like saving money, making smarter choices, and getting more done.
• Financial audits check if an organization is honest and accurate about its money. An independent expert looks at the organization's finances to ensure everything is reported correctly.
• Attestation engagements check if specific statements made by the organization's leaders are accurate. For example, an attestation engagement might look at whether a company's sustainability report accurately reflects its environmental impact.

Single Audit vs. Yellow Book Audit

While related, Single Audits and Yellow Book Audits serve different purposes. Single Audits are specifically required when organizations spend $750,000 or more in federal funds during their fiscal year. Yellow Book Audits, however, may be needed regardless of spending levels, depending on specific grant agreements or agency requirements.

Who Needs a Yellow Book Audit?

Yellow Book Audit requirements extend beyond government agencies. Organizations that may need a Yellow Book Audit include:

• State and local government entities receiving federal funding
• Nonprofit organizations with government grants
• Private companies participating in government contracts
• Educational institutions with federal programs
• Healthcare organizations receiving government funds

If an organization fails to comply with the Yellow Book Audit requirements, it can result in the loss of grant funding.

What Triggers a Yellow Book Audit?

Here's what can trigger a Yellow Book Audit:

• Regular checkups: Some audits are just part of a regular schedule, required by law.  
• Agency requests: A government agency might ask for an audit to check on a specific program or department.
• Suspicions of wrongdoing: If someone suspects that money is being misused, an audit can be triggered to investigate.

On December 15, 2025, a new rule will take effect. Organizations will need to put a quality management system in place by that date and have it evaluated by December 15, 2026. In other words, they need to have a system in place to ensure quality work and then have someone check to ensure the system is working. This new rule makes Yellow Book Audits even more thorough.

Why Do You Need a Yellow Book Audit?

Yellow Book Audits serve as a cornerstone of government accountability. They help prevent fraud, ensure proper use of taxpayer dollars, and maintain public trust. For organizations receiving federal funding, these audits demonstrate responsible stewardship and compliance with government requirements.

Yellow Book Standards for Audits

The Yellow Book outlines comprehensive standards for conducting high-quality government audits. These standards emphasize:

• Independence and ethical conduct
• Professional judgment
• Quality control and assurance
• Risk assessment procedures
• Documentation requirements
• Reporting standards

How to Choose the Right Auditor for a Yellow Book Audit

Make sure the auditor meets the following requirements:

• Adheres to Generally Accepted Audit Standards in the United States of America
• Has at least 24 hours of continuing education related to government auditing, the government environment, or your specific industry

Choosing the right auditor is an essential decision. Using the above criteria ensures you have a qualified auditor who understands the intricacies of Yellow Book Audits and can provide a reliable and accurate assessment.