Auditing a government: opinion units, the Yellow Book and the link to Single Audit

• Identify the opinion units in a government's basic financial statements
• Set and apply materiality separately for each opinion unit
• Apply the GAGAS reporting requirements for internal control and compliance
• Determine whether the audit must also meet Single Audit requirements

Opinion units

A government's basic financial statements are not one set of numbers. AICPA guidance for state and local government audits treats each of these as a separate opinion unit:

• governmental activities;
• business-type activities;
• aggregate discretely presented component units;
• each major governmental fund and each major enterprise fund; and
• aggregate remaining fund information (nonmajor funds, internal service funds and fiduciary funds together).

The auditor plans, sets materiality, performs procedures and forms an opinion for each opinion unit. A misstatement immaterial to governmental activities can be material to a small major fund. The report can be unmodified on most units and modified on one. Because major funds change from year to year, the opinion units do too, so the major fund test (lesson 2) is a planning step, not a reporting afterthought.

Government Auditing Standards (the Yellow Book)

Many governments must be audited under generally accepted government auditing standards (GAGAS), issued by the Government Accountability Office, because of state law, grant agreements or the Single Audit Act. The 2024 revision is effective for financial audits, attestation engagements and reviews of financial statements for periods beginning on or after December 15, 2025, with early implementation permitted. Its main change replaces the quality control chapter with a quality management chapter.

GAGAS incorporates the AICPA audit standards for financial audits and adds requirements. Those that change the work and the report (paragraph numbers are from the 2024 revision; use the 2018 numbering on engagements still under that revision):

• Statement of compliance: when the auditor complies with all applicable GAGAS requirements, the report says the audit was conducted in accordance with GAGAS (paragraph 6.36). It need not also cite the AICPA standards (6.37).
• Report on internal control and compliance: the auditor reports on internal control over financial reporting and on compliance with provisions of laws, regulations, contracts and grant agreements, whether or not deficiencies or noncompliance were found (6.40). Significant deficiencies and material weaknesses are reported as findings (6.41). Material noncompliance and material fraud identified or suspected are included (6.42). The report describes the scope of testing and states whether the tests supported opinions on internal control and compliance (6.43). If issued separately, the opinion report refers to it (6.44).
• Less than material matters: noncompliance or fraud that is less than material but warrants the attention of those charged with governance is communicated in writing (6.45).
• Findings are developed with their elements (criteria, condition, cause and effect) to the extent relevant.
• Competence: auditors who plan, direct, perform or report on GAGAS engagements complete at least 80 hours of CPE every two years, including 24 hours directly related to the government environment, government auditing or the specific environment in which the audited entity operates (4.16).
• Peer review: an audit organization not already subject to peer review obtains an external peer review at least once every three years (5.179).
• Independence: GAGAS has its own conceptual framework and rules on nonaudit services, which apply on top of the AICPA rules.

The link to Single Audit

When a non-federal entity expends federal awards at or above the threshold in 2 CFR 200.501, it must have a Single Audit. For fiscal years beginning on or after October 1, 2024, the threshold is $1,000,000. A Single Audit includes the GAGAS financial statement audit plus a compliance audit of major programs under the Uniform Guidance, with additional reports and the schedule of expenditures of federal awards. The Single Audit track picks up from here, and the audit type comparison sets the three side by side.

Planning checklist

1. List the opinion units and set materiality for each.
2. Confirm whether GAGAS applies (law, contract, grant) and which revision.
3. Determine federal expenditures and whether the Single Audit threshold is met.
4. Check that every team member meets the GAGAS CPE requirement and that independence, including nonaudit services, is documented.
5. Plan the GAGAS report on internal control and compliance alongside the opinion.

Planning the Lakeview City audit for fiscal 2026