Generally Accepted Accounting Principles and Governmental Auditing Standards differ and cover different aspects of the financial reporting process. GAAP defines how businesses, both public and private, prepare their financial statements. Governmental Auditing Standards are a series of rules that define how an independent agent is supposed to review a government agency's financial statements and internal processes.
Many businesses and governmental agencies issue financial statements at least once a year. Financial reports provide interested parties information about the issuing entity's financial condition and how it used its assets in the past year. These statements summarize the business's earnings, expenses, assets and liabilities. The three components of financial statements are the balance sheet, income statement and cash flow statement.
An audit is a type of third-party review meant to assure the entity's management and outside concerned parties. An audit may focus on ensuring that the entity's financial records are accurate and complete. Another focus of an audit may be on the entity's internal controls. The internal controls are a set of procedures applied to all of the business's actions. These practices are meant to promote efficiency, prevent fraud and generate accurate financial information.
GAAP contain a series of guidelines that define how American companies are supposed to record their accounting data and present their financial statements. GAAP has been defined by the Financial Accounting Standards Board since 1973. The U.S. Securities and Exchange Commission requires that all American publicly-traded companies prepare their financial statements in accordance with GAAP. The American Institute of Certified Public Accountants requires that all CPAs prepare financial statements in accordance with GAAP. FASB statements are the current authority in GAAP. However, opinions by FASB’s predecessor, the Accounting Principles Board, and the AICPA Accounting Research Bulletins that are not in conflict with FASB statements are authoritative as well.
Government Auditing Standards determine how performance and financial audits of government offices are to be conducted. Also known as “the Yellow Book,” these rules are determined by the Government Accountability Office. In addition to government agencies, organizations that receive federal funding are required to participate in audits that are conducted in accordance with GAS. A GAS audit must be executed with due care by independent auditors. GAS covers audits of financial statements as well as audits of an entity's internal controls.
GAAP vs. GAS
Since GAAP defines financial reporting standards and GAS defines how government entities are audited, you may think that the two frameworks are closely related. However, GAAP does not apply to government entities. The Governmental Accounting Standards Board determines the financial reporting standards for state and local government entities. The Federal Accounting Standards Advisory Board determines the financial reporting standards for federal government agencies.
- Business Dictionary: Financial Statement
- Business Dictionary: Audit
- Business Dictionary: Internal Control
- Accounting for Management: Generally Accepted Accounting Principles (GAAP):
- Financial Accounting Standards Board: Facts About FASB
- Business Dictionary: Government Auditing Standards
- American Institute of CPAs: Audits Performed Under Government Auditing Standards
- US Government Accountability Office: Government Auditing Standards
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