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Audit Standards

Reference Number: MTAS-658
Reviewed Date: 12/01/2022

State law requires municipalities be audited annually. The financial statement audit must be performed in accordance with generally accepted government auditing standards also known as the Yellow Book.* This means that auditors must follow statements on auditing standards (SAS) issued by the American Institute of Certified Public Accountants (AICPA) and additionally comply with government auditing standards issued by the United States Government Accountability Office (GAO). The audit industry has come under scrutiny in recent years due to major corporate frauds and failures. As a result, the industry has strengthened auditing requirements related to internal controls and communications of audit deficiencies.

*AKA Government Auditing Standards

Government Auditing Standards (the "Yellow Book") contains standards for audits of government organizations, programs, activities, functions, and of government assistance received by contractors, nonprofit organizations, and other nongovernment organizations. These standards, often referred to as generally accepted government auditing standards (GAGAS), are to be followed by auditors and audit organizations when required by law, regulation, agreement, contract, or policy. These standards pertain to auditors' professional qualifications, the quality of audit effort, and the characteristics of professional and meaningful audit reports. The Tennessee Division of Local Government Audit requires auditors who contract to perform municipal audits in Tennessee to follow these standards.