The University of Tennessee, Knoxville

Tennessee County Municipal Advisory Service

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Audit Standards

Reference Number: MTAS-658
Tennessee Code Annotated
Reviewed Date: October 15, 2015
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State law requires that municipalities be audited. The financial statement audit must be performed in accordance with generally accepted government auditing standards also known as the Yellow Book.* What this means is that auditors must follow statements on auditing standards (SAS) issued by the American Institute of Certified Public Accountants (AICPA) and additionally must 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 some major corporate frauds and failures. As a result the industry has strengthened auditing requirements related to internal controls and communications of audit deficiencies.

*About Government Auditing Standards

Government Auditing Standards (the "Yellow Book") contains standards for audits of government organizations, programs, activities, and 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.