This engagement is anonymized to protect client confidentiality. Clarity Tax & CPAs is a PCAOB-registered, peer-reviewed firm.
Client Snapshot
- Industry
- Professional services / government contracting
- Size
- Roughly $6.8M in annual revenue; primarily federal contract work
- Location
- Mid-Atlantic region (anonymized)
- Engagement type
- Government Auditing Standards (Yellow Book / GAGAS) financial audit
The Challenge
A professional services firm providing IT staffing to federal civilian agencies was required by its prime contractor to produce a GAGAS-compliant audit as a condition of contract renewal. The firm had been using a small regional CPA for annual compilations and had no audit history. Its controller had never worked through a Yellow Book engagement and was unaware that GAGAS adds requirements beyond GAAS, including independence standards that go beyond the AICPA standards and mandatory continuing professional education for the audit team.
Complicating matters, the firm had taken a forgivable PPP loan that had been partially forgiven, and the controller had recorded the forgiveness as miscellaneous income rather than as a contribution, creating a potential restatement issue. The prime contractor's deadline for audit delivery was eight weeks out.
What We Did
- Confirmed GAGAS independence compliance for the engagement under the Yellow Book conceptual framework, documenting the threats and safeguards analysis in the working papers.
- Corrected the PPP loan accounting: reclassified the forgiven amount from other income to contribution revenue in accordance with ASC 958-605 (applying the conditions-met model) and issued a prior-period adjustment note in the financial statements.
- Evaluated internal controls over financial reporting at a level consistent with GAGAS, including the expanded reporting on internal control deficiencies and compliance with applicable laws and regulations.
- Issued an unmodified GAGAS opinion on the restated financial statements, along with a separate report on internal control and compliance. No material weaknesses were identified; two control observations were communicated in the management letter.
- Delivered the full audit package, including all supplementary schedules required by the prime, five days ahead of the contractor deadline.
The Outcome
The firm retained its prime contract and was awarded a follow-on task order six weeks after audit delivery. The PPP restatement, proactively disclosed and properly documented, was accepted without objection by the prime contractor's compliance team. The client has since engaged Clarity for annual Yellow Book audits and has qualified for two additional federal contracts that required GAGAS-audited financials.
Learn more about our Yellow Book audit services, or see how to choose between an audit, review, and compilation.