We pledge allegiance to criteria, condition, cause, and effect (consequences) and…recommendations. We regard these as the logical foundation for every evaluative audit report. And we believe every auditor has to have this logic-path down cold.
Unfortunately, we think the Yellow Book is wrong (or at least misleading) in its definition of “condition.” We hear it being misused regularly. We seek to explain and correct this perilous misapprehension….
Here’s the current Yellow Book definition of “condition”:
4.12. Condition: Condition is a situation that exists. The condition is determined and documented during the audit.
We believe the word “situation” is unfortunate here. Everything auditors determine and document during an evaluative audit is THE SITUATION. It includes
· the issue that led to the audit
· the relevant background information
· the actual finding itself
· all the types of evidence discovered
· and ALL the elements of a finding.
At 4.10, the Yellow Book says, "As part of a GAGAS audit, when auditors identify findings, auditors should plan and perform procedures to develop the elements of a finding that are relevant and necessary to achieve the audit objectives.
However, if CONDITION is supposed to be just one of what the Yellow Book calls the elements of a finding, it can't also be the whole situation, the finding itself.
We routinely hear very experienced and senior auditors use the word "condition" as a synonym for "the finding." So, when asked, "What was the 'condition'?" an auditor might say, "The ABC Program provided information that did not comply with regulations." Or, asked to see if ABC Program published certain reports as required, an auditor might say, "The reports were outdated and inaccurate."
These are statements of findings, not "condition."
We assert that "condition" must be one of the elements of information an auditor uses to arrive at a whole finding. It is not a statement of the finding itself. We would prefer the following definition:
Condition. What IS. Condition is a description of the actual performance or physical state observed by the auditor. The condition, along with the other elements of a finding, is determined and documented during the audit and used to arrive a an overall finding necessary to achieve the audit objective.
Where does this confusion come from?
The Yellow Book uses the word “condition” in different contexts. For instance, it says, “Certain conditions may lead to threats that are so significant that they cannot be eliminated or reduced to an acceptable level through the application of safeguards, resulting in impaired independence.” In this example, the word does apply to the whole situation. It is not being used to describe a single element of an overall finding.
A judge might ask, “What was the condition of the children’s home and home life?” A social worker might say, “The house was not adequately maintained. The children did not have enough to eat. They were not provided with adequate medical care,” etc. But these are “findings.” These statements give conclusions that are the result of evaluation, specifically the result of observing condition (what is) and comparing it against criteria (what must/should be).
What is the problem with using “condition” in a broader sense?
Without a specific statement of the actual condition, it’s impossible to understand what we call the GAP. The GAP is the difference between criteria and condition, as in the following (oversimplified) example:
CRITERIA - CONDITION = THE GAP
In one of the examples above, the auditor stated that records were outdated and inaccurate. That may be the finding. But what’s the GAP? How outdated and inaccurate were they? Without a statement of condition and the criteria against which condition is measured, it’s impossible to know the GAP.
Let’s consider two scenarios:
1. The auditors checked the regulation and found that it required ABC Program to issue an inventory of all vehicles annually by December 31st. When auditors checked the inventories, they found no inventories for the past three years, and only two inventories in the past five years, which were not even performed by ABC Program, as required.
2. Same inventory regulation. When auditors checked the inventories, they found the following:
· 2015—inventory issued two weeks late
· 2014—inventory issued on time
· 2013—inventory issued two days late
· 2012—inventory issued on time
· 2011—inventory issued one month late
Clearly, in both cases, the finding could be ABC Program did not issue inventories in a timely manner as required. However, the two situations are vastly different.
Without “condition,” a specific description of WHAT IS, of actual performance, it’s impossible to understand the GAP, which allows us to better understand how far the entity’s performance missed the required goal.
In the example of the social worker, the Judge could ask the following questions:
· What exactly did the house look like? Was it just messy, or were there rats?
· Did the children go without any food at all? How much did they eat?
· Were they completely ignored when they were sick? Did they get an aspirin and warm soup but no visits to a doctor?
Without a specific statement of the actual conditions, it’s impossible to know how bad the situation is. And, the report will lack balance, omitting what WAS being done. We often find true statements of condition in an agency’s comments, where they explain what they are actually doing. Given the agency's perspective once they state the actual condition, the findings sometimes don’t seem quite so bad.
Be methodical when you consider all the elements of a finding, especially when you consider the “condition.” It’s not the whole situation. It’s what is…what is actually being done. Don’t use “condition” as a synonym for “finding.” And politely correct others when they do. In an evaluative report, condition cannot be the whole finding…that way madness lies.
Do you agree?