ASB Update as of
September 15, 2001
Ray Whittington, DePaul University
Academic Member of the Auditing Standards Board
The majority of the
ASBs effort is still being devoted to the significant revisions to the
standards of fieldwork arising out of the Report of the Panel on Audit
Effectiveness. While the new fraud standard will likely be exposed near the end
of this year, the others have proven to be more difficult and are not projected
to be exposed until next summer. Therefore, the ASB continues to be interested
in any research implications related to the audit risk model and the linkage of
risk to audit procedures. In this update I will focus on two other projects,
one undertaken to revise SAS No. 71, Interim Financial Information, and the
other undertaken to develop guidance for reporting on nonfinancial information
that accompanies financial statements. Please send any questions, comments, or
suggestions to firstname.lastname@example.org.
Revision of SAS No.
The revision of SAS No. 71 is in response to the new requirement for timely
performance of interim reviews of public companies, the recommendations of the
Panel on Audit Effectiveness, and the issuance of Practice Alert 2000-4,
Quarterly Review Procedures for Public Companies, by the
Professional Issues Task Force of the SEC Practice Section.
With respect to interim
reviews of public companies, the Report of the Panel on Audit Effectiveness
included the following recommendations to the ASB:
- Include in its standards specific
guidance for the application of procedures in interim periods using a
- Provide criteria for the areas that
should be addressed in reviews of interim financial information. Such criteria
might include, for example, areas involving a high degree of subjectivity,
areas involving complex accounting standards, related party transactions and
areas where controls are particularly susceptible to being overridden;
- Provide guidance on how procedures
employed in interim periods that address the potential for fraud in financial
reporting also may be useful as continuous auditing techniques to
improve full-year audits.
While the deliberations
of this project are ongoing, the ASB has made several conclusions regarding
likely changes in SAS No. 71. Currently, SAS No. 71 prescribes a procedural
approach to the performance of interim reviews. The standard indicates that
inquiry and analytical procedures provide a basis for the limited assurance in
the report. While retaining the primary reliance on inquiry and analytical
procedures, the revised standard will set forth a more risk-based approach, in
which the accountant uses his or her knowledge of the clients business
risk to design the procedures. In addition, substantially all of the best
practices recommendations from Practice Alert 2000-4 will be incorporated into
the revised standard. A new appendix will describe example analytical
procedures and unusual or complex transactions for the accountant to consider
in performing a review. It is also likely that a few required procedures will
be added to the revision of SAS No. 71 to address the risk of management
override of internal control and related fraudulent misstatements of interim
There are several open
questions regarding this project that are also being considered by the ASB,
- When performing a review, should the
accountant determine a materiality level for the engagement?
- Should the accountant specifically
make an assessment of the risk of fraud in performing a review?
- Should the requirements in SAS No.
59 regarding the consideration of disclosure of information regarding going
concern be expanded to engagements to review interim financial information?
Any research that would
help in providing guidance in these areas, especially with respect to the
auditors judgment about the level of effort required to achieve moderate
assurance, would be useful.
Accounting standards setters are increasingly requiring the presentation of
various types of nonfinancial information. A major example is the information
about stewardship land and heritage assets required for federal government
entities by the Federal Accounting Standards Advisory Board (FASAB). In
addition, many entities are voluntarily disclosing nonfinancial information.
Accordingly, the ASB is considering how auditors should report on nonfinancial
information that is not a product of the entitys financial reporting
system, when such information is included in or with the entitys
financial statements. Beyond the issue of whether there are suitable criteria
to judge the fairness of the information, there are significant issues with
respect to communication to the users. Currently, auditing standards set forth
different responsibilities for nonfinancial information depending on whether it
is required supplementary information, and whether it is in a
client prepared or an auditor submitted document. If auditor is engaged to
examine the information, he or she must look for guidance in the Attestation
The ASB will attempt to
make the requirements with respect to this information more consistent and
provide additional guidance for the auditor with regard to his or her
responsibilities. In addition, a framework will be developed to deal with
accounting standard setters regarding the auditability of proposed nonfinancial
presentations. The issues regarding auditor involvement with nonfinancial
information will likely be on the ASBs long-term agenda. Therefore, I
would encourage any research that could help in developing a conceptual
framework for the communication of auditor responsibilities for nonfinancial
information that is included in or with financial statements, as well as
research on the attestation to such information.
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