ASB Update as of September 15, 2001

Ray Whittington, DePaul University
Academic Member of the Auditing Standards Board

The majority of the ASB’s 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 rwhittin@wppost.depaul.edu.

Revision of SAS No. 71
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:

1. Include in its standards specific guidance for the application of procedures in interim periods using a forensic-type approach;
2. 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; and
3. 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 client’s 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 financial information.

There are several open questions regarding this project that are also being considered by the ASB, including:

• 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 auditor’s judgment about the level of effort required to achieve moderate assurance, would be useful.

Reporting on Nonfinancial Information
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 entity’s financial reporting system, when such information is included in or with the entity’s 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 Standards.

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 ASB’s 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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