ASB Update as of September 30, 2006
Douglas F. Prawitt, Brigham Young University
Academic Member of the AICPA Auditing Standards Board
I’ll begin this update with an item of special interest to members of the Auditing Section. In August 2006 the ASB, together with the International Auditing and Assurance Standards Board and the American Accounting Association, launched a research initiative to gain a better understanding of users’ perceptions of the financial statement audit and the auditor’s report. The ASB has a project underway to revise the standard auditor’s report and is seeking input and insight through research, so this is a unique opportunity to participate in research that could have a direct bearing on the standard-setting process. The first phase of the research initiative is intended to identify misconceptions that users commonly might have regarding an unqualified auditor’s report. A second phase of the initiative will explore ways in which the auditor’s report might be revised to address identified user misconceptions and more clearly communicate the intended message. The ASB is soliciting proposals for research from members of the Auditing Section and others with an interest in participating. Selected proposals will be eligible for funding in the range of $10,000 to $20,000. Please note that the deadline for research proposals has been extended to October 31, 2006. Proposals should be submitted to Sharon Walker, Technical Manager, Audit and Attest Standards, AICPA, 1211 Avenue of the Americas, New York, NY 10036-8775. The Request for Proposals may be downloaded from the AICPA Web site: http://www.aicpa.org/news/Request_for_Research_Proposal.htm
The Board likely soon will vote on the Proposed SAS relating to Communications with Those Charged with Governance, replacing SAS No. 61. The proposed SAS establishes a requirement for the auditor to communicate with those charged with governance certain significant matters related to the audit and identifies specific matters to be communicated, most of which are consistent with the requirements of SAS 61. It also provides guidance on the communication process and, of course, uses the new phrase "those charged with governance," consistent with SAS No. 103.
Since my last update, the ASB issued SAS No. 112, Communicating Internal Control Related Matters Identified in an Audit. This standard supersedes SAS No. 60, Communication of Internal Control Related Matters Noted in an Audit. The new SAS incorporates the definitions of the terms control deficiency and material weakness used in PCAOB Auditing Standard No. 2, and replaces the term reportable condition with the term significant deficiency and its related definition in PCAOB Auditing Standard No. 2. It requires the auditor to communicate, in writing, to management and those charged with governance significant deficiencies and material weaknesses in internal control.
In my last report I indicated that a major part of the ASB’s focus over the next several months would be on the exposure draft of a proposed SSAE titled Reporting on an Entity’s Internal Control over Financial Reporting. The ED, issued in January 2006, proposes to revise existing standards regarding attestation engagements that involve reporting to third parties about a client’s internal control (AT 501) to reflect concepts and terminology from PCAOB Auditing Standard No. 2. However, the PCAOB has since undertaken a project to revise Auditing Standard No. 2, including plans to revisit the definitions of significant deficiency and material weakness. As a result, the ASB decided to defer completion of the AT 501 revision until after the PCAOB has issued its revision of Auditing Standard No. 2. To avoid confusion stemming from differences in terminology, the Board made conforming revisions to AT 501 to incorporate the new terms, definitions, and guidance on identifying and evaluating control deficiencies that were introduced in SAS No. 112. The conforming changes make terminology and definitions consistent between the two standards and also enhance consistency with current PCAOB standards. The following conforming changes have been made to AT 501 to bring it into conformity with corresponding aspects of SAS No. 112:
- Deleting the term "reportable condition" and its definition and replacing the definition of the term "material weakness."
- Introducing the terms "control deficiency" and "significant deficiency" and their related definitions and replacing the guidance on evaluating control deficiencies with the relevant guidance from SAS No. 112.
- Replacing the term "audit committee" with the term "those charged with governance" (defined in SAS No. 103, Audit Documentation) to describe the party to whom the practitioner must communicate significant deficiencies and material weaknesses.
- Identifying areas in which a control deficiency ordinarily is at least a significant deficiency in internal control as well as identifying indicators of a control deficiency that should be regarded as at least a significant deficiency and a strong indicator of a material weakness in internal control.
- Requiring the practitioner to communicate to management and those charged with governance, in writing, significant deficiencies and material weaknesses.
To coincide with SAS No. 112’s effective date, these conforming changes are effective for periods ending on or after December 15, 2006. The conforming changes to AT 501 can be accessed from the following Web site:
http://www.aicpa.org/members/div/auditstd/exec_summary_conform_amend.htm
The board has agenda items relating to a number of other topics, including development of conventions to enhance the clarity of auditing standards, related parties, quality control, and accounting estimates, among others. A complete list can be found on the AICPA Web site. I will cover these items in future updates as the projects mature.
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