ASB Update as of April 30, 2006
Douglas F. Prawitt, Brigham Young University
Academic Member of the AICPA Auditing Standards Board
The Auditing Standards Board is moving ahead with several important projects and continues its efforts to improve auditing standards and to conform with IAASB standards to the extent possible. Several projects are aimed at minimizing differences in conceptual foundation and terminology between auditing standards for non-issuers and issuers. I list a few items of particular note below.
The ASB has issued an Exposure Draft (ED) titled The Auditor's Communication with Those Charged with Governance, which will replace SAS 61, Communication with Audit Committees. The proposed SAS broadens the applicability of SAS 61 to audits of financial statements of all non-issuers and establishes a requirement for the auditor to communicate with those charged with governance certain significant matters related to the audit. It 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. The exposure draft includes a requirement that the auditor communicate to those charged with governance events or conditions that cause an auditor to conclude that there is substantial doubt about the entity's ability to continue as a going concern, as well as management's plans for addressing such events or conditions. The ED uses the term those charged with governance to refer to the person(s) with responsibility for overseeing the strategic direction of the entity, and the entity's financial reporting and disclosure process. The comment period for this exposure draft ends on May 31, 2006.
By the time this newsletter is available, the Board will have voted on the proposed SAS No. 112, titled Communicating Internal Control Related Matters Identified in an Audit. This standard will supersede SAS No. 60, Communication of Internal Control Related Matters Noted in an Audit. The proposed 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. Finally, the proposed SAS provides guidance to the auditor in evaluating deviations in the design or operation of controls and whether they constitute control deficiencies, as well as the severity of control deficiencies, based on their nature, likelihood, and magnitude.
A major part of the ASB's focus over the next several months will be on the exposure draft of a proposed SSAE titled Reporting on an Entity's Internal Control over Financial Reporting. The ED proposes to revise existing standards regarding attestation engagements that involve reporting to third parties about a client's internal control. The proposed revisions reflect concepts and terminology from PCAOB Auditing Standard No. 2. The proposed SSAE 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. The proposed SSAE requires a scope of work similar to that which would result from the application of PCAOB Auditing Standard No. 2 when an auditor is engaged to examine the design and operating effectiveness of internal control over financial reporting. The proposed SSAE is anticipated to be especially useful for regulated entities, such as financial institutions, insurance companies, and governmental entities. The comment period for this exposure draft ends on May 19, 2006.
The board also has agenda items relating to a number of other topics, including related parties, quality control, accounting estimates, and management representations, among others. A complete list can be found on the AICPA Web site.
As mentioned in the prior newsletter, ASB is interested in working with the Section to encourage research relevant to the Board's deliberations on audit reporting issues. Stay tuned for further announcements and a forthcoming request for proposals.
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