ASB Update as of September 2007
Douglas F. Prawitt, Brigham Young University
Academic Member of the AICPA Auditing Standards Board
The ASB continues to move forward on a number of important projects. This update addresses the progress of three ASB initiatives that are likely to be of particular interest to the Auditing Section: 1) the progress of the ASB Clarity Project, including the possible elimination of the 10 GAAS; 2) the recently approved Statement on Quality Control Standards (SQCS) No. 7; and 3) an announcement of the proposals selected to receive funding from the ASB/IAASB/AAA Auditors' Report Research Initiative. For more details on the ASB's current technical projects, please see the AICPA's Web site.
ASB Clarity Project
During its August 2007 meeting, the ASB discussed comments received about its discussion paper titled "Improving the Clarity of ASB Standards." After considering the comments, the ASB approved a project that will address concerns regarding the clarity, length, and complexity of standards issued by the ASB. The changes that will be introduced include the following:
- Separation of the paragraphs that contain requirements from those that contain application material to allow for easy identification
- Insertion of an outcome-based objective drafted in terms of what the auditor is attempting to achieve in applying each standard
- Addition of a section listing the definitions of new words and expressions used
- Inclusion of sections that contain special consideration for small, less complex entities and for governmental entities
The Board will immediately implement these clarity conventions when developing new standards; the process of changing existing standards is expected to take two to three years. To further the harmonization of the ASB's standards with international auditing standards, as the current standards are converted to the new format the ASB will consider whether other changes should be made to remove any unnecessary differences.
I believe one aspect of the clarity project will be of special interest to the Auditing Section. The ASB clarity task force is considering whether the 10 GAAS (consisting of three general standards, three fieldwork standards, and four reporting standards) will continue to play a role in the revised, "clarified" set of standards. It is my view that, even though auditors rarely reference the 10 GAAS directly, the taxonomy that those statements embody represents an important shared, foundational understanding of the greater body of auditing standards and how they are organized. While I do not believe the 10 GAAS should be seen as "sacred" or untouchable, I do believe that they represent an important and helpful conceptual foundation both for those practicing auditing and perhaps especially for those initially attempting to learn the basics of the discipline. The criticism that the four reporting standards seem to be articulated at more detailed level relative to the general and fieldwork standards has some validity, and I am supportive of an effort to address this issue, perhaps by reducing the number of reporting standards to one or two more general statements. But I believe that the GAAS (whether seven or eight or ten) should be preserved as a foundation into which each individual SAS objective (see above) ties. I urge you to make your voice heard on this issue.
Statement (SQCS) No. 7
The ASB has issued Statement on Quality Control Standards (SQCS) No. 7, A Firm's System of Quality Control, which replaces all previously issued SQCSs. The new SQCS requires each CPA firm to establish a quality control system. The system should provide the firm with reasonable assurance that its accounting and auditing practice as well as its individual personnel comply with professional standards and applicable regulatory requirements and that reports issued by the firms are appropriate in the circumstances. The SQCS requires a firm's system of quality control to address each of the following elements of quality control:
- Leadership responsibilities related to quality within the firm ("tone at the top")
- Relevant ethical requirements
- Acceptance and continuance of client relationships and specific engagements
- Human resources (formerly personnel management)
- Engagement performance
Under the new standard, firms are required to document quality control policies and procedures and communicate them to their personnel. While the new SQCS preserves many of the concepts found in the standards it replaces, it introduces a number of important changes. In the fall, the ASB will issue a Practice Aid to help practitioners in implementing SQCS No. 7. This aid will be called Establishing and Maintaining a System of Quality Control for a CPA Firm's Accounting and Auditing Practice.
ASB/IAASB/AAA Research Initiative
As communicated in previous updates, the ASB/IAASB/AAA Research Initiative was launched to investigate users' perceptions of the auditor's report and to explore possible changes to the report to enhance clarity. The ASB is excited to announce that funding was obtained for all four proposals that made the "finalist list." The proposals that have been selected and funded are:
- "User, Auditor, and Preparer Perceptions of Messages, (Intended or Otherwise) in the Standard Audit Report," Stephen K. Asare and Arnold Wright.
- "International Financial Statement Users' Perceptions of IAASB's ISA 700 Audit Report in Germany and The Netherlands," Christiane Strohm and Anna Nõteberg.
- "User Perception Regarding the Financial Statement Audit and the Unqualified Auditors' Report—A Two-Phase Research Study," Theodore J. Mock and Jerry L. Turner, Principal Investigators, with Co-investigators Charles D. Bailey, Paul J. Coram, and Glen L. Gray.
- "Financial Statement Users' Perceptions Regarding Auditors' Responsibilities when Conducting a Financial Statement Audit and The Message Conveyed in an Unqualified Audit Report (Based on ISA 700 [Revised])," Brenda Porter, Rachel Baskerville, Ciarán Ó hÓgartaigh, Margaret Ó hÓgartaigh.
On behalf of the ASB, I thank and congratulate each member of the teams listed above. The level of interest in this initiative by standard setters, both domestic and international, is very high—I believe these projects have the potential to significantly influence standard setting relative to auditor reports for years to come. An AICPA press release concerning the selection and funding of these research projects will be forthcoming once contract details for all four projects have been finalized.