ASB Update as of September 2008
Doug Prawitt, Brigham Young University
Member of the AICPA Auditing Standards Board
This is my final update as a member of the Auditing Standards Board. Professor Mark Taylor of Creighton University will take my place as the academic board member as I complete my three-year term at the end of October. This has been a truly challenging and fulfilling experience, full of opportunities to network, learn, and grow, and to contribute back to the profession from which we all benefit so greatly as academics. I must say that I have been deeply impressed by the intelligence, integrity, and dedication to the public trust of my colleagues on the board. I congratulate Mark on his appointment, and I encourage others who may be offered the chance to serve on the board in the future to seriously consider the opportunity.
The ASB continues to move forward with an exceptionally ambitious agenda, and has scheduled extra meetings to deal with the demands of the ongoing “clarity project,” as well as with a number of other important projects at various stages of development. In addition to providing an overview of some of these projects, in this update I report on some developments that I think will be of special interest to Auditing Section members: the board’s proposed new preface to the body of auditing standards, titled Principles Governing the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards, and the proposed SAS, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards.
I would urge you to read these important proposed pronouncements and share your views directly with the ASB through comment letters or by contacting a member of the Auditing Section’s Auditing Standards Committee.
Clarity Task Force Projects
The clarity task force has aimed to clarify the SASs by, among other things, establishing an overall objective for each standard, separating requirements from application guidance, including definitions of difficult words in each standard, converging the standards with those issued by the IAASB, and enhancing the formatting to make the standards more readable. As part of this project, the clarity task force has created a proposed preface to the Codification of Statements on Auditing Standards, Principles Governing an Audit. I call particular attention to the principles outlined in this proposed preface (discussed below), because they will substantially modify the original 10 Auditing Standards we have all “grown up with.” The task force has also drafted a proposed SAS, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards. The ASB has voted both of these important documents out for exposure. While the implementation date of the proposed preface and SAS is not yet firmly established, the ASB estimates that it will be effective for financial statement audits beginning on or after December 15, 2010.
The Preface
The proposed preface contains the new Principles Governing an Audit Conducted Under Generally Accepted Auditing Standards, which will replace the original 10 Generally Accepted Auditing Standards. The original 10 standards are not up-to-date with the most recent changes in auditing standards (e.g., the risk assessment standards), nor are they of a consistent scope. For example, the six general and field work standards are broad in their application, whereas the reporting standards are much more specific. Furthermore, under the clarity project guidelines, each standard will include a statement of the broad, overall objectives of the standard. These objectives are meant to bridge the SAS requirements with the overall objectives of the audit, as laid out in the proposed SAS mentioned above (and discussed further below). Taken together, these statements of objectives are intended to serve the same function as the original 10 standards. However, in the context of the overall objective of the audit and the statement of objective for each SAS, the original 10 standards will be both partially incomplete and partially redundant. Thus, the proposed SAS does not contain the original 10 standards.
In view of the continuing need in the legal and academic environments for a clear, concise overall explanation of what an audit is, the ASB developed its proposed Principles Governing the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards as a preface to the Codification of Statements on Auditing Standards. The principles laid out in this proposed preface include much of what was in the original 10 standards, but more consistently and comprehensively cover the purpose of an audit, the responsibilities of the auditor, the procedures for properly performing an audit, and the process of reporting audit findings.
Proposed “Overall Objectives” SAS
The proposed SAS, Overall Objectives Of The Independent Auditor And The Conduct Of An Audit In Accordance With Generally Accepted Auditing Standards, would supersede various sections of SAS No. 1, Codification of Auditing Standards and Procedure; SAS 95, Generally Accepted Auditing Standards; and SAS 102, Defining Professional Responsibilities in Statements on Auditing Standards. The SAS is based on the proposed ISA 200 (Redrafted and revised), Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, in line with the ASB’s objective of convergence with international standards. The proposed SAS is intended to give auditors a general view of their responsibilities when conducting audits of financial statements in accordance with GAAS. The statement also discusses the scope and authority of the generally accepted auditing standards as well as the auditor’s responsibility to comply with those standards in all audits. The proposed SAS was voted out for exposure prior to the board’s October meeting.
Proposed SAS 114 (Redrafted)
Proposed SAS 114 (Redrafted) requires auditors to communicate the risks, scope and timing of the audit with those charged with governance. The statement uses ISA 260 (Revised and Redrafted), The Auditor’s Communication with Those Charged with Governance, as a base in order to clarify and align the standard with the IAASB. The exposure period for proposed SAS 114 lapsed June 30 of this year, and the standard has been balloted for issuance as a final standard.
Internal Control
The ASB has also balloted for issuance final auditing and attestation standards relating to internal control. The proposed SAS will align the definitions of control deficiencies in AU section 325, Communicating Internal Control Related Matters Identified in an Audit, with those in PCAOB’s AS No. 5. The SSAE, An Examination of an Entity’s Internal Control Over Financial Reporting That Is Integrated With an Audit of Its Financial Statements, will closely align AT 501 with AS No. 5 and will limit its scope to integrated audits of internal controls and financial statements.
Revision of AU 722
This SAS is designed to amend AU section 722, Interim Financial Information (AICPA, Professional Standards, vol. 1) because currently this section doesn’t apply to the review of nonpublic entities. The SAS extends AU 722 to reviews of interim financial statements made by nonissuers with securities traded under SEC Rule 144A or other private equity exchanges. The amendment will also eliminate the guidance on the review of interim financial statements of issuers, as such guidance is now under the jurisdiction of the PCAOB. The proposed amendment was issued by the ASB as an exposure draft, with the comment period ending on November 3, 2008. The amendment would be effective for the interim periods starting December 15, 2008.
Service Organizations
The board has worked diligently to align the service organization standards with the International Auditing and Assurance Standard’s Board’s ISA 402, Audit Considerations Relating to an Entity Using a Third Party Service Organization. While the current AU Section 324, Service Organizations, includes guidance for both user and service auditors, the board has separated the guidance into a proposed SSAE that would give guidance for auditors providing reports on service organizations and a SAS that would contain guidance for user auditors. In its July meeting, the board voted both the SAS and the SSAE out for exposure.
Other Key Projects Not Yet Ready for Exposure
The ASB is also in the process of considering a proposed SAS on fraud that would revise SAS No. 99, Consideration of Fraud in a Financial Statement Audit (AICPA, Professional Standards, vol. 1, AU sec. 316). The revisions would align the SAS with ISA 240 (Redrafted), The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements.
Finally, the ASB is working on a number of other projects at various stages of development dealing with such issues as the audit risk standards, financial statements that are prepared for use in other countries, supplementary information, laws and regulations, and the auditor’s report. Watch for future details as these proposals develop and mature. As always, you can find more specific information on the AICPA’s website.
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