ASB Update

Prepared for The Auditor’s Report, Summer 2008

Doug Prawitt, Brigham Young University
Member of the AICPA Auditing Standards Board

In my last update, I provided a list of each of the Auditing Standards Board’s task forces along with a brief summary of what each task force is working on. In this update I focus on three separate issues: 1) the ASB’s revision of AT Section 501 and SAS No. 112;2)the ASB’s update to SAS No. 69; and 3) the progress of the ASB’s Clarity Project.

Before I address these specific issues, however, I would like to briefly address a broader matter that is of central importance to auditors and auditing academics. While every effort is being made by the ASB to minimize divergence between its standards and those of the PCAOB and the IAASB, significant discrepancies persist, and current levels of cooperation and convergence are clearly less than optimal. Auditing Section members should consider whether the current auditing standards-setting structure makes sense. With today’s system, an auditing firm that works with U.S. public companies, U.S. non-registrants, and international clients must stay abreast of three divergent sets of auditing standards. The current system presents auditing educators with serious challenges given time and resource constraints in accounting curricula. These challenges are especially critical in view of the concurrently increasing emphasis on international financial reporting standards. I strongly encourage members to give careful thought to these issues and to make their voices heard.

Internal Control Task Force

The ASB’s AT Section 501, Reporting on an Entity’s Internal Control over Financial Reporting, was initially revised to align with the PCAOB’s Auditing Standard (AS) 2. However, AS 2 was superseded by AS 5 in 2007, and the IAASB has proposed a new ISA regarding the communication of internal control deficiencies as part of a financial statement audit. The ASB’s Internal Control Task Force responded by developing replacements for AT 501 and AU 325. The newly proposed AT 501 aligns closely with AS 5, including aligning the definitions of significant deficiency and material weakness. SAS 112 (AU 325), Communicating Internal Control Related Matters Identified in an Audit, was also initially revised to align closely with AS 2. Accordingly, the ASB’s Internal Control Task Force also developed a revision to AU 325 that will align closely with AS 5 terminology. The ASB voted the proposed revised AT 501 and AU 325 for exposure at its May 2008 meeting.

The proposed effective dates for AT 501 and AU 325 are December 15, 2008 and June 30, 2009, respectively. The effective date for AT 501 was proposed in response to requests from regulators (e.g. the FDIC) that the revision be available for integrated audits of regulated entities (e.g. non-registrant financial institutions) for the year ending December 31, 2008. The effective date for AU 325 is proposed to be later as this change will impact far more auditors of non-public companies; a later effective date will allow more time for firms to train for and apply the revised standard. However, early adoption is encouraged.

Revision to SAS No. 69

During May 2008, the Auditing Standards Board voted to amend SAS No. 69, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles, For Nongovernmental Entities. The ASB’s new SAS (numbering to be determined) will remove the GAAP hierarchy for nongovernmental entities from the auditing literature in view of FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, issued in May 2008. This SFAS appropriately places the GAAP hierarchy in the domain of financial accounting standards.

The ASB’s amendment to SAS No. 69 was initially issued in 2005. However, it was placed on hold when the FASB delayed final issuance of its statement after learning that the PCAOB was undertaking a project relating to the GAAP hierarchy. In January 2008, the PCAOB adopted Auditing Standard No. 6, Evaluating Consistency of Financial Statements (AS 6), which will become effective 60 days after presumed approval by the Securities and Exchange Commission (SEC). AS 6 eliminates the GAAP hierarchy from the PCAOB’s interim auditing standards. The SAS will be issued when the SEC approves AS 6 to ensure that the effective date matches that of AS No. 6 and FASB Statement No. 162.

The Clarity Project

As indicated in previous ASB Updates, the purpose of the ASB’s Clarity Project is to redraft the entire body of existing AICPA auditing standards to a format that clearly sets forth objectives and relevant definitions, and that clearly delineates requirements and application material. The “news” since my last update is that this project is now moving forward at an accelerated pace. The ASB will hold an additional meeting each year for the next two to three years and has added extra days to currently scheduled meetings to provide time to move ahead expeditiously. It is anticipated that revision of the existing standards into the new clarity format will take two to three years. While the primary purpose of the clarity project is to enhance the understandability of the standards, my personal view is that significant substantive changes will be made in the process. My experience is that once the proverbial “door” is open on a standard, it is difficult to limit the changes.

The pace of change in the auditing standards world likely has never been more rapid—it is important for Auditing Section members to stay tuned and to exert influence where possible!

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