Auditing Standards Board Update
Fall 2009
Mark H. Taylor
Weatherhead School of Management, Case Western Reserve University
Cleveland, OH
Since the last update, the ASB has had three additional meetings. It has been a very busy summer of standards setting activities. The meetings were held in June (Boston), July (San Diego), and August (Nashville). As noted in previous updates, the meetings run from Monday through Thursday afternoon and are open to the public. The agenda for each of these meetings was ambitious. A highlight of special note to Auditing Section members is that three additional academic research teams presented the results of their research to the ASB. This update summarizes those findings (presented at the June and July meetings). It also summarizes the overall content and outcomes of the June, July, and August meetings. A number of proposed SASs were voted to ballot. Recall that in the ASB update I provided in the Spring 2009 Issue of The Auditor’s Report, I summarized the existing ASB task forces and their objectives. If more information about the existing ASB Task Forces is required, please refer to the ASB update in the Spring 2009 issue. Once again, I encourage members of the section to contribute to the work of the ASB by developing comment letters related to any of the numerous exposure drafts. If you have any questions regarding any of the ASB activities, please contact me at mt@case.edu.
June 2009 (Boston)
Compliance Audits
George Rippey, Chair of the Compliance Auditing Task Force, led the ASB in a discussion of significant comments received during exposure of a proposed SAS entitled Compliance Audits and the Task Force’s revised draft of the proposed SAS. Among other things, the ASB recommended revising definitions of key terms in the proposed SAS, clarifying the auditor’s period of obligation for performing audit procedures, and providing examples of tests of details in a compliance audit. The Task Force agreed to return with revisions at a future ASB meeting.
Engagement Representations
John Fogarty, Chair of the Engagement Representations Task Force, led a discussion of the proposed SASs Terms of Engagements and Written Representations. Highlights from the Terms of Engagements proposed SAS include the ASB requesting the Task Force to include the required and related application material similar to that found in ISA 210, to assess whether to revise requirements for an engagement letter every year (that is, permit “evergreen letters”), and agree that the proposed SAS should include reference to the “inherent limitations of an audit” in the engagement letter. The ASB also requested the Task Force to consider whether proposed SAS Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks contains the requirements regarding Regulatory or Contractual Basis of Accounting—Other Matters Affecting Acceptance and accordingly, whether those paragraphs can be omitted from the proposed SAS. With respect to Written Representations, the ASB requested the Audit Issues Task Force to discuss whether to allow the representation letter to be dated as of the date of the auditor’s report, but physically provided to the auditor after the report date but before the release date. The Task Force agreed to return to a future ASB meeting with revisions.
Service Organizations
Walt Conn, Chair of the Service Organizations Task Force, led the ASB in a discussion of comments on the ED of proposed Statement on Standards for Attestation Engagements (SSAE),Reporting on Controls at a Service Organization, and issues related to a revised draft of the proposed SSAE. The ASB is converging the proposed SSAE with proposed International Standard on Assurance Engagements (ISAE) 3402, Assurance Reports on Controls at a Service Organization. The ASB agreed with the Task Force that the proposed SSAE should not be applicable when reporting on controls other than controls related to financial reporting. The ASB requested the Task Force to revise the proposed SAS to require the service auditor to give substantive thought to the nature and cause of any deviations identified as a result of performing the procedures noted in paragraph 38, and to draft application material stating that the risks and control objectives encompass intentional and unintentional acts that threaten the achievement of the control objectives. The Task Force agreed to return to a future ASB meeting with revisions.
Estimates/Fair Values
Megan Zietsman, Chair of the Accounting Estimates Task Force (the Task Force), led the discussion of a proposed SAS, Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures. The ultimate aim of the discussion was to request the ASB to vote to ballot the proposed SAS for exposure. The draft document was previously discussed at the April and January 2009 meetings. However, after addressing some fairly broad issues associated with AU 332, Auditing Derivatives (rescinding it due to redundancy with other standards, moving portions of it to Audit Guide, Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures, etc.), the ASB requested the Task Force to perform further analysis of AU section 332 to identify those requirements and related guidance that warrant retention in a stand-alone SAS. Among others, the discussion then addressed the following topics: 1. Retrospective Review of Accounting Estimates—the ASB requested the Task Force to add additional application material to explain that the auditor’s procedures in this regard are a matter for professional judgment, and 2. Communications about the entity’s process for formulating sensitive accounting estimates, including fair value estimates—the ASB agreed to make a conforming change to AU 380 to move this requirement and add an application guidance paragraph in this proposed SAS to refer auditors to AU section 380. The ASB voted unanimously to ballot the proposed SAS for exposure.
Auditor’s Reports – 700 Series
Dan Montgomery, Chair of the Auditor’s Report Task Force, led a discussion of proposed SASs: Forming an Opinion and Reporting on Financial Statements. After finalizing a number of changes to the proposed SAS, the ASB unanimously voted to ballot the proposed SAS for exposure. The Chair also led a discussion of Reporting on Compliance With Aspects of Contractual Agreements or Regulatory Requirements Related to Audited Financial Statements. The ASB requested the Task Force to consider a number of changes and to return to the August meeting with a revised proposed SAS.
Auditor’s Reports – Special Reports
Susan Jones, Chair of the Special Reports Task Force, led a discussion of the following proposed SASs: Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks; Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement; and Engagements to Report on Summary Financial Statements.
Special Purpose Frameworks
The ASB reconfirmed its agreement to align the reporting for special purpose financial statements prepared in accordance with a regulatory basis of accounting with the extant requirements. That is, if the financial statements and auditor’s report are intended for general use, a dual-opinion on GAAP and the special purpose framework would be required. Otherwise, a single opinion on the framework would be issued, along with (a) an alert that the regulatory basis is a basis other than GAAP, and (b) a report restriction for use by the specified parties. The ASB also requested the Task Force to consider the alignment of the requirements pertaining to auditor’s reports prescribed by law or regulation that are contained in the proposed SAS, Compliance Audits, and other things.
Single Financial Statements & Elements
The ASB agreed with the Task Force to add a requirement and related guidance to address the auditor’s responsibilities related to interrelated items, and requested the Task Force to (1) clarify the requirement not to “issue” the report on the single financial statement or specific element when the presentation of the single financial statement or of the specific element does not differentiate it sufficiently from the complete set of financial statements, and (2) clarify the auditor’s responsibility to determine materiality in an audit of a single financial statement, and to provide additional guidance with regard to disclosures, and highlight this matter in the Explanatory Memorandum.
Summary Financial Statements
The ASB agreed with the Task Force to allow the auditor’s report on the summary financial statements to be dated later than the auditor’s report on the audited financial statements (provided the auditor’s report was modified to clearly indicate the auditor’s responsibilities for the summary financial statements and for subsequent events), and to align the proposed SAS with International Standards on Auditing and SAS 116, Interim Financial Information, by permitting the audited financial statements to be made “readily available,” in lieu of requiring the audited financial statements to accompany the summary financial statements.
Auditor’s Report Research Task Force
That the ASB, in connection with the IAASB, sponsored four academic research projects has been mentioned in previous updates. The ASB has been anxious to hear the reports of the research teams this summer. As I now Chair the Auditor’s Report Research Task Force, I introduced the second of these teams to present their results to the ASB, Brenda Porter, School of Business and Economics Exeter University, United Kingdom; Ciaran Ó hÓgartaigh, Michael Smurfit Graduate School of Business, UCD, Ireland; and Rachel Baskerville, School of Accounting and Commercial Law, Victoria University, Wellington, New Zealand. This team examined the structure, composition, and extent of the audit expectation-performance gap in the United Kingdom (UK) and New Zealand (NZ) in 2008 and how this differed from the gap which existed in NZ in 1989, 1999 and 2008, and in the UK in 1999 and 2008. They also investigated financial statement users’ understanding of the message(s) conveyed in standard unqualified audit reports and changes to the format and wording of auditors’ reports desired financial statement users.
They found that although the structure and composition of the audit expectation-performance gap in the UK and NZ in 2008 were similar, the gap was significantly wider in NZ than in the UK. In 1999, the extent of the gap in the two countries was essentially the same, but between 1999 and 2008 the gap in the UK narrowed substantially, while that in NZ widened slightly. Their findings suggest that this difference may result from differences in the monitoring of auditors’ performance in the UK and NZ, and/or from greater societal awareness of, corporate and financial reporting issues in the UK due to greater publicity. They also found that notwithstanding the use of the long form audit report as an educational tool for nearly two decades, financial statement users’ (and other interest groups’) misunderstanding of auditors’ responsibilities and the audit function persists. This finding is supported by a further finding that the content of a standard auditor’s report has little impact on financial statement users’ understanding of the messages conveyed in the report. For a copy of this team’s research report contact Brenda Porter at porterbr@xtra.co.nz.
Overall Objectives and Proposed Preface
John Fogarty, Chair of the Clarity Task Force, led a discussion of Proposed Preface to the Codification of Statements on Auditing Standards, Principles Governing an Audit Conducted in Accordance With Generally Accepted Auditing Standards, and Proposed Statement on Auditing Standards, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards, and the changes to the proposed documents based on comments received during exposure. The ASB recommended some changes to the proposed documents, and expressed willingness, subject to evaluating the changes suggested by the ASB, to vote the proposed documents for issuance as final standards. The Task Force agreed to return to the August meeting to present changes.
Audit Evidence – Selected Items
Art Winstead led the discussion of the proposed SAS Audit Evidence¾Specific Considerations for Selected Items. As part of this discussion the ASB agreed with the Task Force to rescind AU section 901, Public Warehouses, because the content in that section is covered in other standards and is not a major practice issue. The ASB also agreed to add the content of interpretation AU 9508 Report of an Outside Inventory-Taking Firm as an Alternative Procedure for Observing Inventories as application in this proposed SAS, and to retain content related to segment information, while retaining the content of AU section 337 that addresses the ABA treaty in the U.S. Further, the ASB discussed the requirement in paragraph 11 of the proposed SAS which would allow auditors to perform alternative procedures if an attorney letter is not received. Under extant AU 337, this situation would be a scope limitation. The ASB questioned what the alternatives procedures are contemplated under this requirement, and how practicable alternative procedures could be given that attorneys are the only party privy to all of the communications pertaining to the legal matters of the entity. The ASB raised the concern that this requirement would have the unintended consequence of prompting attorneys not to reply to the attorney letter request because auditors would have other ways to obtain the audit evidence. The ASB concluded that if, based on the risk assessment procedures, the auditor decides to request an attorney letter of confirmation then the auditor is required to follow up on the request.
July 2009 (San Diego)
Auditor’s Report Research Task Force
The third and fourth research teams presented the results of their research to the ASB at the July meeting. I introduced Professors Arnie Wright, Northeastern University and Stephen Asare, University of Florida on Monday, July 27. Arnie and Steve then presented the results of their research. They evaluated the extent to which communication gaps exist among auditor and user groups in their understanding of the macro (i.e., objectives and limitations) and micro (technical terms) implications of the standard audit report (SAR). They used a controlled automated internet-based experiment, in which auditors, bankers and investors reviewed background information on a hypothetical private company that had received a SAR. Participants then answered a series of questions that focused on the objectives, limitations, and technical terms in the SAR. The authors classified between group differences as being consistent with one of three patterns: (i) the user groups differ from the auditor group (“type I gap”); (ii) one user group and the auditor group differ from the other user group (“type II” gap); and (iii) the user groups differ from each other as well as from the auditor group (“type III gap”). They found that users consider the SAR to be relatively more important in assessing that the financial statements are free from material fraud than auditors. They also found that the SAR leads users to have a higher level of confidence about company management, investment soundness of a company, whether the company is likely to meet its strategic goals, and the likelihood that auditors have detected material fraud in the financial statements. Finally, they found that although auditors assess the likelihood that material frauds have been detected at about 60%, users assess a relatively lower likelihood of detection at 44%. Investors found the SAR to be of higher importance for making investing decisions than auditors and bankers did, but the investors also had relatively lower confidence that the presence of SAR would assure viability. With respect to the micro focus, they found one type I gap (auditors indicated they should use a relatively lower percent of net income for materiality than the users), 6 type II gaps, with bankers and auditors having shared meanings, and 1 type III gap. Taken together, the results of their study show that the current SAR results in important type I communication gaps, and there remains an absence of shared meaning on the objectives and limitations of the SAR. A potential vehicle for narrowing these type I communication gaps is to add a statement in the SAR that the audit does not address governance risk, strategic risk, or investment soundness risk. The prevalence of type II gaps in the micro-analysis suggests potential for opportunistic interpretation of the technical terms, which suggests less urgency in revising or eliminating those terms. For a copy of their final report, please contact Stephen Asare at stephen.asare@cba.ufl.edu.
Later in the meeting I introduced the fourth research team, Professors Anna Gold, Rotterdam School of Management, Erasmus University, The Netherlands, Ulfert Gronewold, Ruhr University Bochum, Germany, and Christiane Pott, University of Muenster, Germany. Ulfert presented the results of his team’s research, which had three objectives. The first objective was to investigate whether financial statement users, as compared to experienced auditors, ascribe relatively more responsibility to the auditor than to management, and whether such a disconnect still holds under the revised version of ISA 700. Their second objective was to investigate the difference between experienced auditors’ and financial statement users’ perceptions concerning the reliability of audited financial statements. Furthermore, they investigated whether providing a complete auditor’s report versus a short-form opinion-only version affects the expectation gap. The issuance of an unqualified audit opinion means that the auditor believes that the financial statements provide a true and fair view in accordance with the applicable financial reporting framework. Prior research demonstrates that financial statement users (such as investors and analysts) often associate an absolute level of assurance when they read such messages, potentially resulting in often naïve or unreasonable expectations. The authors implemented an experiment, in which experienced auditors and users (i.e., financial analysts as sophisticated users and students as unsophisticated users) read a brief company description, a summary of the firm’s financial statements, and an audit report, the latter of which we manipulated as being either the complete auditor’s report according to the revised ISA 700 or a short-form audit opinion-only version. They found strong evidence for a persisting audit expectation gap between auditors and financial statement users under the revised ISA 700 auditor’s report. Their results are robust in indicating that the detailed explanations of the ISA 700 auditor’s report of auditor versus management responsibilities and the task and scope of the audit are not effective in reducing this expectation gap, and partially even have a detrimental effect. For a copy of their report, please contact Anna Gold at agold@rsm.nl.
Group Audits
Robert Dohrer, Chair of the Group Audits Task Force, led the ASB in a discussion of proposed SAS, Audits of Group Financial Statements (Including the Work of Component Auditors). As a results of the discussion, the ASB requested the Task Force to make a number of changes, including modifying the proposed SAS to explicitly state that the auditor should not make reference to the audit of a component auditor unless the component’s financial statements are prepared using the same financial reporting framework as the group financial statements, and the component auditor has performed an audit in accordance with GAAS. The ASB believes that these requirements were implicit in extant AU section 543, and to add application material to address financial statements prepared in accordance with GASB with components using a different financial reporting framework. The Chair recommended that the ASB consider the use of an impact assessment to assist respondents in assessing the overall impact of the proposed new standard. The impact assessment is intended to communicate the impact of the incremental difference between the extant and proposed new standard, not between current and future practice. The impact assessment would be summarized in a template based on one prepared by the IAASB. The ASB agreed to pilot the use of the impact assessment template in the exposure draft of this proposed SAS. The ASB voted unanimously to ballot the draft for exposure.
Financial Statements Prepared in Accordance with a Financial Reporting Framework Generally Accepted in Another Country
Walt Conn, Chair of the AU 534 Task Force (Task Force), led the discussion of Reporting on Financial Statements Prepared in Accordance with a Financial Reporting Framework Generally Accepted in Another Country. The objective of the Task Force is to redraft AU Section 534, Financial Statements Prepared for Use in Other Countries, in accordance with the clarity conventions. At the April 2009 meeting, the ASB discussed whether an unqualified opinion on foreign GAAP financial statements (unaccompanied by a modified opinion relative to U.S. GAAP) for use in the U.S. violates Rule 203. A discussion with legal counsel determined that such an opinion would violate Rule 203. If financial statements are prepared in accordance with a financial reporting framework generally accepted in another country (i.e., from a standard setter not designated by the AICPA Council to set accounting standards), that will have more than limited use in the United States, the auditor should report using a modified opinion because of departures from U.S. GAAP. The Task Force agreed to add an illustrative auditor’s report to the SAS, for situations when the financial statements prepared in accordance with a financial reporting framework generally accepted in another country will have more than limited use in the United States, modified as appropriate (qualified or adverse), because of departures from U.S. GAAP. The ASB unanimously voted to ballot the proposed SAS for exposure.
Service Organizations
Walt Conn, Chair of the Service Organizations Task Force, led the ASB in a discussion of a draft of Proposed SAS, Audit Considerations Relating to an Entity Using a Service Organization, which willreplace the guidance in AU section 324, Service Organizations, forauditors of the financial statements of entities that use a service organization. The ASB issued an exposure draft of the proposed SAS in November 2008 which is based on ISA 402, Audit Considerations Relating to an Entity Using a Third Party Service Organization. The changes made to the ED included changes in response to comments on the ED as well as changes to conform with revisions to the final version of ISA 402, which was issued in April 2009. The ASB requested the Task Force to make a number of revisions, and return at a future ASB meeting.
Related Parties
George Fritz, Chair of the Related Parties Task Force (Task Force), led a discussion of the draft proposed SAS, Related Parties. Mr. Fritz explained that ISA 550, Related Parties and the proposed SAS are structured to address financial reporting frameworks such as US GAAP and IFRS, and special purpose frameworks as discussed in the proposed SAS, Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks. The applicability of some objectives, requirements, and definitions in ISA 550 and the proposed SAS depend on whether a framework “establishes” related party requirements; other objectives and requirements apply irrespective of whether the framework establishes such requirements. ISA 550 was drafted in such a manner because certain financial reporting frameworks do not include a definition of related parties and the IAASB concluded that it would not be appropriate to force preparers of financial statements in accordance with those financial reporting frameworks to use GAAP definitions. Since financial statements prepared in accordance with special purpose frameworks include disclosures substantially equivalent to those in GAAP financial statements, the proposed SAS need not include related party definitions and other references to financial reporting frameworks that are necessary in the ISA. The Task Force prepared an alternative SAS which would be completely framework neutral – that is, the applicability, objectives, and requirements of the proposed SAS are the same, irrespective of the financial reporting framework in accordance with which the financial statements being audited were prepared. The ASB considered the separate presentations and concluded that the proposed SAS should be drafted to be framework neutral. The ASB unanimously voted to ballot the proposed SAS for exposure.
Auditor’s Reports – Special Reports
Susan Jones, Chair of the Special Reports Task Force, returned from the June meeting to lead a discussion of the following proposed SASs: Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks; Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement; Engagements to Report on Summary Financial Statements. For Special Purpose Frameworks, the ASB agreed with the Task Force’s inclusion of Exhibit A to supersede Interpretation 14, Evaluating the Adequacy of Disclosure and Presentation in Financial Statements Prepared in Conformity With an Other Comprehensive Basis of Accounting, and provides additional guidance on the adequacy of disclosures based on that Interpretation. The ASB also requested certain editorial revisions. For Single Financial Statements & Elements, the ASB confirmed its decision to modify the extant requirement to perform an audit of the complete financial statements when a specified element, account, or item is, or is based upon, an entity’s net income or stockholders’ equity or equivalent. In the case of an audit of a specific element that is, or is based upon, the entity’s stockholders’ equity or net income (or equivalents), the ASB agreed to require the auditor to perform procedures necessary to obtain sufficient appropriate audit evidence to enable the auditor to express an opinion about financial position, or financial position and results of operations, respectively, because of the interrelationship between the element and the balance sheet accounts and the income statement accounts. For Summary Financial Statements, the ASB agreed with the factors included in paragraph 8(a) of the proposed SAS that will serve as the basis for determining whether the applied criteria are acceptable. The Task Force was asked to make a number of other changes, and based on those, unanimously voted to ballot the proposed SASs for exposure.
RSI/OSI/OI Task Force.
Jeff Markert, Chair of the RSI/OSI Task Force, led a discussion of the significant issues raised in the comment letters on the exposure draft of the proposed Statements on Auditing Standards, Required Supplementary Information (the “RSI SAS”), Other Supplementary Information in Documents Containing Audited Financial Statements (the “OI SAS”), and Supplementary Information in Relation to the Financial Statements as a Whole (the “IRT SAS”). The ASB discussed the applicability of each of the proposed SASs and concluded that each of the applicability paragraphs were clearly stated and appropriately referenced the other SASs. For the proposed RSI SAS, the ASB discussed the draft
The ASB discussed the draft proposed OI SAS and concluded that the effective date of the proposed SAS should be consistent with other clarified SASs. However, the ASB determined that early application should be permitted so that auditors can implement the proposed SAS simultaneously with the proposed RSI and IRT SASs. The ASB discussed the draft proposed IRT SAS and requested the Task Force to consider a new term which would encompass RSI, OI, and any other information upon which an auditor may express an in relation to opinion, and to bring a revised draft of the proposed IRT SAS to the August 2009 ASB meeting for further discussion.
Risk Assessments
Darrel Schubert, Chair of the Risk Assessments Task Force (Task Force) led the discussion of the proposed Risk Assessment Standards. The focus of the discussion was the content of comment letters received in connection with the exposure draft released in January 2009. With respect to the comment that it would be helpful if the ASB consider content in the PCAOB proposed Risk Assessment standards for inclusion in the proposed SASs, the ASB noted that there are instances where AT 501 addresses the same matters. In those cases, the proposed SASs should be consistent with AT 501 rather than with the proposed PCAOB standards. With respect to the comments received about the use of the term “performance materiality,” the GAO continues to be concerned about the use of term, and believes that the changes made to address the comments are not sufficient. The suggestion was made that more guidance is needed to help auditors apply the concept. The Chair noted that consistent with ISA 315, the proposed SAS Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement contains a conforming amendment that establishes a requirement of the auditor to obtain an understanding of the entity’s internal audit function. The Chair reviewed proposed SAS Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement; and proposed SAS Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained. The ASB requested the Task Force to provide a revised proposed SASs to the ASB in October for final issuance.
August 2009
Auditor’s Report – 700 Series
Dan Montgomery, Chair of the Auditor’s Report Task Force, led a discussion of Modifications to the Opinion in the Independent Auditor’s Report; Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report; and Reporting on Compliance With Aspects of Contractual Agreements or Regulatory Requirements in Connection with Audited Financial Statements. The ASB unanimously voted to ballot both of these proposed SASs following discussion and agreement on final changes.
Engagement Terms and Written Representations
John Fogarty, Chair of the Engagement Representations Task Force, led a discussion of the proposed SASs Terms of Engagements and Written Representations. For Terms of Engagements the ASB again discussed the use of “evergreen” and multi-year engagement letters, and discussed whether the proposed SAS should require a new engagement letter each year. The ASB concluded that the proposed SAS should contain a requirement (in paragraph 11) for the auditor to remind, not – as in the ISA – to assess whether to remind, the entity of the existing terms of the engagement, and that that communication should be documented. The ASB requested the Task Force to add application material applicable to this change. The ASB requested the opportunity to see the revisions associated with this change before voting to ballot for exposure. For Written Representations,the ASB agreed with the redrafted language in paragraph A27, subject to certain editorial changes requested at the meeting. The ASB also requested the Task Force to add the guidance that is in ISA 580 regarding the use of fair values in estimates to paragraph A14, and to make changes to reflect the ASB’s belief that only fair presentation frameworks are used in the U.S. (see agenda item 5, Overall Objectives). The ASB voted unanimously to ballot the proposed SAS Written Representations for exposure.
AU section 625 Redrafted
Tom Ratcliffe, Chair of the AU Section 625 Task Force (Task Force), led the discussion for proposed SAS Reports on the Application of the Requirements of an Applicable Financial Reporting Framework. The Task Force has been charged with redrafting AU Section 625, Reports on the Application of Accounting Principles, in accordance with the clarity conventions. There is no ISA that corresponds to AU Section 625. The ASB discussed the concept of an advisory accountant and how it differs from a reporting accountant. The ASB requested the Task Force to include the criteria that a reporting accountant serving in an advisory role is required to overcome the presumptive requirement of consulting with the continuing accountant, in the requirements section. The ASB also discussed the effective date and concluded the determining factor for the effective date should be the accountant’s action (that is, providing the written report or oral advice), not the entity’s action (that is, the transaction). Accordingly, the effective date paragraph was revised to state that the proposed SAS will be effective for reports and advice provided by a reporting accountant on or after December 15, 2010. The Task Force was requested to bring a revised draft to the ASB in October 2009.
Compliance Audits
George Rippey, Chair of the Compliance Auditing Task Force, led the ASB in a discussion of significant comments on, and a revised draft of, the proposed SAS Compliance Audits that would supersede SAS No. 74, Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance (AU sec. 801). Based on the discussion, the ASB requested the Task Force to make a number of changes to the draft and voted to ballot the proposed SAS for issuance as a final SAS.
Overall Objectives
John Fogarty, Chair of the Clarity Task Force, led a discussion of the Proposed Preface to the Codification of SASs, Principles Governing an Audit Conducted in Accordance With Generally Accepted Auditing Standards, and Proposed SAS Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards, and the changes to the proposed documents based on direction received from the ASB at its June 2009 meeting. Based on the discussion, the ASB requested the Task Force to make a number of changes, including changing references to the financial statements being “prepared, in all material respects, in accordance with the applicable financial reporting framework’ to “presented fairly, …” to be consistent with the wording of the auditor’s report in proposed SAS Forming an Opinion and Reporting on Financial Statements. The ASB also requested the Task Force to make changes to reflect the ASBs assumption that only “fair presentation” frameworks are used in the U.S. The ASB unanimously voted to ballot the proposed Preface and SAS for issuance as a final standard.
Analytical Procedures
Walt Conn, Chair of the Analytical Procedures Task Force (Task Force), led a discussion of the issues with respect to the drafting of a SAS that is intended to be in convergence with ISA 520, Analytical Procedures. As a result of the discussion, the ASB requested the Task for to effect a number of changes to the draft, including, as noted by the Task Force, the language in paragraph 5(c) of ISA 520 could reasonably lead an auditor to conclude that he or she cannot use substantive analytical procedures as audit evidence when the analytical procedures are less precise than tolerable error – even if such analytical procedures supplement other audit procedures. The ASB requested the Task Force to revise the draft and to bring a revised draft to the ASB in October 2009 for a vote to ballot for exposure.
Internal Control
Keith Newton, Chair of the Internal Control Task Force, led the ASB in a discussion of a proposed SAS Communicating Internal Control Related Matters Identified in an Audit (Redrafted) and related issues. The proposed SAS represents the redrafting of SAS No. 115, Communicating Internal Control Related Matters Identified in an Audit, for clarity and convergence with certain aspects of ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance. The ASB requested the Task Force to retain the definitions of the various kinds of deficiencies, guidance for evaluating such deficiencies, and indicators of a material weakness currently in SAS No. 115 so that the proposed SAS will be aligned with SSAE No. 15, An Examination of an Entity’s Internal Control Over Financial Reporting That Is Integrated With an Audit of Its Financial Statements. The ASB also requested the Task Force to draft the SAS by starting with ISA 265 as a base, to incorporate the requirement in ISA 265 for the auditor to communicate “other deficiencies” to management, and to communicate the use of judgment in determining which other deficiencies should be communicated. The ASB requested the Task Force to return to a future ASB meeting with a revised draft.
Specialists
Darrel Schubert led the discussion of the proposed SAS, Using the Work of a Specialist, and the proposed SAS, Using the Work of a Management Specialist. The objective of the presentation was to discuss the draft of the proposed SASs. The Chair explained that the Task Force’s original plan was to replace AU section 336, Using the Work of a Specialist, with two SASs. One SAS wouldconverge with ISA 620, Using the Work of an Auditor's Expert, and would address auditor’s specialists. The other SAS would address management’s specialists and would be based on the IAASB’s conforming amendment to ISA 500, Audit Evidence. The Chair also explained that the Task Force reconsidered this decision and recommended the Audit Evidence SAS be amended instead.
Letters for Underwriters
Phil Wedemeyer, Chair of the Comfort Letter Task Force led the discussion of the proposed SAS, Letters for Underwriters and Certain Other Requesting Parties. The Task Force was charged with redrafting AU section 634, Letters for Underwriters and Certain Other Requesting Parties, in accordance with the clarity conventions. The ASB discussed whether, the alternatives of obtaining a legal letter or obtaining a requesting party’s representation should be equally acceptable, regarding requesting parties that have, or are believed to have, a statutory due diligence defense under section the SEC Acts. The ASB also discussed whether the wording of the representation letter should be revised. The ASB expressed concern that the proposed SAS will be perceived as changing the existing practice. The Task Force agreed to consult with AICPA legal counsel, ASB members, and firm experts in comfort letters, and return with results at a future ASB meeting.
Specific Items
Megan Zietsman and Art Winstead led the discussion of issues related to proposed SAS Audit Evidence—Specific Considerations for Selected Items. As requested by the ASB at its June 2009 meeting, the Estimates Task Force (Task Force) reviewed AU 332, Auditing Derivative Instruments, Hedging Activities and Investments in Securities. While much of the content of AU 332 will be addressed by the Audit Guide Auditing Derivative Instruments, Hedging Activities and Investments in Securities, the Task Force identified requirements of AU 332 that are incremental to, and not duplicative of, requirements in other standards, including the risk assessment standards, and proposed SAS Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures, and therefore not specifically addressed elsewhere in GAAS. After discussion, the ASB agreed to include in the proposed SAS Audit Evidence—Specific Considerations for Selected Items the incremental requirements identified by the Task Force, as modified to reflect the comments received from ASB members.
GAAP Hierarchy – Withdrawal of SAS No. 69
Harold Monk led a discussion of the materials for Agenda Item 11, GAAP Hierarchy. The objective of this agenda item is to vote to ballot the withdrawal of SAS No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, as amended (AICPA, Professional Standards, vol. 1, AU sec. 411), from the auditing literature.The GAAP hierarchies of nongovernmental, state, local, and federal reporting entities have resided in SAS No. 69 in the auditing literature. With the issuance of recent pronouncements by the FASB, GASB, and FASAB to incorporate their respective GAAP hierarchies into their respective authoritative literature, the ASB believes that specifying GAAP hierarchies in GAAS is no longer necessary or appropriate. Because the ASB did not direct that Auditing Interpretation No. 3, “The Auditor’s Consideration of Management’s Adoption of Accounting Principles for New Transactions or Events,” of SAS No. 69 (AICPA, Professional Standards, vol. 1, AU sec. 9411.11–.15) be retained and moved elsewhere within the literature, the interpretation will be withdrawn automatically when SAS No. 69 is withdrawn. The ASB voted unanimously to withdraw the SAS. The effective date of the withdrawal will be September 2009, by which time the standards issued by the FASB, GASB and FASAB will all be effective.
RSI/SI/OI
Jeff Markert, Chair of the RSI/OSI Task Force (Task Force), led a discussion of the revisions made to the proposed SAS, Supplementary Information in Relation to the Financial Statements as a Whole (the “IRT SAS”) as a result of issues raised by the ASB at its July 2009 meeting. At that meeting, the ASB requested the Task Force to consider a new term which would encompass RSI, OI, and any other information upon which an auditor may express an in relation to opinion. The Task Force developed a definition of supplementary information. The Chair stated that the term supplementary information is advantageous, as it is already well known and understood. However, the Chair noted that the term conflicts with GASB’s use of the same term. The ASB concluded that it agrees with the Task Force’s use of the term supplementary information but requested that it develop application guidance to make clear that the term is defined differently in the GASB literature. Based on additional ASB requests for revisions, the Task Force will bring drafts of the proposed SASs, Required Supplementary Information, Other Information in Documents Containing Audited Financial Statements and the IRT SAS to the October 2009 ASB meeting for a vote to ballot those proposed SASs as final standards.
Concluding Comments
As is clear from this update, the overall summer schedule for the ASB was rigorous, as were each of the agendas for the three meetings in June, July, and August. The ASB members are dedicated to making a positive improvement in auditing standards with an aim to increase audit quality. It has been a busy but rewarding summer participating in moving the work of the ASB forward. Again, if you require additional information about the ASB and its activities, please contact me at mt@case.edu. |
