Auditing Standards Board Update
June 2009

Mark H. Taylor
John P. Begley Endowed Chair in Accounting College of Business Administration
Creighton University Omaha, NE

Since my last meeting, the ASB met in April in New York.  Though only one intervening meeting took place since my last report, the Board worked through a packed agenda.  This update focuses on the content of the meeting and summarizes some of the highlights of that meeting.  For more information about the task forces that are mentioned, please see my update in the Spring 2009 issue of The Auditor’s Report which describes the numerous existing ASB Task Forces and their objectives.  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.  Further, I invite you to consider implementing as an auditing class project, the preparation and submission of thoughtful comments letters on any of those exposure drafts.  If you any questions regarding any of the ASB activities, please contact me at mhtaylor@creighton.edu

1. Confirmations
   Megan Zietsman, Chair of the Confirmations Task Force, led a discussion of the proposed Statement on Auditing Standard (SAS), External Confirmations. The board’s discussion lead to a number of changes in the proposed SAS, including:
   
   • Modifying the definition of external confirmation to provide for the inclusion of confirmations effected through the auditor’s direct access to information held by a third party.
   • Clarifying that restrictive language included in a confirmation response, to the extent that it does not relate to the assertions being tested by the confirmation, does not necessarily invalidate the reliability of the response as audit evidence.
     
     The ASB unanimously voted to ballot the proposed SAS for exposure.
     
     
2. Reporting on Financial Statements Prepared in Accordance with a Financial Reporting Framework Generally Accepted in Another Country
   Walt Conn, Chair of the AU 534 Task Force, led the discussion of Reporting on Financial Statements Prepared in Accordance with a Financial Reporting Framework Generally Accepted in Another Country.  The Task Force’s objective was to redraft AU § 534, Financial Statements Prepared for Use in Other Countries, in accordance with the clarity conventions.  The discussion included coverage of the following issues:
   • That AU 534 is intended for fair presentation frameworks.  The ASB recommended that the draft be revised to include a reference to compliance frameworks, along with guidance to follow the requirements for regulatory basis special purpose frameworks in the ASB’s proposed standard, Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks.
   • The auditor’s requirements before accepting an engagement covered by AU 534, as well as before reporting on financial statements.  The ASB agreed that the clarified standard should reference the new proposed standard “Agreeing the Terms of Audit Engagements” which is also being developed.
   • 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.  The ASB considered that such would violate Rule 203. If financial statements are prepared in accordance with a financial reporting framework generally accepted in another country 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 draft of clarified AU 534 will be revised to reflect this conclusion.
     
     
3. Quality Control
   Sheila Birch, member of the Quality Control Task Force, led a discussion of the proposed SAS, Quality Control for an Audit of  Financial Statements, and of the proposed Statement on Quality Control Standards (SQCS), A Firm’s System of Quality Control. The proposed SQCS is a redrafting of SQCS No. 7 for clarity; SQCS 7 was drafted in convergence with ISQC1.  The ASB directed the Task Force to make a number of changes, including:

Proposed SAS

• Clarifying the engagement partner’s responsibilities
• Revising the definition of monitoring to conform to changes made to proposed SQCS.

Proposed SQCS

• Adding a requirement, from AU section 311, for a firm’s procedures to enable a member of the engagement team to document that member’s disagreement with the conclusions reached after appropriate consultation. The ASB considered that this requirement is more appropriately placed at the firm level than at the engagement level.
• Including a periodic review of engagement documentation, reports and clients’ financial statements for a selection of completed engagements in the requirements.

Other changes:

• Adding a request in the exposure draft for respondents to consider, with respect to the Public Company Accounting Oversight Board’s proposed standard, Proposed Auditing Standard — Engagement Quality Review, whether additional requirements relating to engagement quality control review should be included in the proposed standards.

The ASB unanimously voted to ballot the proposed standards for exposure.

4. Estimates/Fair Values.
   Megan Zietsman, chair of the Accounting Estimates Task Force (the Task Force), led the disussion of a proposed SAS, Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures. The Task Force had obtained preliminary views from the ASB on the draft and returned to the April meeting to discuss revisions.  The ASB reaffirmed the tentative conclusions reached at the January 2009 ASB meeting with respect to:
• Non monetary items—the definition of an accounting estimate in the proposed SAS should only focus on accounting estimates.
  Neutrality—the proposed SAS should be written framework neutral. Thus, no appendix is necessary to include U.S.-specific matters.  The ASB also reviewed the Practice Aid on Alternative Investments and concluded that no additional guidance was necessary.
• Application material related to collateral—Extant AU 328.50 contains application material addressing collateral and its effects in determining fair value, as well as necessary considerations when an estimate is made as of a different date other than the reporting date (not address in ISA 540).  The ASB agreed that this content should be retained in the proposed SAS.
• Application material related to illiquid assets—In October 2008, the IAASB issued audit practice alert, Challenges in Auditing Fair Value Accounting Estimates in the Current Market Environment. In addition to pointing the auditor to the relevant auditing literature, the alert provides guidance. The ASB agreed to add this content as application material in the proposed SAS.  
• Disposition of AU section 332, Auditing Derivative Instruments, Hedging Activities and Investments in Securities—The ASB agreed that many of the AU 332’s requirements are redundant or very similar to requirements that are in the risk assessment standards or elsewhere.  As a result, the ASB agreed that AU section 332 be rescinded and that the application guidance can be addressed in Audit Guide.
  
  
5. Auditor’s Reports – 700 Series.
   Dan Montgomery, Chair of the 700 Report Task Force, led the discussion of the following proposed SASs:   
   Forming an Opinion and Reporting on Financial Statements

   The draft of the proposed SAS reflected the Task Force’s disposition of issues discussed at the ASB’s October 2008 and January 2009 meetings.  Highlights of the resolutions included:    

   • Signature on the Auditor’s Report— The ASB agreed with the proposed SAS requirement for a manual or printed signature of the auditor’s firm. Note that the PCAOB is considering modification to its standards to require the partner in charge of the engagement to also sign the audit report.
   • Management Responsibilities for the Financial Statements— The ASB agreed that the description of management’s responsibilities should retain the words “this responsibility includes the design, implementation, and maintenance of internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error.” 
   • AU Section 504, Association With Financial Statements—The Board recommended that guidance in AU section 504 Association With Financial Statements be retained as a separate SAS.

Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
With regard to the issues presented in April, the ASB directed the Task Force as follows:

• Required Explanatory Paragraph for Changes in Accounting Principles—The ASB is in favor of retaining a consistency paragraph in the auditor’s report. The task force is to consider how best to include such requirement in the proposed SAS.
• Restricting the Use of an Auditor’s Report—The ASB did not object to the inclusion of this guidance in the proposed SAS. 
• Liquidation Basis of Accounting— The ASB agreed that this issue was important to retain. The ASB asked the task force to consider the extent of the guidance to include and why the international standards are silent on such reporting.

6. Auditor’s Reports – Special Reports.
   Susan Jones, Chair of the Special Reports Task Force, and Maria Manasses, member of and staff to the Task Force, led a discussion of the following proposed SASs:

Special Purpose Frameworks
The ASB reconfirmed its agreement with the following:

• The applicability of the standard to only the four financial reporting frameworks (cash, tax, regulatory, contractual).
• The elimination of the definition and use of the term OCBOA, subject to discussions with the Accounting and Review Services Committee (ARSC) and depending on ARSC’s position may include a statement that special purpose frameworks can be referred to as OCBOA.
• The elimination of the category of “a definite set of criteria having substantial support that is applied to all material items appearing in financial statements, such as the price-level basis of accounting.”
• Reporting on financial statements prepared in accordance with the cash and tax bases of accounting should remain consistent with current practice (one opinion, an alert stating that the basis of accounting is not GAAP, and no restriction).
• Reporting on financial statements prepared in accordance with the regulatory or contractual bases of accounting should require a dual-opinion on GAAP

Single Financial Statements & Elements 
With regard to the issues presented in April, the ABS agreed with the Task Force to:

• Align the proposed SAS with ISA 805 and therefore, address specific elements, accounts or items, as well as single financial statements in the proposed SAS.
• Maintain the requirement in extant paragraph 15(b)(1) relating to the reference to the auditor’s report on the complete set of financial statements only for specific elements (and not single financial statements). This is consistent with the extant standard.
• Require a separate report in an audit of a single financial statement or a specific element of a financial stateme

Summary Financial Statements
The ASB agreed with the Task Force to:

• Align the proposed SAS with ISA 810, Engagements to Report on Summary Financial Statements, and allow reporting on summary financial statements for non-issuers.
• Use the term summary financial statements in lieu of condensed financial statements.
• Eliminate the optional report language in ISA 810 and prescribe one method to report on summary financial statements; and in this regard, use the phrase “consistent, in all material respects” with slight modification to incorporate the concept that the opinion is based on the audited financial statements from which the summary financial statements are derived.
• Exclude from the proposed SAS the requirement in paragraph 15 of ISA 810 and the related application material with respect to an addressee that may differ from the addressee on the auditor’s report on the financial statements.
• Include an additional requirement relating to comparatives when the summary financial statements contain comparatives that were not reported on by the auditor or another auditor.
• Remove the requirements and guidance pertaining to auditor association with summary financial statements in AU section 504, Association With Financial Statements, or its equivalent. The Auditor’s Reports Task Force will consider this matter.

With regard to the audited financial statements, the ASB agreed that the audited financial statements should accompany the summary financial statements. This is required for non-issuers under the extant standard with respect to selected financial data.

7. Auditor’s Report Research Task Force
   A couple years ago, the ASB, in conjunction with the IAASB, sponsored four academic teams to conduct research on auditor’s report. Doug Prawitt chaired the task force until the conclusion of his term on the Board.  As I have served on the Task Force, first as an SEC observer, and then as a general member, the ASB requested that I chair the Task Force going forward.  At the April meeting, the first team, composed Glen Gray, Ted Mock and Jerry Turner presented the results of their research to the ASB.  The title of their report is, “The Unqualified Auditor’s Report: A Study of User Perceptions, Effects on User Decisions and Decision Processes, and Directions for Further Research.”  The project had two primary objectives with the first being to identify and provide insight on the nature and underlying causes of user perceptions regarding the unqualified auditor’s report among various classes of financial statement and auditor’s report users. The second objective was to examine if and how an unqualified auditor’s report impacts the judgments of financial statement users.  This team’s research report will be made available soon as will the other three teams’ reports. 
   
   The ASB and the IAASB have been anxiously anticipating the results of these research projects as they consider modifications to the auditor’s report.  Watch for a call for proposal for the second phase of this research effort.  Clearly this effort is an outstanding way for the academy to interact with the professional with the specific purpose of conducting research which has the potential to directly inform and affect practice.
   
   
8. Group Audits
   Bob Dohrer, chair of the Group Audits Task Force, led the ASB in a discussion of the issues raised in the agenda material and of the proposed SAS, Audits of Group Financial Statements (Including the Work of Component Auditors).

      The ASB considered the issues and directed the Task Force to:

• Modify language used regarding “full” and “divided” responsibility to “make reference to the report of the component auditor” and “assume responsibility for the work of the component auditor.” This is more consistent with the language in extant AU 543 (which only uses the word “divide” once).
• Revise the definition of “component auditor.”
  Revise wording to include consideration of the extent of use of the component auditor’s work, and whether reference will be made in the report.

The ASB’s schedule for the remainder of 2009 is ambitious and includes four additional meetings:  June 22-25 (Boston), July 27-30 (San Diego), August 24-27 (Nashville) and October 26-29 (Arizona).  ASB meetings are open to the public. 
                                                                                   

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