Auditing Standards Board Update
Mark H. Taylor
Weatherhead School of Management
Case Western Reserve University
The Auditing Standards Board (ASB) convened one meeting since the spring update; the ASB met in Fort Worth, TX May 3-6, 2010. As has been typical, the meetings ran from Monday through Thursday afternoon and were open to the public. The agenda continued to be an ambitious one. This update provides highlights of the meeting’s content and outcomes. If you have any questions regarding any of the ASB activities, please contact me at firstname.lastname@example.org.
- Letters for Underwriters
Phil Wedemeyer, Chair of the Letters for Underwriters Task Force, led the ASB in a discussion of a revised draft of the proposed Statement on Auditing Standards (SAS), Letters for Underwriters. In consequence of the discussion, the ASB directed the Task Force to:
- Define requesting parties as “underwriters and other parties that are conducting a review process that is, or will be, substantially consistent with the due diligence process that would be performed if this securities offering were being registered pursuant to the Securities Act of 1933 (the Act).”;
- Not distinguish parties with a statutory due diligence defense under section 11 of the Act from other requesting parties other than underwriters; and
- Not require legal opinions with respect to parties that have a statutory due diligence defense under section 11 of the Act.
Filings Under Federal Securities Statutes
The ASB also requested the Task Force to require the procedures included as application material in paragraph A63, and require that the comfort letter indicate if, at the client’s request, the unaudited condensed financial information was attached only to the copy of the letter intended for the managing underwriter. A number of other issues were discussed that were primarily editorial in nature. The Task Force will bring a revised draft to the June 2010 meeting for vote to ballot for exposure.
John May, Chair of the AU Section 711 Task Force, led a discussion of Proposed Statement on Auditing Standards Filings With the U.S. Securities and Exchange Commission Under the Securities Act of 1933. This agenda item was also discussed at the January 2010 meeting. Based on comments raised, the Task Force prepared a revised draft document in revising SAS No. 37, Filings Under Federal Securities Statutes (AICPA, Professional Standards, vol. 1, AU sec. 711), in accordance with the clarity conventions. There is no ISA that corresponds to AU section 711. The significant issues discussed follow:
Association with Financial Statements
- The proposed SAS requires the auditor to perform certain subsequent events procedures in proposed SAS Subsequent Events and Subsequently Discovered Facts, which includes separate definitions for subsequent events and subsequently discovered facts to clearly distinguish the auditor’s responsibilities for each. The ASB directed the Task Force to add modifying language to the proposed SAS (paragraphs 7a, 10, and 12) to make it clear that the auditor is required to consider events occurring after the date of the auditor’s report.
- Paragraph 7c of the proposed SAS contains a requirement for the auditor who has audited the most recent period for which separate audited financial statements of the entity are included in a registration statement to inquire or extend oral or previous inquiries of the entity’s legal counsel. This requirement currently exists in paragraph 12 of SAS No. 1, section 560, Subsequent Events (AICPA, Professional Standards, vol. 1, AU sec. 560.12), and in paragraph 6 of SAS No. 12, Inquiry of a Client’s Lawyer Concerning Litigation, Claims, and Assessment (AICPA, Professional Standards, vol. 1, AU sec. 337.06). However, proposed SAS Subsequent Events and Subsequently Discovered Facts (“proposed Subsequent Events SAS”), which clarifies AU section 560, changes this requirement. The proposed Subsequent Events SAS indicates that “the auditor may consider it necessary and appropriate to… inquire or extend previous oral or written inquiries of the entity’s legal counsel concerning litigation, claims, and assessments....” Proposed SAS Audit Evidence—Specific Considerations for Selected Items (“proposed Audit Evidence SAS”), which clarifies AU section 337, also changes this requirement. The proposed Audit Evidence SAS, in paragraph 18, indicates that “If the auditor assesses a risk of material misstatement regarding litigation or claims that have been identified, or when audit procedures performed indicate that other material litigation or claims may exist, the auditor should ... seek direct communication with the entity’s external legal counsel. …” The ASB believes that the requirement in paragraph 7c of the proposed SAS to be more of a risk management concern and, therefore, directed the Task Force to change the requirement to application and other explanatory material to remain consistent with the respective approaches taken with the proposed SASs in the paragraph above.
The ASB unanimously voted to ballot the proposed SAS for exposure.
Dan Montgomery, Chair of the Auditor’s Report Task Force, led the ASB in a discussion of AU section 504. The Task Force proposed that AU section 504 be withdrawn and its content addressed through conforming amendments to SSARS, to the extent needed, and in other SASs. The Accounting and Review Services Committee will be asked to consider the conforming amendments at its August 2010 meeting. The Task Force will bring a draft SAS containing the proposal to withdraw and the proposed conforming amendments to the ASB in July 2010.
Interim Financial Information
Brian Croteau, Chair of the Interim Financial Information Task Force (Task Force), led a discussion of the agenda materials, The Task Force has been charged with revising AU section 722, Interim Financial Information in accordance with the ASB clarity conventions.
- The ASB agreed with the revision to make the SAS applicable when the auditor audited the entity’s latest annual financial statements and the appointment of another auditor to audit the current year financial statements is not effective prior to the beginning of the period covered by the review. Since the SSARS will be amended such that the SSARS will not be applicable in such circumstances, the ASB directed that SAS 116 be amended accordingly so that the revised applicability of SAS 116 and of the SSARS can be effective at the same time.
- The ASB directed the Task Force to change the reference in the review report regarding the standards that the review was performed in accordance with from standards established by the AICPA to auditing standards generally accepted in the United States of America, to more specifically identify the relevant standards; to make the proposed SAS effective for reviews of interim financial information for interim periods of fiscal years beginning after December 15, 2012, to add reference in paragraph 7 to paragraphs 12-15 of proposed SAS Terms of Engagement; to revise the wording of paragraph 27 to more clearly state when a written report is required, and to make a number of other minor changes to the proposed SAS.
The ASB voted unanimously to ballot the proposed SAS for exposure.
Sheila Birch, Chair of the Subsequent Events Task Force, led a discussion of the proposed SAS Subsequent Events (Redrafted). The objective was to discuss the significant issues identified in the comment letters received in connection with the exposure draft. The ASB directed the Task Force to:
- Include guidance related to situations in which a subsequent event disclosed in reissued financial statements can be labeled unaudited.
- Modify the definition of subsequent events to align more closely with the international standard.
- Maintain the requirements and guidance related to the predecessor auditor’s responsibility for report reissuance in comparative financial statements within the proposed SAS.
- Add framework neutral guidance based on Technical Practice Aid TIS Section 8700.02, “Auditor Responsibilities for Subsequent Events.”
- Determine the appropriate requirements and guidance within the proposed SAS to address the auditor’s responsibilities related to litigation, claims, and assessments.
- The ASB also requested the Task Force to consider the application guidance related to dual-dating the auditor’s report. Although the application guidance is consistent with International Standards, current practice is to dual-date the report with the same date as the subsequent event, and not the date the auditor completed the procedures in auditing the event.
The Task force will return to the July 2010 meeting with final changes in anticipation that the ASB will vote to issue the final standard.
Robert Dohrer, Chair of the Group Audits Task Force, led a discussion of the agenda material for proposed SAS Audits of Group Financial Statements (Including the Work of Component Auditors). The objective of the presentation was to discuss the significant issues identified in the comment letters received in connection with the exposure draft of the proposed standard. The ASB agreed with Task Force not to change auditor’s report when dividing responsibility. Further, the ASB discussed a concern that the approach in the proposed SAS to identifying significant components will lead to inefficiencies on multi-location audits because auditors are likely to take a “bottom-up” approach. The ASB directed the Task Force to consider developing application material to address this matters as well as application material to address group audits of smaller, less complex entities. Also, the latter will be addressed in the practice aid to be developed on group audits. Additional discussion points follow:
- The ASB discussed the use of the term group engagement partner and the IAASB’s basis for conclusion for using that term rather than group auditor. Since certain requirements apply to the partner with final responsibility for the report, a distinction between the auditor who is the engagement partner and the other auditors on the engagement is necessary; the ASB concluded to retain the terminology used in ISA 600.
- The ASB discussed component materiality and directed the Task Force to develop more guidance on component materiality; including component materiality with respect to a referred-to component and how that differs from the materiality the group engagement team sets, and component materiality with respect to equity method investees.
- The ASB discussed whether significant components should be based on significant risks of material misstatements of the group financial statements or risks of material misstatement significant to the group financial statements, and whether the difference warrants divergence from ISA 600.
The Task Force will return with revisions at the July 2010 meeting in anticipation of voting to issue the final standard.
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 objective of the presentation was to discuss the significant issues identified in the comment letters received in connection with the exposure draft of these proposed standards.
SQCS, A Firm’s System of Quality Control
- The ASB directed the task force to add application material clarifying that although each element is required to have policies and procedures that are designed to provide reasonable assurance, whether a system of internal control is operating effectively may be assessed for the system as a whole.
- The ASB discussed the inclusion of the requirements related to engagement quality control review and made no changes and directed the task force to add application material addressing the assembly of final engagement files when no report will be issued.
SAS, Quality Control for an Audit of Financial Statements
- The ASB directed that the title as exposed be retained and the interim reviews be added to the first paragraph as an example of an engagement other than an audit conducted in accordance with generally accepted auditing standards.
- The ASB also required a revision to a reference in paragraph 2 to Governmental Auditing Standards to more accurately reflect what is incorporated in Governmental Auditing Standards, and the discussion in paragraph A7 about independence with respect to audits of governmental entities should be revised based on recent changes to Governmental Auditing Standards,
- The ASB also requested that a summary of the requirements specifically applicable to the engagement partner in this proposed SAS be included with the agenda materials when this proposed SAS is brought back to the ASB.
The Task Force will return with revised drafts at the ASB July 2010 meeting.
Rob Chevalier, Chair of the Special Reports Task Force, led a discussion of the materials for Agenda Item 8 Special Reports.
Special Purpose Frameworks
The ASB agreed with the Task Force to Limit the definition of special purpose frameworks to the four frameworks (cash, tax, regulatory, and contractual), as proposed. The ASB was silent on whether additional examples of such frameworks were needed. The ASB also did not conclude where the rationale for removing the category related to “the definite set of criteria having substantial support that is applied to all material items appearing in financial statements” could be provided. The ASB also agreed with the Task Force to not include the statement “Ordinarily, a modification would have substantial support if the method is equivalent to the accrual basis of accounting for that item and if the method is not illogical” as it relates to the definition of the cash basis of accounting. The ASB did not believe this would cause an inconsistency with Statement on Standards for Accounting and Review Services No. 19. The Task Force also recommended eliminating the new definitions related to regulatory basis statements (regulatory basis – general use statements and regulatory basis – restricted use statements), as the definitions caused more confusion. In this regard, the requirements and application guidance would also need to be modified to align with the language that was originally proposed, maintaining the requirements related to reports prescribed by law or regulation within the proposed SAS; however, the ASB requested the Task Force to include application guidance in the proposed SAS Forming an Opinion and Reporting on Financial Statements that references these requirements. A number of editorial changes were also discussed.
Single Financial Statements and Elements
The Task for proposed, and the ASB agreed with, the following:
- Maintaining the requirements and guidance related to audit procedures on interrelated items to obtain sufficient appropriate audit evidence about financial position, or financial position or results of operations.
- Excluding a table of reporting requirements, similar to the proposed SAS Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, as the table would be, in some respects, duplicative.
A number of other minor changes were discussed an approved.
Summary Financial Statements
The Task Force recommended and the ASB approved the following changes:
- Including an additional objective related to the performance of procedures and also modifying the objective related to forming an opinion by clarifying the type of opinion to be expressed.
- Including the requirements in ISA 810, Engagements to Report on Summary Financial Statements, related to association within the proposed SAS.
- Broadening the proposed SAS to also apply to selected financial data and provide an example of such data, particularly related to the not-for-profit industry.
- Maintaining the form of auditor’s opinion that the summary financial statements are consistent, in all material respects, with the audited financial statements from which they have been derived, as proposed.
- Maintaining the requirement for the audited financial statements to be “readily available,” as that term has been defined in SAS 116 Interim Financial Information.
- The ASB also requested the Task Force to eliminate the reference to a “denial of opinion.”
The ASB concurs with the form of opinion that it is inappropriate to, and the auditor does not, express an opinion; however, the ASB believes it is not necessary to introduce this new term within the auditing literature.
The Task Force will return to the July 2010 meeting with revisions to the Special Purpose Frameworks SAS and will bring final changes to the ASB on the Single Financial Statements and Elements SAS and the Summary Financial Statements SAS to the August 2010 meeting with the intention to vote to issue the final standards.
George Fritz, Chair of the Related Parties Task Force (Task Force), led a discussion of the comments received from the exposure of the proposed SAS, Related Parties, and the related revisions to the proposed SAS. Based on the comments received, the Task Force proposed, and the ASB agreed that:
Auditing Accounting Estimates
- the definition of related parties as presented in the exposure draft is appropriate and that the related application material provides sufficient guidance with sufficient guidance with respect to GAAP frameworks as well as special purpose frameworks.
- the Task Force has appropriately provided guidance for auditors of governmental entities.
The ASB directed the Task Force to consider adding application material addressing considerations specific to auditing related parties of a governmental entity, and to make a number of other minor changes. The Task Force will bring a revised draft SAS to the ASB meeting in July 2010 to consider voting issue the SAS.
Megan Zietsman, Chair of the Accounting Estimates Task Force (Task Force), led a discussion of the comments received from the exposure of the proposed SAS Auditing Accounting Estimates and the related revisions to the proposed SAS. The Task Force had not identified any issues for discussion by the ASB from the twenty-one comment letters received. The ASB reviewed the proposed SAS and had no substantive comments. The Task Force will bring the proposed SAS to the ASB for issuance as a final standard at its July 2010 meeting.
Three additional meetings are scheduled between the updates for which will appear in the Section’s Fall newsletter: June (in Atlanta), July (in New Orleans) and August (in Denver). I encourage members of the Section to keep abreast of the numerous exposure drafts that have been or will be issued and to consider making a class project of preparing and submitting a comment letter on any of drafts. If you require additional information about the ASB and its activities, please contact me at email@example.com.