This update includes topics addressed by the Board subsequent to December 31, 1995, the date of my last update. Since the fraud exposure draft received the most Board attention, I emphasize that topic. Following are several other topics that I believe may be of interest. As always, feel free to contact me with any questions, comments, etc.
Fraud
The Board issued the exposure draft Consideration of Fraud in a Financial Statement Audit which, if ultimately passed, will supersede SAS No. 53 (AU 316) and modify a number of other portions of the professional standards. That exposure draft provides expanded operational guidance on the consideration of "fraud," the term replacing SAS No. 53's "irregularities." The fraud draft also attempts to clarify the auditor's present responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether caused by error or fraud. It calls for specific and ongoing assessment of the potential for material misstatements caused by fraud and outlines responses appropriate to the assessed risk of material misstatement due to fraud. The proposed changes also provide additional guidance on the standard of due professional care in the performance of work and include expanded discussions of "professional skepticism" and "reasonable assurance."
The exposure draft reflects academic and practitioner research about risk factors that can, and sometimes do, provide clues about whether fraud has occurred or might occur. It attempts to synthesize this information and articulate it to provide auditors with appropriate guidance in furthering the objective of detecting material misstatement in financial statements resulting from fraud. Also, because of differences between management fraud (fraudulent financial reporting) and misappropriation of assets (theft of assets or defalcations), the draft provides separate risk factors and other guidance.
The structure of the document is as follows:
It is accompanied by a "Commentator Guide to Significant Issues." It is my hope that many will find time to consider and provide input on those issues and any others of significance to this project. The issues identified by the Board include a number which may be of interest to various researchers. Professor W. Steve Albrecht of Brigham Young University has served as a member of the fraud task force.
Auditing Investments
The Board issued the exposure draft, Investments in Debt and Equity Securities, which updates the guidance currently provided in AU 332 by incorporating guidance relating to FASB Statement No. 115.
Management's Discussion and Analysis
The Board is considering the development of proposed new services involving association with a company's management discussion and analysis (MD&A). Tentative draft procedures for an examination have been developed and tested by applying a case study approach to MD&A of several companies. Professor Karen Hooks of the University of South Florida is a member of the MD&A task force.
Auditor Communications
This task force is studying CPA communication responsibilities in addition to the primary report issued, particularly communications with audit committees. Those communications include, for example, reporting on illegal acts, irregularities, reportable conditions and those nine required communications under SAS 61 (AU 380). As the chair of that task force I am interested in any input you may have relating to CPA communications with audit committees. Of particular interest is any research with which you are involved that deals with internal control "reportable conditions" and/or "material weaknesses."
Attestation Re-Codification Task Force
A task force has been formed to evaluate the profession's attestation standards, which are meant to serve as a framework for a variety of attestation services. Although a variety of issues will be considered, two may be of particular interest to academics. First, the standards require a "written assertion" to which the CPA attests. This written assertion requirement has caused difficulties, particularly in certain agreed-upon procedures engagements in which many do not believe it is necessary. Also, some believe that this requirement has had the effect of unnecessarily limiting extension of assurance services.
Second, the review form of association continues to cause difficulties. Recall that reviews include a combination of inquiry and analytical procedures (see AT 100). Because applying meaningful analytical procedures seems difficult in various areas (e.g., internal control, compliance attestation), the review form of association sometimes "doesn't work" since inquiry alone generally may not be sufficient.
Recent Publications
The following auditing procedures studies have been published relatively recently by the AICPA and may be of interest:
Auditing with Computers
Auditing in Common Computer Environments
Audit Implications of EDI
In addition, the revised Audit Guide Consideration of Internal Control in a Financial Statement Audit uses the COSO definition of internal control that SAS No. 78 incorporated in the professional standards. The exhibits included in Chapter 5 may be particularly helpful for designing both teaching and research materials.
The various publications may be purchased through the AICPA Order Department (800-862-4272).
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Auditor's Report, Summer, 1996