In this update I discuss a number of the projects on which the board is currently involved and which I believe may be of interest. As always, feel free to contact me with any questions, comments and suggestions.

 Auditing Investments

In 1996 the Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) No. 81 to provide auditing guidance consistent with recently issued accounting standards, including FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. A number of issues relating to investments remain, including auditor responsibility when a client’s securities are held by a third party (e.g., a broker) and for the valuation of various financial instruments (e.g., derivatives). Among the issues currently being considered are:

• When is a confirmation from a broker sufficient evidence as to the existence of securities? May such a confirmation generally be considered as equivalent to a confirmation of accounts receivable? Under what circumstances must an auditor consider the internal control of the broker?
• When should an auditor use a specialist in auditing the values of financial instruments?
• How should a situation be handled in which the most qualified specialist relating to a financial instrument has a business relationship with the client and/or has developed the instrument?

 Attestation Re-Codification

The ASB is considering a variety of changes relating to the attest standards. A significant possible change involves allowing CPAs to provide assurance in the opinion paragraph directly on the subject matter, either as an alternative to reporting upon a "written assertion," or as a replacement. As an example, when reporting on internal control under the attest standards, CPAs currently provide an opinion relating to the accuracy of a written assertion by management that the company has maintained effective internal control. The alternative would allow (or possibly require) a direct opinion on whether the company maintained effective internal control. Such a report is considered more "user friendly" than the current report. In addition, the ASB is in the process of eliminating a number of inconsistencies within the various SSAEs. This project is still at a relatively early stage of development.

 Restricted Use

The professional standards are currently inconsistent in using terms such as "restricted use," "limited distribution" and "restricted distribution" when reports are not meant for general use. Because these terms may imply unintended differences of meaning, this project is aimed at eliminating the inconsistencies and developing a "placeholder" within the standards to discuss reasons for restricting the use of various CPA reports. The reasons for restriction currently include: (1) The measurement criteria are not generally understood (e.g., information prepared following regulatory basis of accounting); (2) Users take responsibility for the procedures performed (e.g., agreed-upon procedure engagements); (3) Reporting is a by-product of an audit (e.g., a report on reportable conditions issued to the audit committee as a result of an audit).

Another topic that has been considered is whether a CPA may restrict the use of what is ordinarily a general use report. For example, may a CPA add a paragraph to an audit report stating that its use is only for the company itself and, perhaps, one other party such as a bank? Currently, although not directly considered in the professional standards, the general belief is that such a restriction is acceptable under certain circumstances. Perhaps distribution is a salable product, with some similarities to extended warranties on other products.

 Interaction with Assurance Services

The AICPA has established the Assurance Services Committee to identify and develop promising new services for practitioners. This committee is using the work of Special Committee on Assurance Services (the "Elliott Committee") as a starting point. The Assurance Services Committee is currently creating task forces to address the following services:

• Electronic commerce
• Elder care
• Health care effectiveness
• Systems reliability
• Performance measures
• Risk assessment

 Each task force will develop guidance for performing engagements on its particular subject area. For example, one approach might be to develop both measurement standards relating to the topic (i.e., the area’s "generally accepted accounting principles") and practitioner performance standards (i.e., the area’s "generally accepted auditing standards"). Alternatively, if the profession’s attest or consulting standards are appropriate for a particular area, the task force might suggest development of the service within them. A basic premise is that the task forces develop "quick to market" products in a less time consuming manner than does the ASB.

A variety of issues relating to the new committee’s role exist at this point, including:

• How will decisions be made on whether particular new services should be structured under existing professional standards, particularly the attest and consulting standards?
• What are the likely effects of developing "quick to market" measurement and performance standards?
• What would be the effect of requiring practitioner independence as the only performance standard on certain engagements and allowing the "market" to develop the service?
• What effect, if any, will reporting upon these engagements have upon CPA overall reputation?
• What is the appropriate interaction between the ASB and the Assurance Services Committee, especially given the potential overlap of attest services and assurance engagements.

 Representation Letters

The ASB is in the process of voting on whether to issue an exposure draft on management representation letters. This draft, which would replace SAS No. 19, reflects accounting and auditing changes that have occurred and more closely aligns representation letters with current environment.

 Exposure Drafts Outstanding

Exposure drafts are currently outstanding for (1) management discussion and analysis, (2) the predecessor/successor auditor relationship and (3) a requirement to obtain an understanding with the client as to particular details of the engagement. My previous column discussed each in detail.

Finally, if you have areas that you believe ASB should consider I would appreciate your input; it need not be more than a paragraph or two summarizing the area. Also, I am interested in any research in which you may be involved that may provide insights into any of the above issues.

Auditor's Report Contents Page

Site Administrators: Mike Groomer (groomer@indiana.edu) & Richard Rand (rsr2907@tntech.edu)
Date Last Updated: August 14, 1997