The Auditors Report

ASB Update as of September 15,1998
Kurt Pany, Arizona State University
Academic Member of the Auditing Standards Board

In this update, I discuss a number of the current ASB projects that I believe may be of interest. As always, feel free to contact me with any questions, comments and suggestions.

Academic Opportunities
Academic Fellow
As indicated elsewhere in the newsletter, the AICPA Audit and Attest Standards team has re-instituted the academic fellow program. The program is designed to engage an academic to work with the AICPA in New York City for 12 months. The AICPA’s financing of the program is designed to be used in conjunction with a sabbatical leave from that individual’s university. The position will involve a variety of tasks, but particularly identifying and analyzing research that is relevant to the Auditing Standards Board’s various projects. I served in this role during the development of the nine expectation gap standards during the 1980s. I thoroughly enjoyed the experience and still consider it unsurpassed in my career. As indicated in the announcement, if you believe that you may be interested in being considered for such an opportunity, you may contact Thomas Ray, AICPA Director—Audit and Attest Standards. You may contact Tom by telephone, (212) 596-6006, or by email (tray@aicpa.org).

SAS No. 82 Evaluation

The AICPA is committed to evaluating how well SAS No. 82, Consideration of Fraud in a Financial Statement Audit, has met the Auditing Standards Board’s objectives. A task force is considering this topic and is seeking research proposals relating to the effectiveness of SAS No. 82 and to assisting the Board in its efforts to improve SAS No. 82. The formal announcement is included in this issue.

ASB Projects

Restricted Use
The Board has approved issuance of SAS No. 87, Restricting the Use of an Auditor’s Report in largely the same form as exposed. As I have previously reported, the SAS states that the primary reasons for restriction 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). Also, for the first time in the professional standards, it includes a statement that a CPA may restrict the use of any report that is ordinarily “general use.” For example, an audit report might be considered “restricted use” if so contracted with a client when no laws or regulations prohibit such a restriction. SAS No. 87 revises terminology in a number of areas of the auditing professional standards to use the term “restricted use” rather than “restricted distribution” or “limited distribution” due to difficulties in controlling distribution.

Auditing Investments

In 1996 the Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) 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. The Board continues to work on a number of issues including:

  • 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

The ASB has undertaken a series of projects to improve the usefulness of the Attestation Standards. The Attestation Standards were first issued approximately 12 years ago. During the past few years, there has been a proliferation of engagements performed pursuant to these standards. For example, the recently developed WebTrust attestation service provides guidance about policies and controls of entities offering services or products for sale over the Internet. Additionally, regulators are increasingly seeking to obtain assurance from the public accounting profession as to the reliability of an entity’s assertions about internal control, compliance with laws and regulations, and a variety of other matters.

The Board is currently considering the comments received relating to the proposed SSAE that would:

  • Enable the CPA to report directly on a specified subject matter, such as internal control or on management’s assertion about internal control. For example, the CPA could now express a conclusion about internal control in part as:
    • In our opinion, Lowe Company maintained effective internal control over financial reporting as of December 31, 19XX, based upon criteria established in [identify criteria].

      Alternatively, the CPA could continue to report on management’s assertion about internal control in part as:

      In our opinion, management’s assertion that Lowe Company maintained effective internal control over financial reporting as of December 31, 19XX is fairly stated, in all material respects, based upon criteria established in [identify criteria]

  • Eliminate the requirement for a separate presentation of management’s assertion in certain cases where the assertion is included in the introductory paragraph of the CPA’s report.
  • Align attestation reporting language to that included in SAS No. 58, Reports on Audited Financial Statements.
  • Provide guidance on the relationship between the Attestation Standards and the Quality Control Standards.

The second phase of this project is considering issues relating to allowing further direct reporting engagements in which a practitioner provides assurance when no assertion is obtained or when the client is other than the responsible party making the assertion. It will also address certain inconsistencies existing within the standards.

A related project is considering the development of a framework for attestable measurement criteria. For example, generally accepted accounting principles are the “measurement criteria” for audits. The criteria are far less clear in other areas (e.g., systems reliability, elder care, etc.) This task force is attempting to provide guidance that will assist in the development of measurement criteria.

Finally, as always, if you have areas that you believe that 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.

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