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ASB Update as of May 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.
Restricted
Use
The exposure period for this proposed SAS ended on May 6 and
discussion of the document is scheduled for the June ASB meeting.
The professional standards have been 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 proposed SAS attempts to eliminate
the inconsistencies. The proposed SAS states that the primary
reasons for restriction include the following: (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.
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
Re-Codification
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 first
project is currently outstanding as an exposure draft that focuses
primarily on improving the understandability of the conclusion
communicated by the practitioner in an attest engagement. The
proposed SSAE 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, Brody 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 Brody 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.
Electronic
Dissemination of Financial Information This task force is
surveying CPAs on their experiences and beliefs relating to
appropriate auditor responsibility when a client’s financial
statements are disseminated electronically, particularly on a web
site. For example, should an auditor have a responsibility to
determine that audited financial statements are properly included
on a client’s web site? If so, how far does this
responsibility go? Should each number and word within the
financial statements be compared to the “hard copy”
financial statements”? Should changes to the website that
might affect the financial statements be monitored? Should an
auditor determine that any “links” to financial
statements are properly identified as “unaudited”? This
project is at an early stage of development and I particularly
encourage any academics with insights into such issues to contact
me.
Interpretations
- Year 2000
Issue. A continuing series of interpretations addressing
this computer processing problem is in progress.
Responsibilities include:
Overall—The auditor’s responsibility relates
to the detection of material misstatements of the financial
statements being audited, whether caused by the Year 2000 Issue
or by some other cause. An auditor does not have a
responsibility to detect current or future effects of the Year
2000 Issue on operational matters that do not affect a client’s
ability to prepare financial statements.
Planning—The results of an auditor’s
consideration of the methods used to process accounting
information pursuant to AU 311 may affect the auditor’s
assessed level of control risk, testing of internal control, and
substantive procedures.
Internal Control Deficiencies—An internal control
deficiency, including one relating to the Year 2000 Issue,
becomes a reportable condition only when, in the auditor’s
judgment, it could adversely affect the organization’s
ability to record, process summarize, and report financial data
consistent with the assertions of management in the financial
statements being audited. For example, during the audit of
financial statements for the year ended December 31, 1997, an
auditor may become aware of computer programs that are correctly
processing current data, but would not function correctly if
used to process data in the year 2000. This is not considered a
reportable condition (although best practice would suggest that
the auditor might wish to communicate it to management).
Beginning with the January 1998 Codification of Statements
on Auditing Standards, this and the preceding two areas
follow AU 311.
Going Concern—This recently issued interpretation
provides illustrations on how the Year 2000 Issue relates to SAS
59. It suggests that the auditor does not have a responsibility
to plan and perform procedures solely to identify conditions and
events relating to the Year 2000 Issue. However, the auditor
does have a responsibility to consider whether the results of
procedures performed in planning, gathering evidential matters
relative to the various audit objectives, and completing the
audit identify such conditions and events. In brief, conditions
and events relating to the Year 2000 Issue must be considered in
conjunction with other conditions and events in the
consideration of a client’s going concern status.
Management Discussion and Analysis—This
interpretation is still in progress; it will provide guidance
similar to that outlined above for MD&A engagements.
Segmental Disclosures—This interpretation, still in
progress, will update the guidance in SAS 21 (AU 435) pursuant
to the new accounting requirements of SFAS 131.
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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