The Auditors Report

ASB Update as of August 31, 1999

Ray Whittington, DePaul University
Academic Member of the Auditing Standards Board

The ASB is devoting attention to several projects that deal with issues that continue to be particularly susceptible to academic research. In this update I will focus on two such projects, financial capability (going concern) and the auditor’s responsibility to detect fraud. In addition, I will describe a project related to revenue recognition. Please send any questions, comments, or suggestions to rwhittin@wppost.depaul.edu.

Financial Capability and Going Concern
Recently the ASB attempted to undertake a project to revise SAS No. 59 to improve auditor performance. However, it was concluded that no significant progress could be made in light of the lack of reporting criteria regarding financial capability in generally accepted accounting principles. At the urging of the ASB, a Work Group on Financial Capability was formed to determine if accounting and auditing standards setters should undertake a project to address financial reporting and auditing issues on the topic of financial capability. The working group is composed of representatives of the FASB, the ASB, the Accounting Standards Executive Committee, and the Technical Issues Committee. In an attempt to solicit user input, a Financial Capability Roundtable was held on June 28 that brought together various leaders of the business community. These deliberations have identified the following issues:

  • What types of conditions or events should trigger the requirement to disclose information about an entity’s financial capability?
  • What kinds of disclosures regarding financial capability should be included in financial statements when the threshold is triggered?
  • Should all entities be required to disclose information about financial capability or should the requirement only apply to the entities that are experiencing financial difficulties?
  • Should the auditing literature continue to require a going concern paragraph in the auditor’s report if certain conditions regarding financial capability are present?
  • Do the SEC’s Management Discussion & Analysis Rules, in requirement and in practice, provide sufficient disclosure related to financial capability, especially in periods immediately preceding the declaration of bankruptcy.

Research related to any of these issues would be valuable to the ASB’s eventual consideration of this issue.

The Auditor’s Responsibility for Detection of Material Misstatement Due to Fraud
The ASB recently decided to support the following four proposals to research the effectiveness of SAS No. 82:

  • Assessing the Effectiveness of SAS No. 82, by Steven Glover, Mark Zimbelman, and Douglas Prawitt of Brigham Young University and Joseph J. Schultz of Arizona State University. Using the prior study by Zimbelman (Journal of Accounting Research, Supplement, 1997) as a benchmark, the researchers will attempt, through behavioral experiments, to determine (a) changes in the extent of planned audit testing due to elevated fraud risk, and (b) significant changes in the nature of planned audit testing due to elevated fraud risk.
  • Audit Fraud Risk Assessment Information and Its Relationship to Audit Programs, by Theodore Mock of the University of Southern California and Jerry L. Turner of Florida International University. The researchers will use archival methodology to study (a) the extent to which fraud risk assessments vary between clients in similar industry groups and over time, (b) the extent to which auditing procedures have been affected by the fraud risk assessment required by SAS No. 82, and (c) the nature of the adjustments in audit programs resulting from differences in fraud risk assessments.
  • The Impact of a Standard Audit Program and Management Strategic Behavior on the Planning of Fraud Detection Procedures, by Steven K. Asare of the University of Florida and Arnie Wright of Boston College. Using a behavioral experiment, the researchers will examine the effect of a standard program and management diversionary tactics on auditors’ effectiveness in designing appropriate fraud-related procedures.
  • An untitled proposal by Barbara Apostolou of Louisiana State University and John M. Hassell of Indiana University. This proposal is for a study that will attempt to determine the relative importance of the SAS No. 82 risk factors to practicing auditors using the Analytic Hierarchy Process.

The ASB continues to be interested in other projects that may shed light on the effectiveness of audits in detecting material misstatements due to fraud.

Revenue Recognition
Revenue recognition is generally considered to be one of the most contentious issues in a financial statement audit, especially as it is applied in certain specialized industries. It has been an issue in many audit failures, and was recently identified by the SEC as a major concern for the profession. As a result, a task force of the ASB has been established to oversee the development of guidance in this area. The first publication of the task force brings together in one source the audit and accounting guidance on revenue recognition from AICPA Audit and Accounting Guides. Its primary objective is to assist auditors in fulfilling heir responsibilities in auditing the financial statements assertions related to revenue. The publication is an excellent resource for auditing classes and can be obtained form the AICPA Order Department by requesting product number 022506. It also may be downloaded from the AICPA web site.

Now the task force has turned its attention to development of a guide on auditing revenue in certain industries that are not covered by existing AICPA Guides. The focus of this project will be on industry-specific issues that present special audit risks. Industries identified thus far for inclusion are computer software, high technology, service providers, and franchisors.

Back to Contents Page