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Auditing Standards Update

Mike Glynn, CPA

AICPA Audit & Attest Standards

[email protected]

American Institute of CPAs

Objectives

Understand the key requirements of Clarity StandardsIdentify areas that may affect current practice

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Clarity Project Goals

Address concerns over length and complexity of standards

Make standards easier to read, understand and implement

Lead to enhancements in audit quality


Clarity

Convergence with ISAs

• Harmonize, not adopt

• Most audits performed internationally are of nonpublic entities –therefore, ASB and IAASB have a similar focus

• Avoid unnecessary differences with PCAOB

• ASB standards—more use of “should” than ISAs, but fewer than existing SASs

Avoid unnecessary conflicts with PCAOB standards.

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Clarity

Purpose of the Clarity Project was not to create additional requirements

Adjustments will have to be made to practices as a result of the clarified SASs


Clarity Format

Introduction

Objectives

Definitions

Requirements

Application Material

Appendices and Exhibits

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Considerations for Audits of Smaller, Less Complex Entities

Smaller, less complex refers to characteristics such as:

• Concentration of ownership and management in a small number of individuals

• One or more of the following:

- Straight forward/uncomplicated transactions

- Simple record keeping

- Few lines of business/few products

- Few internal controls

- Few personnel with a wide range of duties


Considerations for Audits of Smaller, Less Complex Entities

Guidance generally results in:

• Specifying alternate procedures appropriate for situations like:

- Scaling down audit programs and procedures

- Recognizing governance and management are the same people

- Addressing controls that are not documented or segregated

- Recognizing irrelevant requirements

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Considerations for Audits of Governmental Entities

Most clarified standards have guidance for audits of governmental entities• About uniqueness of governmental entities

• About uniqueness of state audit organizations

• Opinion units

• Materiality

• Laws and regulations, e.g., “withdrawal from engagements”

Accounting standards neutrality


Clarity Project Status

SASs 117-120 • Compliance auditing (SAS 117) and supplementary information

(SAS Nos. 118-120)

• Currently effective

SASs 122-125 • Effective for audits of financial statements for periods

ending on or after 12/15/12 (CY 2012 financial statement audits)

• Early adoption not permitted to avoid “piecemeal” adoption

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Clarity Project Status

Two SASs not yet clarified• Going Concern

- delayed to enable the ASB to align the proposed SAS with expected accounting standards

• Use of Internal Auditors

- delayed to enable the ASB to align with the IAASB’s revisions to clarified ISA 610

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Clarity Project

Clarified SASs codified with new section numbers designated “AU-C”

AU section numbers changed to converge with ISA numbering

58 AU sections 47 new “AU-C” sections

• 3 withdrawn

- AU section 504, Association With Financial Statements

- AU section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles

- AU section 901, Public Warehouses – Controls and Auditing Procedures for Goods Held

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Clarity Project

• 37 redrafted to corresponding AU-C section

• 7 combined into 1 new AU-C section

- AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards

• 11 combined/split into 9 SASs

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2012 Professional Standards

• The complete body of clarified SASs to be published in a separate volume of AICPA Professional Standards

- The volume will also include

- A preface, Principles Underlying the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards

- A glossary of terms defined in the standards

- Appendixes describing the differences between GAAS and the ISAs and mapping the current AU sections to AU-C sections.

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Changes to Auditing Standards

• New terms

- Applicable financial reporting framework

- Emphasis-of-matter and other-matter paragraphs replace explanatory paragraphs

- Group engagement partner and component auditor replace principal auditor and other auditor, respectively.

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• Auditor’s Reports

- Use of paragraph headings

- Expansion of the description of management’s responsibilities

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Auditor’s Reports

Illustration: An Auditor’s Report on Consolidated Comparative Financial Statements Prepared in Accordance With Accounting Principles Generally Accepted in the United States of America

Circumstances include the following:• Audit of a complete set of general purpose consolidated financial

statements (comparative).

• The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.

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Auditor’s Reports

INDEPENDENT AUDITOR’S REPORT

[Appropriate Addressee]

We have audited the accompanying consolidated financial statements of ABC Company and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 20X1 and 20X0, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

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Auditor’s Reports

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

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Auditor’s Reports

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Auditor’s Reports

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Company and its subsidiaries as of December 31, 20X1 and 20X0, and the results of their operations and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

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Auditor’s Reports

[Auditor’s signature]

[Auditor’s city and state]

[Date of the auditor’s report]

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Modifications to the Opinion (AU-C 705)

Basis for qualified, adverse, or disclaimer (placed before opinion paragraph)

Modified opinion (Qualified, Adverse, or Disclaimer


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Emphasis of Matter and Other Matter Paragraphs (AU-C 706)

Emphasis of Matter• Matters appropriately

presented or disclosed

Other Matter• To understand audit matters

(Combining statements, SI, RSI, SEFA)

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Emphasis of Matter and Other Matter Paragraphs (AU-C 706)

Going concern

Contractual or regulatory reporting frameworks

Consistency

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Audit reports of prior periods presented

Materially inconsistent “other information”

“In relation to” opinion

RSI

General use regulatory F/S

“In connection with” compliance reporting

Emphasis of Matter Other Matter

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• Laws and Regulations

- Paragraph 14 of AU-C section 250 states

The auditor should perform the following audit procedures that may identify instances of noncompliance with other laws and regulations that may have a material effect on the financial statements (see paragraph .06b): (Ref: par. .A12–.A15)

a. Inquiring of management and, when appropriate, those charged with governance about whether the entity is in compliance with such laws and regulations

b. Inspecting correspondence, if any, with the relevant licensing or regulatory authorities (Ref: par. .A16)

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• Laws and Regulations

- The requirement to inspect correspondence is not required in the extant auditing standards.

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• Opening balances

- The clarified SAS makes clear (paragraph 8 of AU-C section 510) that reviewing a predecessor auditor’s audit documentation cannot be the only procedure performed to obtain sufficient appropriate audit evidence regarding opening balances.

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Overall Objectives (AU 200)

Preface

Provides framework for an audit

Place holder for the former “10 generally accepted standards”

Principles

Structure for an audit

Components of each standard

Various definitions and terms


Terms of Engagement (AU 210)

Preconditions for an audit• Determine the financial reporting framework

is acceptable

- Was implicit in extant SASs

- Change is not expected to affect practice

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Terms of Engagement (AU 210)

Preconditions for an audit• In engagement letter, obtain management’s

acknowledgement of its responsibilities for

- Preparing financial statements

- Designing and implementing internal control

- Providing the auditor access to information and persons


Special Considerations—Special Purpose Frameworks (AU-C 800)

Replaces OCBOA with cash, tax, contractual and regulatory

Requires the auditor to understand the purpose and intended users for framework appropriateness

Audit still based on the rest of GAAS, but this section provides the reporting requirements and guidance

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Special Considerations—Special Purpose Frameworks ( AU-C 800)

Cash Basis Tax Basis Contractual Regulatory

Restricted General

Opinion Single Single Single Single Dual

Use EOM? Yes Yes Yes Yes No

DescribePurpose

No No Yes Yes Yes

Restrict use?

No No Yes Yes No


Impact of Selected Standards—Group Audits

OLD

Part of the audit performed by other auditors

OLD

“Principal Auditor”

“Other Auditor”

NEW

Group Audit

Component Auditor

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Special Considerations—Audit of Group Financial Statements (AU-C 600)

Key definitions

__ Group

__ Component

__ Component auditor

__ Component materiality

__ Significant component

Group financial statementsGroup managementGroup‐wide controlsGroup auditGroup auditorGroup audit opinion

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Special Considerations—Audit of Group Financial Statements ( AU-C 600)

Preconditions to making reference to others’ work• Component f/s prepared on same GAAP

basis*

• Component auditor followed GAAS

• Component auditor report is not restricted as to use

*exception in application paragraphs for GASB and FASAB, which address this

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Special Considerations—Audit of Group Financial Statements ( AU-C 600)

Materiality – the GA should determine:• Materiality, incl. performance materiality, for group

financial statements• Whether specific circumstances exist for which

something less than materiality would influence users; if so, apply a different materiality to those transactions, balances, or disclosures

• Component materiality for components that will be audited – component materiality s/b lower than group materiality and component performance materiality s/b lower than group performance materiality

• Threshold above which misstatements are trivial37



Performing procedures

For components with significant RMM – an audit or other specific procedures to address those RMM

For components that are not significant, the GA performs analytical procedures

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The requirements for a group auditor who does not make reference to a component auditor’s report, and decides instead to take responsibility for the work of a component auditor has a SIGNIFICANT increase in requirements compared to:

• Current guidance on the matter

• When making reference under this new AU section

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• 585‐Omitted Procedures

• 610 Internal Audit (coming)

• 705‐Modifications to Opinion

• 720‐Other Information

• 725‐Suppl Information

• 730‐Required Suppl Info

• 806‐Reports on Compliance

• 910‐Repts of Another Country

• 915‐Rept Appl of Acctg Princ

• 920‐Underwriters

• 925‐SEC Filings

• 930‐Interim Fin Info

• 935‐Compliance Audits

Summary of Changes

• 220‐Quality Control

• 230‐Audit Documentation

• 240‐Consider Fraud

• 260‐Comm with Governance

• 300‐Planning

• 315‐Understanding the Entity

• 450‐Evaluate Misstatements

• 500‐Audit Evidence

• 520‐Analytical Procedures

• 530‐Audit Sampling

• 540‐Auditing Estimates

• 570‐Going Concern (ED status)

• 580‐Written Representations

Essentially no/little change

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Formula for Implementation Success

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Remember, clarified SASs are effective for calendar year 2012 audits

Familiarize yourself with Clarified Standards—including application material, appendixes, and exhibits

Go to www.aicpa.org/SASClarity for other resources

Read summary of changes between extant standards and new clarified standards


Formula for Implementation Success

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Begin “project management”• Appoint a person or team to be in charge• Consider small task forces of staff at different

levels• Staff training• Revise firm guidance and audit programs to refer

to clarified standards

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Clarity Project Website Resources

Guide to Clarified and Converged Standards for Auditing and Quality Control

Clarity Project FAQs

Mapping of Existing AUsections to AU-C sections

Listing of Effective Dates of Each AU-C section

Summary of Differences Between Existing SASs and Clarified SASs


Clarity Project Website Resources

Substantive Differences Between theISAs and GAAS

Scalability of GAAS to theSize and Complexity of an Entity

Videos

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American Institute of CPAs® aicpa.org/FRC

Financial Reporting Center

Questions?

Auditing Standards Update - macpamedia.orgmacpamedia.org/media/downloads/2012GNFP/Auditing_Standards_U… · Auditing Standards Update ... - Appendixes describing the differences

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