38 Years of Excellent Client Service
CLARITY STANDARDS
SSummary of Changes
f Ch
Effective for periods ending after December 15, 2012
Presented By
William Blend, CPA, CFE
and
Joe opp, C
Joel Knopp, CPA Purpose
p
of this Training
g
• This training is designed to:
– Give a detailed overview of the important changes in AU‐C 122 for most audits
– Discussion of the required documentation changes required as a result of the new standards
– An opportunity for you to ask questions to enhance An opportunity for you to ask questions to enhance
your understanding
• This training is not designed to:
This training is not designed to:
– Make you an expert on the new standards
2
SAS 122 An Overview
ep aces a S S s o
6 e cept:
• Replaces all SAS’s from 1 –
116 except:
– SAS 65 ‐ The Auditor’s Consideration of the Internal Audit Function in Audit of F/S – SAS 124 ‐ Financial Statements Prepared in Accordance with Financial Reporting Framework Generally Accepted in Another Country
y
p
y
– SAS 125 – Alert That Restricts the use of the Auditor’s Written Communication
– SAS 126 ‐ The Auditor’s Consideration of an Entity’s Ability to continue as Going Concern (no major changes)
g )
3
Specific Sections Not Covered By This
T i i
Training
U C 800 Spec
a o s de a o s Audits of Financial ud s o
a ca
• AU‐C 800 –
Special Considerations –
Statements (F/S) prepared in accordance with Special Purpose Frameworks
• AU‐C 805 – Audits of Single F/S and Specific Elements, Accounts, or Items of a F/S
• SAS 124 –
SAS 124 F/S Prepared in Accordance with a Financial F/S P
di A
d
ith Fi
i l
Reporting Framework Generally Accepted in Another Countryy
4
What’s New or Different

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
Terms of engagement (engagement letters)
Initial audit engagements
Performance materiality Considerations of laws and regulations g
Use of a service organization
External confirmations
Specific considerations for selected items
Specific considerations for selected items
Audits of Group Financial Statements
5
What’s New or Different







Auditing estimates
Communicating internal control matters Restriction on use of reports
Use of specialists (including auditor’s specialists)
p
Audit Reports
Reports on summary financial statements
Consistency of financial statements
Consistency of financial statements
6
AU-C Section 210 – Terms Of Engagement
• Requires assessment of the “preconditions for an audit”
 Determine whether the financial reporting framework (such as GAAP or OCBOA) used by management in
(such as GAAP or OCBOA) used by management in preparation of the financial statements is acceptable
 Obtain management’s agreement that it acknowledges and understands its responsibilities
• to occur in the planning phase, and
• to be explicitly detailed in the engagement letter
to be explicitly detailed in the engagement letter
 Group engagement shareholder is to evaluate that sufficient appropriate audit evidence will be able to be pp p
obtained (including component auditors)
7
AU-C Section 510 - Opening Balances-Initial
A dit Engagements,
Engagements Including
Incl ding Re
a dits
Audit
Re-audits
• Reading a predecessor auditor’s report and reviewing predecessor’s audit documentation cannot be the only audit procedures on opening balances
• The auditor’s risk assessment of opening balances will h
di ’ i k
f
i b l
ill
determine audit procedures
• Now required to perform audit procedures to determine Now required to perform audit procedures to determine
whether:
 Opening balances contain material misstatements
p
g
 Accounting policies have been consistently applied, appropriately accounted for, presented and disclosed
8
AU-C Section 320 – Materiality in Planning
dit
and Performing an A
Audit
• Introduces the term “Performance Materiality”
– Replaces previous use of tolerable misstatement
• Performance materiality is defined as: – the amount(s) set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate
appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole
– also refers to the amount(s) set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances, or disclosures
,
,
9
Performance Materiality
y
• Performance materiality is to be distinguished from tolerable misstatement. • Tolerable misstatement is defined as:
– the application of performance materiality to a particular h
li i
f
f
i li
i l
sampling procedure (Audit Sampling AU‐C 530)
– a monetary amount set by the auditor to obtain an a monetary amount set by the auditor to obtain an
appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population
misstatement in the population
– can be same as performance materiality or smaller
10
AU-C Section 250 – Consideration Of Laws &
Regulations In Financial Statement Audits
Gu
da ce Requirement
equ e e t
Guidance
a p es
Examples
• The auditor should obtain a general understanding of the legal and regulatory framework applicable to entity and industry in
applicable to entity and industry in which it operates
• The auditor should obtain a general understanding of how the entity is complying with this framework
Single
g Audit
Rules of Auditor General
Code of ordinances
Controls in place
Public notice for RFPs
Responsible Party(s)
Record keeping
Record keeping
11
AU-C Section 250 – Consideration Of Laws &
Regulations In Financial Statement Audits
Guidance Requirement
Examples
• The auditor should obtain sufficient appropriate audit
sufficient appropriate audit evidence regarding material amounts and disclosures in the financial statements that are determined by the provisions of those laws and regulations
of those laws and regulations generally recognized to have a direct effect on their determination determination
Pensions
OPEB
Investments
Fixed Assets
Debt
12
AU-C Section 250 – Consideration Of Laws &
Regulations In Financial Statement Audits
Guidance Requirement
Examples
• The auditor is to perform procedures to determine
procedures to determine instances of non‐compliance with laws and regulations that would have a material effect
View of documents
Verification of information
of information
Inquiries of management
Client representation letter
13
Additional Fraud Inquiries
q
g
q y
Additional Management Fraud Inquiry
• Has the any correspondence from relevant licensing or regulatory authorities been received? Are you aware of, or do you suspect, any noncompliance by the of relevant laws and t
li
b th f l
tl
d
regulations?
Additional Inquiry of Others and if applicable Audit Committee
q y
pp
• Are you aware of, or do you suspect any noncompliance by related to relevant laws or regulations? Are you aware of any
related correspondence from relevant licensing or regulatory l d
d
f
l
li
i
l
authorities?
14
AU-C 402 - Audit Considerations Relating
Ser ice Organization
Organi ation
To An Entit
Entity Using A Service
• The user auditor (i.e., the auditor who is relying on the service auditor’s report for an entity that uses a service organization) is now required to ask client management about whether their service organizations have reported:
about whether their service organizations have reported:
 Any fraud
 Noncompliance with laws and regulations
Noncompliance with laws and regulations
 Uncorrected misstatements affecting the financial statements of the entity • If the answer to any of these questions is yes, the auditor is required to evaluate the impact on their audit procedures
15
AU‐C Section 505‐ External Confirmations
 To be an external confirmation, the response is to be obtained directly from the confirming source in writing
 Can be electronic if obtained directly from source or facilitated by a third party service provider
facilitated by a third‐party service provider  Example ‐ confirming source provides electronic access codes or information necessary to access secure website y
where data that addresses the subject matter of the confirmation is held
 Validity of electronic confirmations (e.g. fax) can be V lidit f l t i
fi
ti
(
f )
b
enhanced by follow‐up with sender (e.g. telephone call)
g
p
g
 Management providing the auditor with access codes would not be considered an external confirmation
16
AU‐C Section 505‐ External Confirmations
• Per A.27, “An oral response to a confirmation request does not meet the definition of an external confirmation because it is not a direct written response to the auditor.”
– It permits the use of an oral response as part of It permits the use of an oral response as part of
alternative procedures to provide audit evidence under certain circumstances
• Verbal updates to a written external confirmations are permitted • Alternative procedures are not considered sufficient if the Alt
ti
d
t
id d ffi i t if th
team determines that a direct written response is needed to obtain sufficient audit evidence (determine impact on (
p
audit opinion) 17
AU‐C Section 505‐ External Confirmations
 A response to a confirmation request may contain restrictive language regarding its use. Such restrictions do not l
di it
S h t i ti
d
t
necessarily invalidate the reliability of the response as audit evidence (depends on nature and substance of language)
 Specific examples of disclaimers that would cast doubt about the reliability include:
 Statements that information is not guaranteed, complete Statements that information is not guaranteed, complete
or that the response is a matter of opinion
 A declaration that the confirmation cannot be relied on
 Questions about reliability would result in need to consider Q ti
b t li bilit
ld
lt i
dt
id
additional procedures
 See guidance if management does not permit external confirmations and the team deems it unreasonable 18
AU‐C Section 330‐ Accounts Receivable • Retains presumptive requirement for confirmation of trade receivables  Unless exception such as immaterial balance or expect response would be ineffective
response would be ineffective
19
AU-C Section 501 Audit Evidence—Specific
Considerations for Selected Items
• There are 8 specific areas that have prescribed audit procedures that are to be followed
• #1 ‐ Investments in Securities When Valuations Are Based on the Investee’s Financial Results – Does not apply to equity method investments
20
AU-C Section 501 Audit Evidence—Specific
Considerations for Selected Items
• #2 Investments in Derivative Instruments and Securities Measured or Disclosed at Fair Value – Determine if accounting framework specifies the method for demining fair value instrument
for demining fair value instrument
– Determine if valuation was based on that method
– If the fair value is based on a third
If the fair value is based on a third‐party’s
party s (broker dealer) (broker dealer)
model, obtain an understanding of the model
– If fair value is based on management’s model, obtain audit evidence regarding management’s assertions
21
AU-C Section 501 Audit Evidence—Specific
Considerations for Selected Items
• #3 Impairment Losses – Applies to permanent decline in value of securities / derivatives below its cost of carrying value
• #4 Unrealized Appreciation or Depreciation
#4 U
li d A
i i
D
i i
– Applies to ineffective portion of derivatives
• #5 Inventory #5 Inventory
– Applies when inventory is subject to risk of material misstatement – Provides specific guidance on determining accuracy of counts and condition of inventory (i.e. guidance for physical inventory or alternative procedures)
h i li
t
lt
ti
d
)
22
AU-C Section 501 Audit Evidence—Specific
Considerations for Selected Items
• #6 Litigation, Claims, and Assessments – Auditor should perform the following to identify litigation, claims, and assessment
• inquiring of management and in‐house legal counsel
f
d h
l l
l
• obtaining from management a description and evaluation of litigation, claims, and assessments
evaluation of litigation, claims, and assessments
• reviewing minutes of meetings
• reviewing legal expenses and invoices
– For identified claims, obtain information about (a) applicable period (b) probability of unfavorable outcome and (c) range of potential loss
t
d( )
f t ti l l
23
AU-C Section 501 Audit Evidence—Specific
Considerations for Selected Items
• #7 Communication with Legal Counsel
– Outlines guidance for obtaining direct written correspondence from legal counsel
– Specific requirement to document decision and basis not S ifi
i
tt d
td i i
db i
t
to confirm with legal counsel if no risk of material misstatement exist
• #8 Segment Information
– Understand the methods used by management in determining segment information, and – Perform analytical procedures/other audit procedures appropriate in the circumstances
appropriate in the circumstances
24
AU-C Section 550 – Related Parties
• No change in definitions or disclosure requirements
• Previously, only applied to U.S. GAAP
q
• The clarified standard requires us to consider the risk of material misstatement regardless of the financial reporting framework used (i.e. GAAP, IFRS or a special‐purpose framework)
25
AU-C Section 600 – Audits of Group
Financial Statements
• Applies to any engagement that has more than one component:
– An entity or business activity for which management prepares financial information that should be included fi
i li f
i
h h ld b i l d d
in the financial statements
– Examples of a component may include a subsidiary, Examples of a component may include a subsidiary
division, account balance, product, service, combination of products or services, location, an investment accounted for under the equity method, or a governmental blended or discretely presented component unit
component unit
26
AU-C Section 600 – Audits of Group
Financial Statements
• Components do not necessarily follow legal structures but will follow operational and financial reporting structures
• Various levels of components may exist within the group fi
financial reporting system, in which case it may be i l
i
i hi h
i
b
appropriate to identify components at certain levels of aggregation rather than individually.
aggregation rather than individually. 27
AU-C Section 600 – Audits of Group
Financial Statements
• Any audit with more than one component is considered a group audit of group financial statements • While the requirements are expanded for use of other auditors (i.e. component auditors), it applies when there di
(i
di
) i
li
h
h
is a single engagement team
• The general concept is not necessarily new. Engagement The general concept is not necessarily new Engagement
teams, in considering risk, identify areas that require special consideration because of unique risks.
• Additionally, that engagement team’s must evaluate closing and consolidating procedures for risk of misstatement i
28
AU-C Section 600 – Audits of Group
Fi
Financial
i l Statements
St t
t
p g g
p
p
• Group engagement partner‐
The professional in the firm who is responsible for the group audit engagement, its performance, and the audit report
• Group engagement team‐
Group engagement team Establish the overall group Establish the overall group
audit strategy, communicate with components, perform work on the consolidation process, and evaluate conclusions drawn from audit evidence l
d
f
d
d
• Group management‐ Responsible for preparing and presenting the group’ss financial statements
presenting the group
financial statements
• Group materiality ‐ Overall materiality for the Group F/S
• Group‐ wide controls‐ Designed, implemented, and maintained by group management
29
AU-C Section 600 – Audits of Group
Fi
Financial
i l Statements
St t
t
• Component‐ An entity or business activity for which management prepares financial information that should t
fi
i li f
ti th t h ld
be included in the group financial statements.
• Component auditor‐
p
performs work on the financial p
information of a component that will be used as audit evidence (may be part of engagement team’s firm, network firm or external firm)
network firm, or external firm)
• Component management‐ group or component management responsible for preparing a component’s financial information
• Component materiality‐ The materiality level for a component determined by the group audit team
component determined by the group audit team
30
AU-C Section 600 – Audits of Group
Financial Statements
o po e
ud o e a p es
• Component Auditor examples:
 An audit of a division of a company that is performed by a separate engagement team of the same firm  Subsidiary financial statements audited by another external auditing firm
 An equity method investee
An equity method investee
• Key consideration is whether they are a member of the engagement team or if they are assigned responsibility
g g
y
g
p
y
 Is part of the work performed by other auditors?
 Who assigns responsibility, extent of procedures, materiality, supervises work, resolves key issues?
31
Applicable
pp
to All Group
p Audits
• Perform continuance and assessment procedures
• Identify components and associated risks of material misstatement of each the components
• Identify components by level of significance (level of risk) Identify components by level of significance (level of risk)
and work to be performed
• Define component materiality • Obtain an understanding of the group wide controls
Obt i
d t di
f th
id
t l
• Obtain an understanding of the consolidation process and management’s instructions to components
• Perform sufficient procedures / including analytics at group wide level • Evaluate subsequent events (including components)
Evaluate subsequent events (including components)
32
Acceptance
/ Continuation
p
• As part of acceptance and continuance considerations the group engagement partner should:
the group engagement partner should:
 Determine whether sufficient audit evidence can reasonably be expected to be obtained regarding the consolidation process and financial information of components on which to base the group audit opinion
 Evaluate whether sufficient evidence can be obtained Evaluate whether sufficient evidence can be obtained
by group engagement team to act at the group auditor:
 Work of group engagement team
 Use of component auditors
 For this purpose, the engagement partner will need to assess competence and capabilities of component
assess competence and capabilities of component auditors
33
Overall Audit Strategy
gy and Audit Plan
• Establish an overall group audit strategy Establish an overall group audit strategy
• Gain an understanding of the component auditors  The
The degree to which they will comply w/ requirements degree to which they will comply w/ requirements
(independence), cooperate, and share information  Assessment of competence • Assess the extent to which the team will use the work of component auditors and whether the auditors report will make reference to component auditor • The group engagement partner should review and approve the overall group audit strategy and audit plan
34
Materiality
ate a ty
• The group engagement team determines:
– Materiality, for the group financial statements as whole Materiality for the group financial statements as whole
when establishing group audit strategy
– Whether a lower materiality should be applied to certain y
pp
classes of transaction, account balances or disclosures
– The threshold for trivial misstatements
– Component materiality (considering all components)
• Should be lower than the overall group materiality
• Required evaluation by group auditor on component Required evaluation by group auditor on component
materiality when assuming responsibility
• The group auditor does not need to evaluate materiality where reference to component auditor is made
35
For Each Component
p
of the Audit
• Determine if it is significant “significant
component” based on: – Financial Financial
significance (i.e. materiality)
– Significant risk Si ifi t i k
(e.g. legal issues) that could result i
in material t i l
misstatement • If significant, follow group audit standards for audit standards for
component audits
• If not significant, apply analytic procedures for components at group level
• If sufficient evidence for an If sufficient evidence for an
opinion at group level cannot be obtained, expand procedures to non‐significant d
f
components to provide sufficient evidence
See Diagram at paragraph A.76 of AU‐C 600
36
AU-C Section 600 – Audits of Group
Fi
Financial
i l Statements
St t
t
• Detection risk in a group audit includes the risk that:
 a component auditor may not detect a misstatement in the financial information of a component  this could cause a material misstatement of the group g p
financial statements and  the group engagement team may not detect this misstatement
• The group engagement team’s responsibilities for component audits is dependent on the assessment of significant components and whether reference will be i ifi
d h h
f
ill b
made to other auditor’s in report
• The group audit standards still apply even if it is The group audit standards still apply even if it is
determined there are no significant components. 37
Consolidation Process Defined
consolidation process
• Reference to Reference to “consolidation
process” includes:
includes:
– The recognition, measurement, presentation and disclosure of component financial information in a group financial statement
– Through inclusion, consolidation, proportionate consolidation, and equity / cost methods of lid i
d
i /
h d f
accounting
– The aggregation in combined or consolidated financial The aggregation in combined or consolidated financial
statements of the financial information of components under common control
38
Component
p
Auditors
g p g g
• The group engagement team is to obtain:
– An understanding of each component auditor
• Professional competence / if regulated
• If they will comply with ethical / independence requirements
If component auditor will cooperate and degree to
• If component auditor will cooperate and degree to which group engagement team can be involved
– Make certain communications with the component auditor (regardless of whether reference made)
auditor (regardless of whether reference made)
– Make determination whether to make reference
– Evaluate sufficiency of work Evaluate sufficiency of work
39
When Understanding of Component
A dit
Auditors
Can
C B
Be W
Waived
i d
o necessary
ecessa y to
o ob
a aan u
de s a d g o
e
• “It iss not
obtain
understanding
of the
auditors of those components for which the group
auditor will not be using the work of the component
auditor
di
to provide
id audit
di evidence
id
f the
for
h group audit.”
di ”
AICPA Technical Practice Aid 8800 #19
• “It
It will not be necessary to obtain an understanding of
the auditors of those components for which the group
engagement team plans to perform analytical procedures
at group level only.” AU‐C 600 A.41
40
Expanded Communications (From Group
Auditor to All Component Auditors)
• The group engagement team should communicate:
 A request that the component auditor will cooperate (knowing how the group engagement will use work)
 Ethical (e.g. independence) requirements that are ( g
p
) q
relevant to the group audit
 A list of related parties prepared by group management (request that component auditor
management (request that component auditor provide information on missing related parties)
 Identified significant risks of material misstatement of the group financial statements due to fraud or error
the group financial statements, due to fraud or error, that are relevant to the component auditor
41
Expanded Communications (From
Component Auditor to Group Auditor)
• Whether the component auditor has complied with the group engagement team’s requirements
’
• Areas of risk to a material misstatement at the group financial statement level identified:
financial statement level identified:
 Instances of noncompliance with laws or regulations at the component or group level
 Significant risks of material misstatement, due to fraud or Si ifi
ik f
i l i
d
f d
error, identified by the component auditor and the component auditor’s response
• The group engagement auditor is responsible for subsequent events through the date of issuance of group financial statements (including at the component level)
financial statements (including at the component level)
42
Reference to a Component Auditor in
A dit ’ Report
Auditor’s
R
t
• Reference should not be made unless:
 The Component’s and the group’s financial statement framework are the same
 Audit was preformed in accordance with GAAS
Audit was preformed in accordance with GAAS
 Issued an auditor’s report that is not restricted
• Report should clearly indicate the portion of the F/S p
y
p
/
audited by the component auditor
• If naming the component auditor in audit report:
 Permission must be obtained from component auditor to i i
b b i df
di
name the component auditor  Both reports should be presented together
43
AU-C Section 600 – Audits of Group
Financial Statements
• When the auditor chooses to assume responsibility for the work of the component auditor, the new standard increases auditor responsibilities (and their involvement with the component auditor) with
involvement with the component auditor) with respect to:
 Significant components
Significant components
 Communications with the component auditor
• No
No reference in auditor
reference in auditor’ss report should be made report should be made
when assuming responsibility
44
Expanded Communications (From
Component
Auditor to Group
p
p Auditor))
When Assuming Responsibility
• Corrected and waived adjustments identified by component auditor (excluding trivial misstatements) • Indicators of possible management bias regarding accounting estimates and the application of accounting ti
ti t
d th
li ti
f
ti
principles
• Description of any identified material weaknesses and Description of any identified material weaknesses and
significant deficiencies in internal control at the component level
• Other significant findings that have been / will be communicated to those charged with governance
45
AU-C Section 600 – Audits of Group
Financial Statements
Acceptance and continuance ‐ group auditor; identify components; preconditions
identify components; preconditions
Understanding ‐ group; components; component auditors; make reference?
di
k
f
?
Materiality decisions and responding to risks of material misstatement
Other procedures Other
procedures ‐ consolidation process; consolidation process;
subsequent events; evaluating evidence
Communications ‐ with component auditors; with Communications
with component auditors; with
group governance and management
46
AU-C Section 265 – Communicating Internal
Control Related Matters Identified In An Audit
• Now required to include an explanation of the potential effects in the written communication of Significant Deficiencies and Material Weaknesses
 Effect does not need to be quantified, just explained
Effect does not need to be quantified just explained
• Now required to communicate to management all q
g
other identified deficiencies in internal controls (at least verbally) that merit management’s attention.
• Following slides illustrate language changes related to communication of “findings”
to communication of findings
47
Communication of “Findings”
Communication of Findings
In planning and performing our audit of the financial
statements of ABC Company (the “Company”) as of
and for the year ended December 31, 20XX, in
accordance with auditingg standards ggenerallyy accepted
p
in the United States of America, we considered the
Company’s internal control over financial reporting
((“internal control")) as a basis for designing
g g audit
procedures that are appropriate in the circumstances
for the purpose of expressing our opinion on the
financial statements,, but not for the p
purpose
p
of
expressing an opinion on the effectiveness of the
Company’s internal control. Accordingly, we do not
p
an opinion
p
on the effectiveness of the
express
Company’s internal control.
48
Communication of “Findings”
Communication of Findings
P. 14 The auditor should include in the written
communication:
iv. the auditor
iv
the auditor’ss consideration of internal control consideration of internal control
was not designed to identify all deficiencies in internal control that might be material
internal control that might be material weaknesses or significant deficiencies, and therefore, material weaknesses or significant ,
g
deficiencies may exist that were not identified. 49
Communication of “Findings”
Communication of Findings
Our consideration of internal control was for the
limited purpose described in the first paragraph
and was not designed to identify all deficiencies
in internal control that might be material
weaknesses. Given these limitations, duringg our
audit we did not identify any deficiencies in
internal control that we consider to be material
weaknesses. However, material weaknesses
may exist that have not been identified.
50
Communication of “Findings”
Communication of Findings
• Our consideration of internal control was for the
limited purpose described in the preceding paragraph
and was not designed to identify all deficiencies in
internal control that might be material weaknesses,
and therefore, material weaknesses may exist that
were not identified.
identified However,
However as discussed below,
below we
identified certain deficiencies in internal control that
we consider to be material weaknesses.
• Note: “material weaknesses” can be replaced with “material weaknesses or significant g
deficiencies” in the above language
51
AU-C 125 (Restriction of Auditor’s
R
Report)
t)
• Establishes an umbrella requirement to include an alert that restricts the use of the auditor’s written communication when the subject matter of that communication is based on: – Measurement or disclosure criteria that are determined by the auditor to be suitable only for a limited number of users who can be presumed to have an adequate understanding of the criteria, d t di
f th it i
– Measurement or disclosure criteria that are available only to the specified parties, or – Matters identified by the auditor during the course of the audit engagement when the identification of such matters is not the primary objective of the audit engagement (commonly referred to as a by product report)
(commonly referred to as a by‐product report). 52
Alert Language
g g
• The alert language, which states that the The alert language, which states that the
“communication is intended solely for the information and use of the specified parties” is consistent with GAAS – Exception if an engagement is also performed in accordance with Government Auditing Standards d
ith G
t A diti St d d
– In this circumstance, the alert language describes the p p
purpose of the communication and states that the communication is not suitable for any other purpose. No specified parties are identified in this type of alert. 53
AU-C 540 Auditing Accounting Estimates
(including Fair Value and Related Disclosures)
• Requires a risk based approach to evaluating Requires a risk based approach to evaluating
accounting estimates
– Identify and perform sufficient procedures on estimates that have a risk of material misstatement
• Assessment include (required understanding):
– Accounting requirements and related disclosures
– Management’s process for identifying those t
transactions or events that may give rise to estimates
ti
t th t
i
i t
ti t
– Management’s process for making the accounting estimates and the data on which they are based
estimates and the data on which they are based
54
Management’s Process for Making The
Accounting Estimates and Data on Which
These are Based
e od (o ode ) used
a g e es a e
Method (or model) used in making the estimate
Relevant controls surrounding the estimates
If Management has used a specialist
g
p
Assumptions underlying the estimate
Whether there has been or ought to be a change from prior year method or assumptions
• Assessment of impact of estimation uncertainty
•
•
•
•
•
– Amount of judgment
– Sensitivity to change in assumptions
– Comparatives between prior estimates and actual results
Comparatives between prior estimates and actual results
55
Responding to Risks of Material
Misstatement (Auditor Should Perform
One or More of the Following)
es g a age e s p ocess o de e op g e
• Testing management’s process for developing the estimate
– Method and assumptions used are reasonable
– Management’s intent to carryout specific course or action and ability to do so
• Test operating effectiveness over control process
• Auditor develops its own estimate (point or range)
• Utilize information subsequent to balance sheet date up to the audit report date 56
Additional Procedures To Respond To
Risk of Material Misstatement
g g
g
• The should evaluate the following regarding estimation uncertainty:
– How management has considered alternative assumptions or outcomes
or outcomes – Reasonableness of assumptions
– Intent of management to carryout action and ability to do carryout these actions
• Consider indications of management bias
– Review
Review judgments and decisions by management for judgments and decisions by management for
indicators of possible bias
– Can be considered with other estimates and over multiple periods
i d
57
Documentation Considerations
U 5 0p
e aud o s ou d docu e
• AU‐C 540 p. 22 The auditor should document:
– For those accounting estimates that give rise to significant risks, the basis for the auditor’s conclusions about the reasonableness of accounting estimates and their bl
f
i
i
d h i
disclosures
– Indicators of possible misstatement bias, if any
58
AU-C Section 500 – Using The Work Of
Management’s Specialist
• .08 (.A35–.A39) If information to be used as audit evidence has been prepared using the work of a d
h b
d
h
k f
management‘s specialist (for expertise in a field other than accounting or auditing), the auditor should:
g
g),
– a. evaluate the competence, capabilities, and objectivity of that specialist
– b. obtain an understanding of the work of that specialist; – c. evaluate the appropriateness of that specialist‘s work as audit evidence for the relevant assertion
as audit evidence for the relevant assertion. • Includes verification of completeness and accuracy of source data if significant to specialist’s findings
59
AU-C Section 620 – Using The Work Of
An Auditor’s Specialist
• Applies to situations in which the auditor uses the work of an auditor’s specialist for expertise in a field k f
dit ’
i li t f
ti i fi ld
other than accounting or auditing
• Applies to internal and external specialist
pp
p
• Determine during planning if specialists will be needed or utilized and perform required considerations for using the work of specialist
considerations for using the work of specialist
• Requires similar evaluation of competence, assumptions, and underlying data (p. 7 –
p
,
y g
(p
13))
• Avoid referring to “specialist” in documentation when standard does not apply 60
AU-C Section 620 – Using The Work Of
An Auditor’s Specialist
• Who constitutes a specialist?
 An expert in taxation law to determine status on complex compliance issues (legal expertise)
 Actuarial calculations (insurance claims, pension plans)
(
,p
p
)
 Valuation assistance (on complex financial instruments, building appraisal)
 IT specialists (See AU‐C 300 p. A.18 & A.19)
IT specialists (See AU C 300 p A 18 & A 19)
• Who does not constitute a specialist?
 Assistance from the auditor’s tax department on p
deferred income tax provisions (accounting function)
 Assistance with third party settlement receivable / payables (accounting function)
payables (accounting function)
61
AU-C Sections 700, 705 & 706 –
Auditor's
Auditor
s Report
• AU‐C 700 Forming an Opinion and Reporting on Financial Statements
• AU‐C 705 Modifications to the Opinion in the I d
Independent Auditor’s Report
d t A dit ’ R
t
• AU‐C 706 Emphasis‐of‐Matter Paragraphs and Other‐
Matter Paragraphs in the Independent Auditor’ss Report
Matter Paragraphs in the Independent Auditor
Report
• Applies to the form and content of the auditor’s report
62
AU-C Sections 700, 705 & 706 –
A ditor's Report
Auditor's
• The format of the auditor’s report is different as follows:
• Management responsibilities have not changed but are clarified and described in more detail than was previously required
• Headings that distinguish each section are now Headings that distinguish each section are now
required throughout the report
• Introduces emphasis
Introduces emphasis‐of‐matter
of matter (EOM) and other
(EOM) and other‐
matter (OM) paragraphs to replace the explanatory paragraph 63
Audit Report
p
• The format of the auditor’s report has been changed consistent with the requirements of AU‐C 700
h h
f
• Introductory paragraph is modified to include: – Reference
Reference to the complete set of audited financial to the complete set of audited financial
statements
– A statement that the summary financial statements do not reflect any subsequent events if the date of the report t fl t
b
t
t if th d t f th
t
is later than the date of the report on the audited financials
– A statement that summary financial statements do not contain all the required disclosures and that reading the summary financial statements is no substitute for reading the audited financial statements
64
Audit Report
p
• The wording of an unmodified opinion has changed • If the auditor’s report on the complete set of audited financial statements contains a modified opinion, an emphasis of matter paragraph, or an other‐matter h i f tt
h
th
tt
paragraph, then the auditor’s report on the summary financial statements should include reference
financial statements should include reference
• New requirements if auditor report on complete set of financial statements contains an adverse or disclaimer of opinion 65
Standard Audit Report – Order of
P
Presentation
t ti
By
B H
Heading
di
p
• “Report on the Financial Statements”
• “Management’s Responsibility for the Financial Statements” • “Auditor’s Responsibility”
“Auditor’s Responsibility”
• “Opinion”
• If Applicable:
pp
– “Emphasis of Matter”
– “Other Matter”
– Other:
Oh
• “Report on Summarized Comparative Information” • “Report on Summarized Comparative Information” epo o Su
a ed Co pa a e o a o
• “Report on Other Legal and Regulatory Requirements” 66
Opening
p
g Paragraph
g p
epo t o t e a c a State e ts
Report on the Financial Statements
We have audited the accompanying consolidated
financial statements of [Client Name], which comprise
the balance sheets as of [Year End] and [Prior Year End],
and the related statements of [List Statements….], and
cash flows for the years then ended,
ended and the related
notes to the financial statements.
67
Second Paragraph
g p
a age e t s espo s b ty o t e a c a
Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair
presentation of these financial statements in accordance
with accounting principles generally accepted in the
United States of America; this includes the design,
design
implementation, and maintenance of internal control
relevant to the preparation and fair presentation of
financial statements that are free from material
misstatement, whether due to fraud or error.
68
Third Paragraph
g p
Auditor
Auditor’ss Responsibility Responsibility
Our responsibility is to express an opinion on these
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
financial statements are free from material
misstatement.
69
Fourth Paragraph
g p
An audit involves performing procedures to obtain audit
evidence
about
the
in
id
b
h amounts and
d disclosures
di l
i the
h consolidated
lid d
financial statements. The procedures selected depend on the
auditor‘s judgment, including the assessment of the risks of
material misstatement of the financial statements,
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 financial statements in order to
d i
design
audit
di procedures
d
that
h
are appropriate
i
i
in
the
h
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.
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
h financial
fi
i l statements.
70
Fifth Paragraph
g p / Sixth Paragraph
g p
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion,
opinion the financial statements referred to above
present fairly, in all material respects, the financial position of
[Client Name] as of [Year End] and [Prior Year End], and the
results of their operations and their cash flows for the years
then ended in accordance with accounting principles
ggenerallyy accepted
p
in the United States of America.
71
Emphasis
p
of Matter
p g p
p
• Defined as a paragraph in the auditor’s report:
– Required by GAAS or Auditor’s Discretion
– Refers to a matter presented or disclosed
– In auditor’s judgment is of important to user’s d ’ d
f
’
understanding
• Immediately follows opinion y
p
• Use “Emphasis of Matter” or other appropriate heading
• Include a clear reference to where in the report the matter is presented or disclosed
• Add language that “Our opinion is not modified with respect to this matter “
respect to this matter. 72
Examples
p
of Emphasis
p
of Matter
• Defined as a paragraph in the auditor
Defined as a paragraph in the auditor’ss report:
report:
Subsequent Events
Going Concern Consistency of Financial Statements
Special Purpose Frameworks
An uncertainty relating to the future outcome of unusually important litigation or regulatory action – A major catastrophe that has had, or continues to have, a A major catastrophe that has had or continues to have a
significant effect on the entity‘s financial position – Significant transactions with related parties –
–
–
–
–
73
Other Matters
• Defined as a paragraph in the auditor
Defined as a paragraph in the auditor’ss report:
report:
– Required by GAAS or Auditor’s Discretion
– Refers to a matter that is not presented or disclosed
– In auditor’s judgment is of important to the:
• User’s understanding
• Auditor’s responsibility
• The Auditor’s Report
– Use “Other” or other appropriate heading
U “Oth ”
th
i t h di
– This does not address cases where the auditor has other p
y
(
p
g
responsibilities beyond GAAS (this is “Other Reporting Responsibilities”)
74
Other Matters
q
p
• Should be clear that it is not required to be presented and disclosed in the financial statements
• An Other Matter does not include information:
– That is required to be presented by management
Th i
i d b
db
– Laws, regulations, and other professional standards
• Exhibit
Exhibit C C – of AU
of AU‐C
C 706 gives a listing of examples
706 gives a listing of examples
• When a report on compliance is included in the auditor’s report (AU‐C 806 (.13):
– include an other‐matter paragraph
– includes a reference to the specific covenants or paragraphs of the contractual agreement or regulatory
paragraphs of the contractual agreement or regulatory requirement (as it relates to accounting matters)
75
AU-C 708 - Consistency Of Financial
Statements
• Requires the auditor to evaluate material changes in financial statement classifications from previously issued financial statements to determine whether each change is also either:
is also either:  A change in accounting principle, or  An adjustment to correct a material misstatement in j
previously issued financial statements
• If either exists, include an emphasis of matter paragraph i h
in the auditor’s report and refer to the disclosure
di ’
d f
h di l
• Team to document considerations, if applicable
76
AU-C 810 - Engagements To Report On
Summary Financial Statements
• Applies to engagements to report separately on
summary financial
f
l statements:
– Historical financial information that is derived from
financial statements
– Contains less detail that the financial statements
– Still provides a structure representation consistent with
the financial statements
• Replaces term “condensed financial statements”
• No longer allowed to opine on selected financial data
No longer allowed to opine on selected financial data
– Differs from summary financial statements because it doesn’t maintain a structure consistent with the complete set of financial statements
set of financial statements 77
Acceptance
/ Continuance
p
• Explicitly outlines requirements for the auditor to
consider
accepting the
d before
b f
h audit
d engagement:
– Only allowed to report on summary financial statements if also performing the audit of the corresponding complete p
g
p
g
p
set of financial statements
– Required to obtain engagement letter that it acknowledges and understands its responsibilities for the
acknowledges and understands its responsibilities for the summary financial statements
– Management is responsible for making the complete set of audited financials readily available to users of the
of audited financials readily available to users of the summary financial statements (e.g. by posting them on the company’s website).
• “Available on request” is no longer acceptable.
“
”
78
New Audit Considerations
• Make clear that the financial statements are summarized
• If the audited financial statements are not presented with the summary financial statements:
• Clearly
Clearly identity the financial statements and where the identity the financial statements and where the
financial statements can be found
• Verify that audited financial statements readily available
• Be clear on criteria used for summary statements
• Verify that summary financial statements agree with, or can they be recalculated from the audited financial
can they be recalculated from, the audited financial statements
• Unaudited information must be clearly identified and checked for material inconsistencies
79
Management
Representation
Letter
g
p
• The management representation letter is now required
to acknowledge:
– Management has prepared the summary financial
statements
– Management has made the audited financial statements
readily available to users of the summary financial
statements
– Whether any subsequent events have occurred that may
require adjustment or disclosure in the audited financial
statements
80
38 Years of Excellent Client Service
QUESTIONS?
81