Quarterly Auditing Standards Update
2014, Third Quarter
By Larry L. Perry, CPA
CPA Firm Support Services, LLC
Objectives:



To become familiar with the Auditing Standards Board’s Clarified Auditing Standards
commonly applicable to audits of non-public, non-governmental entities.
To understand practical application issues related to certain Clarified Auditing
Standards.
To be aware of updates from the Accounting and Review Services committee and other
AICPA Committees
Introduction
The AICPA Auditing Standards Board (ASB) has issued its Clarified Auditing Standards that are
designed to make U.S. generally accepted auditing standards (GAAS) easier to read,
understand, and apply. These standards resulted from the convergence of U.S. GAAS with the
International Auditing Standards while, at the same time, avoiding unnecessary conflict with
PCAOB standards. The result is over 40 redrafted or clarified auditing standards, the most
commonly applied of which are discussed below.
I. U.S. Auditing Standards—AICPA (Clarified)
A.
Introduction
In October 2011, the ASB issued SAS No. 122, Statements on Auditing Standards:
Clarification and Recodification. SAS No. 122 is the culmination of a multiyear Clarity
Project to clarify the SASs and converge them with the International Standards on
Auditing. Beginning with SAS No. 122, all new SASs are now included in the section
U.S. Auditing Standards—AICPA (Clarified). SAS No. 122 is effective for audits of
financial statements for periods ending on or after December 15, 2012.
1.
The following table lists the sections of U.S. Auditing Standards—AICPA
(Clarified) and their titles. The AU-C references will be permanently retained.
AU–C Sections
Preface
Principles Underlying an Audit Conducted in
Accordance With Generally Accepted Auditing
Standards
AU-C Sections 200–299
General Principles And Responsibilities
Au-C Sections 300–499
Risk Assessment And Response To Assessed Risks
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Au-C Sections 500–599
Audit Evidence
Au-C Sections 600–699
Using The Work Of Others
Au-C Sections 700–799
Audit Conclusions And Reporting
Au-C Sections 800–899
Special Considerations
Au-C Sections 900–999
Special Considerations In The United States
B.
SAS Nos. 122–124
1.
The section U.S. Auditing Standards—AICPA (Clarified),
incorporates all SASs issued beginning with SAS No. 122. SAS No. 122
contains 39 clarified SASs and supersedes all outstanding SASs through SAS
No. 121 except the following which are covered in SASs published later:
a)
SAS No. 51, Reporting on Financial Statements Prepared for Use
in Other Countries (AU sec. 534)
b)
SAS No. 124, Financial Statements Prepared in Accordance With
a Financial Reporting Framework Generally Accepted in Another Country
(AU-C sec. 910), supersedes SAS No. 51.
c)
SAS No. 59, The Auditor’s Consideration of an Entity’s Ability to
Continue as a Going Concern, as amended (AU sec. 341)
d)
SAS No. 65, The Auditor’s Consideration of the Internal Audit
Function in an Audit of Financial Statements (AU sec. 322)
e)
532)
SAS No. 87, Restricting the Use of an Auditor’s Report (AU sec.
f)
SAS Nos. 117–120
2.
SAS No. 122 also withdraws SAS No. 26, Association With Financial
Statements, as amended.
3.
SAS No. 123 Omnibus Statement On Auditing Standards—2011
Issued October 2011
a)
Amends:
(1)
SAS No. 117, Compliance Audits (AICPA, Professional
Standards, AU sec. 801)
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(2)
SAS No. 118, Other Information in Documents Containing
Audited Financial Statements (AICPA, Professional Standards,
AU sec. 550)
(3)
Clarified SAS Overall Objectives of the Independent
Auditor and the Conduct of an Audit in Accordance With Generally
Accepted Auditing Standards
(4)
Clarified SAS Modifications to the Opinion in the
Independent Auditor’s Report
(5)
Clarified SAS Reports on Application of Requirements of
an Applicable Financial Reporting Framework
(6)
Clarified SAS The Auditor’s Communication With Those
Charged With Governance (Redrafted)
(7)
Clarified SAS Audit Documentation (Redrafted)
b)
This SAS contains amendments to SAS Nos. 117 and 118 and
other finalized clarified SASs that have been issued. These amendments
were needed to conform SAS Nos.117 and 118 to the other clarified SASs
and to address other changes necessitated by the clarity project.
4.
SAS No. 124 Reporting on Financial Statements Prepared in
Accordance With a Financial Reporting Framework Generally Accepted in
Another Country
Issued October 2011
a)
This SAS
(1)
Supersedes SAS No. 51, Reporting on Financial
Statements Prepared for Use in Other Countries (AICPA,
Professional Standards, vol. 1, AU sec. 534).
(2)
Redrafts SAS No. 51 to apply the ASB’s clarity drafting
conventions, as discussed in the following sections.
(3)
International Standards on Auditing do not include a
corresponding standard.
b)
Changes From Existing Standards
(1)
Is not expected to change practice in any significant
respect
(2)
There are some changes to the existing standards
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(a)
Paragraphs .05, .06, and .12 of extant AU section
534 indicate that the auditor “should consider consulting”
with persons having expertise in auditing and accounting
standards of the other country. The ASB believes that the
consideration of consulting with persons having expertise
in auditing and accounting standards should not be a
requirement. Instead:
(i)
This standard requires the auditor to obtain
an understanding of a relevant financial reporting
framework generally accepted in another country
and of relevant auditing standards other than U.S.
generally accepted auditing standards;
(b)
The previous requirements (prescribing “how”)
have been converted to application material.
C.
SAS No. 125, Alert That Restricts the Use of the Auditor’s Written
Communication
The ASB has issued SAS No. 125, Alert That Restricts the Use of the Auditor’s Written
Communication, to
1.
Supersede SAS No. 87, Restricting the Use of an Auditor’s Report
(AICPA, Professional Standards, AU sec. 532 and AU-C sec. 905).
2.
SAS No. 125 addresses the auditor’s responsibility, when required or
the auditor decides, to include in the auditor’s report or other written
communication issued by the auditor in connection with an engagement
conducted in accordance with GAAS language that restricts the use of the
auditor’s written communication. In an auditor’s report, such language is
included in an other-matter paragraph.
3.
Significant changes from previous standards as a result of the issuance of
SAS No. 125 are:
a)
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, 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).
b)
The alert language, which states that the communication is
intended solely for the information and use of the specified parties, is
consistent with AU section 532 and AU-C section 905, except when the
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engagement is also performed in accordance with Government Auditing
Standards, and the written communication pursuant to that engagement is
issued in accordance with AU-C section 265, AU-C section 806, or AU-C
section 935. In this circumstance, the alert language describes the 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.
c)
Modifies the guidance pertaining to single combined reports
covering both (a) communications that are required to include an alert
restricting its use and (b) communications that are for general use, which
do not ordinarily include such an alert.
(1)
AU section 532 and AU-C section 905 states that if an
auditor issues a single combined report, the use of the single
combined report should be restricted to the specified parties.
(2)
SAS No. 125, however, indicates that the alert that restricts
the use of the written communication pertains only to the
communications required to include such an alert.
(3)
Accordingly, the intended use of the communications that
are for general use is not affected by this alert.
d)
AU section 532 and AU-C section 905 requires the auditor to
consider informing his or her client that restricted use reports are not
intended for distribution to non-specified parties.
(1)
SAS No. 125 does not include a comparable requirement
and makes clear that an auditor is not responsible for controlling,
and cannot control, distribution of the auditor’s written
communication after its release.
(2)
The alert is designed to avoid misunderstandings related
to the use of the written communication, particularly when taken
out of the context in which it is intended to be used. An auditor
may consider informing the entity or other specified parties that
the written communication is not intended for distribution to parties
other than those specified in the written communication.
II.
Clarified Statement on Auditing Standards
A.
Preface to Codification of Statements on Auditing Standards,
Principles Underlying an Audit Conducted in Accordance With Generally
Accepted Auditing Standards and Statement on Auditing Standards,
Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance With Generally Accepted Auditing Standards
This released document contains two elements:
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

Preface to Codification of Statements on Auditing Standards, Principles Underlying an
Audit Conducted in Accordance With Generally Accepted Auditing Standards, and
Statement on Auditing Standards, Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance With Generally Accepted Auditing Standards.
1.
Changes from Previous Standards
a)
Supercedes SAS No. 95, as amended, which contains the
general, field work, and reporting standards (the 10 standards).
b)
Consideration by the ASB of the 10 standards
(1)
SASs are codified within the framework of the 10
standards, viewed as the historical basis for generally accepted
auditing standards (GAAS). The clarity drafting conventions
adopted by the ASB include establishing an objective or objectives
for each SAS.
(2)
The SAS establishes the overall objectives of the auditor,
which are to obtain reasonable assurance about whether the
financial statements as a whole are free from material
misstatement, whether due to fraud or error, thus, enabling the
auditor to express an opinion on whether the financial statements
are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and to report on the
financial statements, or otherwise as required by the SASs, in
accordance with the auditor’s findings.
(3)
Each SAS contains an objective, or objectives that provide
a link between the requirements and the overall objectives of the
auditor. The SASs taken together provide the standards for the
auditor’s work in fulfilling the overall objectives of the auditor.
(4)
If an auditor fulfills the overall objective of the audit and
meets applicable ethical requirements, such as the AICPA Code
of Professional Conduct, the ASB believes that the auditor will
have fulfilled the requirements currently stated in the 10
standards. Accordingly, the SAS does not contain 10
unconditional requirements that are the direct equivalent of the 10
standards.
c)
Replacement of the 10 standards with principles
(1)
To preserve the functions of the 10 standards, the ASB
has developed the Principles Governing the Conduct of an Audit
in Accordance With Generally Accepted Auditing Standards
(referred to as the principles).
(2)
The principles identified in the preface:
(a)
have been drafted in the present tense.
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(b)
are not requirements and
(c)
do not carry any authority.
(d)
are the fundamental principles that govern an audit
and are supported by the objectives and requirements of
the individual SASs.
(3)
Structure of the Principles
(a)
The purpose of an audit (purpose). To provide
financial statement users with an opinion by the auditor on
whether the statements are presented fairly, in all material
respects, in a manner that conforms to an applicable
financial reporting framework
(b)
Personal responsibilities of the auditor
(responsibilities). These include competence and
capabilities, compliance with appropriate ethical standards
and approaching the work with appropriate professional
skepticism and judgment.
(c)
Auditor actions in performing the audit
(performance). Perform the work necessary to be
reasonably, but not absolutely, sure that the financial
statements are free from material misstatement due to
fraud or error.
(d)
Reporting (reporting). Based on the results of the
performance of the audit, express an opinion or state that
an opinion cannot be expressed on the financial
statements.
2.
Applicable Financial Reporting Frameworks
The SAS introduces the following terms:
a)
Financial reporting framework. A set of accounting principles
that are used to determine measurement, recognition, presentation, and
disclosure of all material items for preparing financial statements in
accordance with principles generally accepted in the U.S.(GAAP),
International Financial Reporting Standards (IFRSs), issued by the
International Accounting Standards Board (IASB), or a special purpose
framework prepared on a comprehensive basis of accounting other than
GAAP (OCBOA– now referred as Special Purpose Framework). Note: The
AICPA’s Financial Reporting Framework for Small- and Medium-Sized
Entities is a special purpose framework.
b)
Applicable financial reporting framework— The financial
reporting framework adopted by management in the preparation and
presentation of its financial statements.
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c)
Fair-presentation framework— Refers to a financial reporting
framework that requires compliance with the requirements of the framework
and acknowledges explicitly or implicitly that, to achieve fair presentation of
the financial statements, it may be necessary for management to provide
disclosures beyond those specifically required by the framework; or
acknowledges explicitly that it may be necessary for management to depart
from a requirement of the framework to achieve fair presentation of the
financial statements. Such departures are expected to be necessary only in
extremely rare circumstances. Current reporting requirements do not permit
departures from GAAP unless they can be justified under Rule 203-1 of the
AICPA Code of Professional Conduct, i.e, when the application of an
accounting standard causes financial statements to be misleading.
d)
Regulatory and contractual-based framework—Refers to a
financial reporting framework that requires compliance with the
requirements of the framework, but does not contain the
acknowledgements in (c) above This type of framework is referred to in the
ISAs as a compliance framework; the term was changed for purposes of
GAAS to regulatory or contractual-based framework to avoid confusion with
the term compliance audit.
Practical Note:
Underpinning the principles in this standard, the concepts of professional skepticism and
professional judgment are discussed in the application material. Professional skepticism
includes being alert for contradictory audit evidence, information that brings doubt as to the
reliability of documents and managements responses to inquiries and errors or fraud that
indicate the need for additional substantive procedures. Professional judgment is necessary on
every engagement when considering audit risk and materiality, the nature, extent and timing of
audit procedures, evaluating the appropriateness and reasonableness of financial statement
assertions and the applicable financial reporting framework.
B.
Statement on Auditing Standards The Auditor’s Communication with
Those Charged with Governance (Redrafted)
1.
Objectives of the auditor’s communications with those charged with
governance are to
a)
Communicate clearly the responsibilities of the auditor in relation
to the financial statement audit and an overview of the planned scope and
timing of the audit.
b)
Obtain from information relevant to the audit.
c)
Provide timely observations arising from the audit that are
significant and relevant to their responsibility to oversee the financial
reporting process.
d)
Promote effective two-way communication
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2.
Definitions – In this SAS the following terms have the meanings attributed
as follows:
a)
Those charged with governance. The person(s) or
organization(s) (for example, a corporate trustee) with responsibility for
overseeing the strategic direction of the entity and the obligations related to
the accountability of the entity. This includes overseeing the financial
reporting process. Those charged with governance may include
management personnel; for example, executive members of a governance
board or an owner-manager.
b)
Management. The person(s) with executive responsibility for the
conduct of the entity’s operations. For some entities, management includes
some or all of those charged with governance; for example, executive
members of a governance board or an owner-manager.
3.
Requirements–This SAS contains the following requirements
a)
Determine who is charged with governance of the entity.
(1)
Communications With the Audit Committee or Other
Subgroup of Those Charged With Governance may need to be
supplemented by communications to the entire governing body
(2)
When all of those charged with governance are involved in
managing the entity the communications do not need to be
repeated to the same persons.
b)
Matters to be communicated should include
(1)
The Auditor’s Responsibilities in Relation to the Financial
Statement Audit
(2)
Planned Scope and Timing of the Audit
(3)
Significant Findings or Issues From the Audit
(4)
Uncorrected Misstatements
c)
When not all of those charged with governance are involved in
management the auditor should also communicate to the governing body:
(1)
Material corrected misstatements that were brought to the
attention of management through the audit process.
(2)
Significant findings or issues (including the Auditor’s views)
that arose through audit procedures and were discussed with or
communicated to management.
(3)
d)
Written representations that the auditor is requesting.
The Communication Process
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(1)
Establishing the Communication Process
(2)
Forms of Communication
(3)
Restricted Use
(4)
Timing of Communications
(5)
Adequacy of the Communication Process
e)
Documentation of the oral and written communications with
management and the governing body should be made for workpaper
retention.
Practical Notes:
 Communication of the auditor’s responsibilities should include:
o
A discussion of the reasonable assurance, not absolute, that is, provided by an
audit in accordance with GAAS.
o
That internal control is considered in designing an audit strategy but that no
opinion of offered as to its effectiveness.
o
That significant matters related to the audit, determined by the auditor’s
professional judgment, will be communicated to those charged with governance.
 Matters related to the planned scope and timing of the audit to be communicated may
include:
o
How the auditor plans to address significant risks of material misstatement.
o
The impact of risks of material misstatement on the consideration of materiality
levels.
o
Other matters related to the structure and responsibilities of the board of
governance.
 Significant audit findings concerning accounting estimates and qualitative aspects of
significant accounting practices may be communicated.
 Significant difficulties encountered during the audit, such as delayed or unavailable
expected information, management restrictions and additional time necessary to obtain
appropriate audit evidence may be communicated.
C.
Statement on Auditing Standards Audit Documentation (Redrafted)
1.
Objective of the auditor
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a)
To prepare documentation that provides
(1)
a sufficient and appropriate record of the basis for the
auditor’s report; and
(2)
evidence that the audit was planned and performed in
accordance with GAAS and applicable legal and regulatory
requirements.
2.
Definitions – This SAS contains the following terms:
a)
Audit documentation. The record of audit procedures performed,
relevant audit evidence obtained, and conclusions the auditor reached
(terms such as working papers or workpapers are also sometimes used).
b)
Audit file. One or more folders or other storage media, in physical
or electronic form, containing the records that constitute the audit
documentation for a specific engagement.
c)
Documentation completion date. The date, no later than 60
days following the report release date, on which the auditor has assembled
for retention a complete and final set of documentation in an audit file.
d)
Experienced auditor. An individual (whether internal or external
to the firm) who has practical audit experience, and a reasonable
understanding of
(1)
audit processes;
(2)
GAAS and applicable legal and regulatory requirements;
(3)
the business environment in which the entity operates; and
(4)
auditing and financial reporting issues relevant to the
entity’s industry.
e)
Report release date. The date the auditor grants the entity
permission to use the auditor’s report in connection with the financial
statements.
3.
Requirements – This SAS covers the following requirements:
a)
Timely Preparation of Audit Documentation
b)
Documentation of the Audit Procedures Performed and Audit
Evidence Obtained
c)
Form, Content, and Extent of Audit Documentation
d)
Departure From a Relevant Requirement
e)
Matters Arising After the Date of the Auditor’s Report
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f) Assembly and Retention of the Final Audit File
Practical Note:
Audit documentation normally includes audit plans, analyses, memorandums, summaries of
significant findings or issues, confirmation and representation letters, various practice aids and
correspondence. Such documentation should demonstrate compliance with GAAS and SQCS
No. 8. All documentation that contains substantive audit evidence must include the identifying
characteristics of the documents inspected, inquiries of client personnel performing procedures
and their responses and the details of any observation procedures.
D.
Statements on Auditing Standards, Risk Assessment
1.
This section covers the following SASs:
a)
SAS, Audit Evidence (Redrafted)
b)
SAS, Materiality in Planning and Performing an Audit (Redrafted)
c)
SAS, Evaluation of Misstatements Identified During the Audit
(Redrafted)
d)
SAS, Planning an Audit (Redrafted)
e)
SAS, Understanding the Entity and Its Environment and
Assessing the Risks of Material Misstatement (Redrafted)
f) SAS, Performing Audit Procedures in Response to Assessed Risks and
Evaluating the Audit Evidence Obtained (Redrafted)
2.
Significant Changes From Existing Standards
a)
SAS, Audit Evidence (AU section 326) (Redrafted)
(1)
Consistent with ISA 500, Considering the Relevance and
Reliability of Audit Evidence, the ASB transferred the
requirements and guidance related to the auditor’s use of
assertions from AU section 326 to redrafted AU section 314,
Understanding the Entity and Its Environment and Assessing the
Risks of Material Misstatement.
b)
SAS, Materiality in Planning and Performing an Audit (AU section
312) (Redrafted)
(1)
To make the standard clearer and consistent with ISA 320
(Revised), Materiality in Planning and Performing an Audit, and
ISA 450, Evaluation of Misstatements Identified during the Audit,
the ASB separates AU section 312 into two separate standards.
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(a)
SAS, Materiality in Planning and Performing an
Audit (Redrafted), addresses the use of materiality in
planning and performing the audit.
(b)
A separate standard, Evaluation of Misstatements
Identified During the Audit, addresses the evaluation of
misstatements identified during the audit.
(2)
The definition of audit risk and its components are now
defined in the SAS, Overall Objectives of the Independent Auditor
and the Conduct of an Audit in Accordance With Generally
Accepted Auditing Standards.
(3)
The ASB eliminates the mandatory requirement of the
auditor to consider audit risk in an audit because the ASB believes
that the consideration of audit risk is fundamental in the audit
process, and an explicit requirement is not necessary.
(4)
Paragraphs .62–.67 of AU section 312 address the
auditor’s responsibilities to evaluate the overall effect of audit
findings on the auditor’s report. The ASB deleted these
paragraphs from this section because these requirements and
guidance are included in redrafted AU section 508, Reports on
Audited Financial Statements (AICPA, Professional Standards,
vol. 1).
c)
SAS, Planning an Audit (AU section 311) (Redrafted)
(1)
The ASB deleted Paragraphs .05–.10 of AU section 311,
Planning and Supervision, which address the auditor’s
responsibilities about the early appointment of the independent
auditor and establishing the terms of the engagement. These
requirements are included in the SAS, Terms of the
Engagements.
(2)
The ASB deleted Paragraphs .28–.32 of AU section 311
which covers supervision in an audit. These requirements and
guidance are included in the SAS, Quality Control for Audit
Engagements,
d)
SAS, Understanding the Entity and Its Environment and
Assessing the Risks of Material Misstatement (AU section 314) (Redrafted)
(1)
Most of the paragraphs written in the form of presumptive
and mandatory requirements, particularly in the content dealing
with internal control, have been moved to application guidance.
(2)
Paragraph .19 of AU section 314 contains a requirement of
the auditor to perform the audit with professional skepticism. This
requirement is was deleted from AU section 314 because it is
addressed by the SAS, Overall Objectives of the Independent
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Auditor and the Conduct of an Audit in Accordance with Generally
Accepted Auditing Standards.
(3)
Paragraph .45 of AU section 314 contains a requirement
that the auditor consider whether the entity has disclosed a
particular matter appropriately. This requirement was deleted
because this requirement is addressed in the redraft of AU section
508, Reports on Audited Financial Statements.
Practical Note:
While there are no significant changes to practice in the redrafted risk assessment SASs, the
auditor’s focus should be on the content of engagement documentation. Documentation of
compliance with the requirements of the quality control standards and the auditing standards,
including the auditor’s professional judgment in engagement circumstances, must be included in
engagement files.
E.
Statement on Auditing Standards, Audit Considerations Relating to
an Entity Using a Service Organization (Redrafted)
1.
Changes from previous standards
a)
A user organization is known as a user entity.
b)
In a type 2 report, the service auditor’s report would contain an
opinion on the fairness of the description of the service organization’s
system and on the suitability of the design of the controls for a period rather
than as of a specified date, as it currently does in a type 1 report.
c)
A user auditor is permitted to make reference to the work of a
service auditor in his or her report to explain a modification of the user
auditor’s opinion. In those circumstances, the user auditor’s report would be
required to indicate that such reference does not diminish the user auditor’s
responsibility for that opinion.
d)
A user auditor is required to inquire of management of the user
entity about whether the service organization has reported to the user entity
any fraud, noncompliance with laws and regulations, or uncorrected
misstatements. If so, the user auditor would be required to evaluate how
such matters affect the nature, timing, and extent of the user auditor’s
further audit procedures.
e)
The SAS is applicable to situations in which an entity uses a
shared service organization that provides services to a group of related
entities.
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Practical Note:
As with the previous SAS No. 70 report, reliance on a type 1 or a type 2 report requires specific
determination that the service auditor’s procedures provide sufficient evidence about specific
internal control procedures that may be necessary to evaluate all relevant financial statement
assertions in the audit of the user entity.
F.
Statement on Auditing Standards Consideration of Laws and
Regulations in an Audit of Financial Statements
SAS Consideration of Laws and Regulations in an Audit of Financial Statements
supersedes SAS No. 54, Illegal Acts by Clients (AICPA, Professional Standards, vol. 1,
AU sec. 317).
1.
Effect of Laws and Regulations
a)
The impact of laws and regulations on financial statements varies
considerably.
b)
The applicable laws and regulations constitute the legal and
regulatory framework of the entity.
c)
Some laws or regulations have provisions with a direct effect on
the financial statements because they determine the reported amounts and
disclosures required in an entity’s financial statements.
d)
Other laws or regulations are to be complied with by management,
or set the provisions under which the entity is allowed to conduct its
business, but do not have a direct effect on an entity’s financial statements.
e)
Some entities operate in heavily regulated industries (such as
banks and chemical companies) while others are subject only to the many
laws and regulations that relate generally to the operating aspects of the
business (such as those related to occupational safety and health and
equal employment opportunity).
f) Noncompliance with laws and regulations may result in fines, litigation, or
other consequences for the entity that may have a material effect on the
financial statements.
2.
Responsibility for Compliance with Laws and Regulations
a)
Responsibility of Management– Management’s responsibility, with
the oversight of those charged with governance, is
(1)
to ensure that the entity’s operations are conducted in
accordance with the provisions of laws and regulations, including
compliance with the provisions of laws and regulations that
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determine the reported amounts and disclosures in an entity’s
financial statements.
b)
Responsibility of the Auditor
(1)
The requirements in this SAS are designed to assist the
auditor in identifying material misstatement of the financial
statements due to noncompliance with laws and regulations.
(2)
The auditor is not responsible for preventing
noncompliance and cannot be expected to detect noncompliance
with all laws and regulations.
(3)
The auditor is responsible for obtaining reasonable
assurance that the financial statements as a whole are free from
material misstatement, whether caused by fraud or error.
(4)
The auditor is responsible for taking into account the
applicable legal and regulatory framework during the planning
and execution of the audit procedures.
(5)
In the context of laws and regulations, the potential effects
of inherent limitations on the auditor’s ability to detect material
misstatements are greater for the following reasons:
(a)
Many laws and regulations (relating principally to
the operating aspects of an entity) typically do not affect
the financial statements and are not captured by the
entity’s information systems relevant to financial reporting.
(b)
Noncompliance may involve acts designed to
conceal it, such as collusion, forgery, deliberate failure to
record transactions, management override of controls, or
intentional misrepresentations made to the auditor.
(c)
Whether an act constitutes noncompliance is
ultimately a matter for legal determination, such as by a
court of law.
(6)
This SAS distinguishes the auditor’s responsibilities in
relation to compliance with the following two categories of laws
and regulations that may have a material effect on the financial
statements of the company:
(a)
The provisions of those laws and regulations
generally recognized to have a direct effect on the
determination of material amounts and disclosures in the
financial statements, such as tax and pension laws and
regulations.
16
(b)
The provisions of other laws and regulations that do
not have a direct effect on the determination of the
amounts and disclosures in the financial statements but
compliance with which may be:
(i)
fundamental to the operating aspects of the
business,
(ii)
fundamental to an entity’s ability to continue
its business, or necessary for the entity to avoid
material penalties (for example, compliance with
the terms of an operating license, regulatory
solvency requirements, or environmental
regulations).
c)
Differing requirements are specified for each of the previously
mentioned categories of laws and regulations.
(1)
Auditor’s responsibility for the category referred to in (6) (a)
is to obtain sufficient appropriate audit evidence regarding
material amounts and disclosures in the financial statements that
are determined by the provisions of those laws and regulations.
(2)
Auditor’s responsibility for the category referred to in (6) (b)
is limited to performing specified audit procedures that may
identify noncompliance with those laws and regulations that may
have a material effect on the financial statements.
d)
The auditor is required to remain alert to the possibility that other
audit procedures applied for the purpose of forming an opinion on financial
statements may bring instances of identified or suspected noncompliance
with laws and regulations to the auditor’s attention.
Practical Note: This SAS requires determination and consideration of direct and indirect laws
and regulations during the planning and performance phases of an audit engagement. A section
of a planning document, as well as other documentation create during engagement
performance, should include evidence of compliance with these requirements.
G.
Statement on Auditing Standards, Related Parties (Redrafted)
1.
Changes From Previous Standards
a)
Previous AU section 334 was premised on the related party
requirements in Financial Accounting Standards Board (FASB) Statement
No. 57, Related Party Disclosures. Therefore it is focused on auditing the
amounts and disclosures pursuant to GAAP in the United States and is
centered on the provisions of FASB Statement No. 57.
b)
This SAS is framework neutral so it includes all approved financial
reporting frameworks, including special purpose frameworks described in
17
the SAS Special Considerations—Audits of Financial Statements Prepared
in Accordance with Special Purpose Frameworks.
c)
The applicability of the objectives, requirements, and definitions in
the SAS are irrespective of whether the framework establishes such
requirements.
2.
The SAS contains sections on:
a)
Nature of Related Party Relationships and Transactions—Many
related party transactions are in the normal course of business and they
may carry no higher risk of material misstatement of the financial
statements than similar transactions with unrelated parties. However, the
nature of related party relationships and transactions may give rise to
higher risks of material misstatement of the financial statements than
transactions with unrelated parties.
b)
Responsibilities of the Auditor:
(1)
Because related parties are not independent of each other,
financial reporting frameworks establish specific accounting and
disclosure requirements for related party relationships,
transactions, and balances to enable users of the financial
statements to understand their nature and actual or potential
effects on the financial statements. Therefore, the auditor has a
responsibility to perform audit procedures to identify, assess, and
respond to the risks of material misstatement arising from the
entity’s failure to appropriately account for or disclose related party
relationships, transactions, or balances.
(2)
An understanding of the entity’s related party relationships
and transactions is relevant to the auditor’s evaluation of whether
one or more fraud risk factors are present, as required by the SAS
Consideration of Fraud in a Financial Statement Audit (Redrafted),
because fraud may be more easily committed or disguised
through related parties.
c)
An audit has inherent limitations, so an unavoidable risk exists
that some material misstatements of the financial statements may not be
detected, even though the audit is properly planned and performed in
accordance with US GAAS. In the context of related parties, the potential
effects of inherent limitations on the auditor’s ability to detect material
misstatements are greater because management may be unaware of the
existence of all related party relationships and transactions. Related party
relationships may present a greater opportunity for collusion, concealment,
or manipulation by management.
d)
Planning and performing the audit with professional skepticism–
The SAS Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance With Generally Accepted Auditing Standards,
requires the auditor to plan and perform the audit with professional
18
skepticism. It is in context, given the potential for undisclosed related party
relationships and transactions.
Practical Note: Even though this is a redrafted SAS, it specifically requires that an auditor
perform risk assessment procedures for related party transactions. While risk assessment may
be performed for transactions with related parties when scanning the general ledger for
transactions greater than the lower limit for individually significant items, transactions below that
amount may not be considered. Since related party transactions must be considered in the
aggregate when determining materiality, related party transactions should be identified early in
the planning phase of an engagement. After making inquiries of management and accounting
personnel, reading minutes of directors’ meetings and reviewing the prior year’s engagement
files, all transactions, large and small, with related parties should be considered.
3.
Requirements
a)
Risk Assessment Procedures and Related Activities
b)
Identification and Assessment of the Risks of Material
Misstatement Associated With Related Party Relationships and
Transactions
c)
Responses to the Risks of Material Misstatement Associated With
Related Party
d)
Relationships and Transactions Evaluation of the Accounting for,
and Disclosure of, Identified Related Party Relationships and Transactions
H.
e)
Communication With Those Charged With Governance
f)
Documentation
Statement on Auditing Standards, External Confirmations
1.
Changes from Previous Standards
a)
It does not change practice in any significant respect;
b)
To reflect a more principles-based approach to standard setting,
certain requirements that are duplicative of broader requirements in SAS
No. 67 have been moved to application and other explanatory material,
consistent with ISA No. 505. In the ASB’s view, this has not changed the
overall effectiveness of the proposed SAS.
c)
Most significant changes to previous standards are as follows:
(1)
Responsibilities of the auditor when management refuses
to allow the auditor to send a confirmation request. These
responsibilities include inquiries as to reasons for the refusal,
evaluating alternative procedures and impact on the risk
assessment. When and if the auditor concludes that
management’s refusal is unreasonable, or the auditor is unable to
19
obtain relevant and reliable audit evidence from alternative audit
procedures the auditor should include communicate with those
charged with governance.
(2)
Added application material to the SAS regarding the use of
oral responses to confirmation requests as audit evidence.
(a)
It clarifies that the receipt of an oral response to a
confirmation request does not meet the definition of an
external confirmation.
(b)
Provides guidance on how the response may be
considered part of alternative procedures performed in
order to obtain sufficient appropriate audit evidence.
(c)
The definition of confirmation has been changed.
(i)
The ASB has expanded the ISA definition of
an external confirmation to include direct access by
the auditor to information held by a third party.
(ii)
Third-party involvement is increasingly
common, and the ASB believes that the inclusion of
this concept clarifies the definition.
(iii)
The ASB believes this clarification is an
improvement to the ISA definition because it
specifically addresses a situation that is becoming
increasingly common, and this change to the ISA
definition is not inconsistent with the intent of the
IAASB’s definition.
Practical Note:
Electronic confirmation processes must be secure and controlled. A secure confirmation
environment depends on the auditor’s and respondent’s processes or mechanisms that
minimize the possibility of compromise.
I.
Statement on Auditing Standards Subsequent Events and
Subsequently Discovered Facts
1.
Objectives of the auditor:
a)
to obtain sufficient appropriate audit evidence about whether
events occurring between the date of the financial statements and the date
of the auditor’s report that require adjustment of, or disclosure in, the
financial statements are appropriately reflected in those financial
statements in accordance with the applicable financial reporting framework
20
b)
to respond appropriately to facts that become known to the auditor
after the date of the auditor’s report that, had they been known to the
auditor at that date, may have caused the auditor to revise the auditor’s
report.
2.
The objective of a predecessor auditor who is requested to reissue a
previously issued auditor’s report on financial statements that are to be
presented on a comparative basis with audited financial statements of a
subsequent period is to perform specified procedures to determine whether the
previously issued auditor’s report is still appropriate before such report is
reissued.
3.
Definitions – This SAS contains the following terms:
a)
Date of the financial statements. The date of the end of the
latest period covered by the financial statements.
b)
Date of the auditor’s report. The date that the auditor dates the
report on the financial statements, in accordance with the SAS Forming an
Opinion and Reporting on Financial Statements. For non-public entities, this
is the date financial statements are available to be issued; for public
entities, the date financial statements are issued should be used.
c)
Subsequent events. Events occurring between the date of the
financial statements and the date of the auditor’s report.
d)
Subsequently discovered facts. Facts that become known to
the auditor after the date of the auditor’s report that, had they been known
to the auditor at that date, may have caused the auditor to revise the
auditor’s report.
4.
Requirements – This SAS covers the following requirements:
a)
Subsequent Events
b)
Subsequently Discovered Facts That Become Known to the
Auditor Before the Report Release Date
c)
Subsequently Discovered Facts That Become Known to the
Auditor After the Report Release Date
d)
Predecessor Auditor’s Reissuance of the Auditor’s Report in
Comparative Financial Statements
e)
J.
Predecessor Auditor’s Report Reissued
Statement on Auditing Standards, Audit Sampling (Redrafted)
1.
Changes from Previous Standards
a)
The SAS does not change or expand SAS No. 39 in any
significant respect.
21
b)
To reflect a more principles-based approach to standard setting,
certain requirements that are duplicative of broader requirements in SAS
No. 39 have been moved to application and other explanatory material,
consistent with ISA No. 530 (Redrafted). In the ASB’s view, this has not
changed the overall effectiveness of the SAS.
K.
Statement on Auditing Standards Communicating Internal Control
Related Matters Identified in an Audit (Redrafted)
1.
Objective of the auditor is
a)
to appropriately communicate to those charged with governance
and management
(1)
deficiencies in internal control that the auditor has
identified during the audit and
(2)
that, in the auditor’s professional judgment, is of sufficient
importance to merit their respective attentions.
2.
Definitions – This SAS contains the following terms:
a)
Deficiency in internal control.
(1)
A deficiency in internal control exists when the design or
operation of a control does not allow management or employees,
in the normal course of performing their assigned functions, to
prevent, or detect and correct, misstatements on a timely basis.
(2)
A deficiency in design exists when
(a)
a control necessary to meet the control objective is
missing or
(b)
an existing control is not properly designed so that,
even if the control operates as designed, the control
objective would not be met.
(3)
A deficiency in operation exists when a properly designed
control does not operate as designed or when the person
performing the control does not possess the necessary authority
or competence to perform the control effectively.
b)
Material weakness. A deficiency or a combination of deficiencies,
in internal control, such that there is a reasonable possibility that a material
misstatement of the entity’s financial statements will not be prevented, or
detected and corrected, on a timely basis.
c)
Significant deficiency. A deficiency, or a combination of
deficiencies, in internal control that is less severe than a material weakness
yet important enough to merit attention by those charged with governance.
22
3.
Requirements – This SAS covers the following requirements:
a)
Determination of Whether Deficiencies in Internal Control Have
Been Identified
4.
b)
Evaluating Identified Deficiencies in Internal Control
c)
Communication of Deficiencies in Internal Control
This SAS contains illustrative written communications:
a)
Exhibit A: Illustrative Written Communication
b)
Exhibit B: Illustrative No Material Weakness Communication
c)
Exhibit C: Examples of Circumstances That May Be Deficiencies,
Significant Deficiencies, or Material Weaknesses
Practical Note:
Internal control is always relevant to the nature, size and complexity of a reporting entity.
Therefore, so should be the contents of the internal control communication letter. Smaller
entities will ordinarily have more informal control activities in the hands of one or a few
individuals. For smaller entities, key controls performed at the entity level will ordinarily have
the most pervasive effects for preventing errors or fraud from occurring and going undetected.
L.
Statement On Auditing Standards Written Representations
1.
Written Representations as Audit Evidence
a)
Audit evidence–the information used by the auditor in arriving at
the conclusions on which the auditor’s opinion is based.
b)
Written representations–necessary information that the auditor
requires in connection with the audit of the entity’s financial statements.
c)
Similar to responses to inquiries, written representations are audit
evidence.
d)
Written representations provide necessary audit evidence
(1)
complement other auditing procedures and
(2)
do not provide sufficient appropriate audit evidence on
their own about any of the matters with which they deal.
(3)
do not affect the nature or extent of other audit procedures
that the auditor applies to obtain audit evidence about the
23
fulfillment of management’s responsibilities or about specific
assertions.
2.
Objectives of the auditor
a)
to obtain written representations from management (when
appropriate, those charged with governance when appropriate) that they
believe that they have fulfilled their responsibility
(1)
for the preparation and fair presentation of the financial
statements and
(2)
for the completeness of the information provided to the
auditor
b)
to support other audit evidence relevant to the financial
statements or specific assertions in the financial statements by means of
written representations if determined necessary by the auditor or required
by other AU-C sections; and
c)
to respond appropriately to written representations provided by
management (when appropriate, those charged with governance) or
d)
to respond appropriately if management (when appropriate, those
charged with governance) do not provide the written representations
requested by the auditor.
3.
Definition –In this SAS the following term has the meaning:
a)
Written representation –. A written statement by management
provided to the auditor to confirm certain matters or to support other audit
evidence. Written representations in this context do not include financial
statements, the assertions therein, or supporting books and records.
4.
Requirements – This SAS covers the following requirements:
a)
Management from whom written representations are requested
(includes management with appropriate responsibilities for the financial
statements and knowledge of the matters concerned.)
(1)
Written representations about management’s
responsibilities for
(a)
Preparation and fair presentation of the financial
statements in accordance with an appropriate financial
framework.
(b)
Information provided and completeness of
transactions
24
(2)
Other Written Representations – The auditor should
request management to provide written representations
concerning
(a)
Fraud
(b)
Laws and Regulations
(c)
Uncorrected Misstatements
(d)
Litigation and Claims
(e)
Estimates
(f)
Related Party Transactions
(g)
Subsequent Events
b)
Additional Written Representations About the Financial
Statements
(1)
Other AU-C sections require the auditor to request written
representations. If, the auditor determines that it is necessary to
obtain one or more written representations to support other audit
evidence relevant to the financial statements or one or more
specific assertions in the financial statements, he or she should
request such other written representations.
5.
Date of, and Period(s) Covered by, Written Representations
a)
should be as of the date of the auditor’s report on the financial
statements.
b)
should be for all financial statements and period(s) referred to in
the auditor’s report.
6.
Form of Written Representations – should be in the form of a
representation letter addressed to the auditor.
7.
Doubt About the Reliability of Written Representations and Requested
Written Representations Not Provided
a)
Doubt About the Reliability of Written Representations –
(1)
If the auditor has concerns about the competence,
integrity, ethical values, or diligence of management or about
management’s commitment to, or enforcement of, these, the
auditor should determine the effect that such concerns may have
on the reliability of representations (oral or written) and audit
evidence in general.
25
(2)
If written representations are inconsistent with other audit
evidence, the auditor should perform audit procedures to attempt
to resolve the matter.
(a)
If the matter remains unresolved, the auditor should
reconsider the assessment of the competence, integrity,
ethical values, or diligence of management or of
management’s commitment to, or enforcement of, these
and should determine the effect that this may have on the
reliability of representations (oral or written) and audit
evidence in general.
(b)
The auditor should take appropriate action,
including determining the possible effect on the opinion in
the auditor’s report in accordance with the SAS
Modifications to the Opinion in the Independent Auditor’s
Report, if the auditor concludes that the written
representations are not reliable.
8.
Written Representations About Management’s Responsibilities
a)
Disclaiming an opinion or withdrawing from the engagement. The
auditor should disclaim an opinion on the financial statements in
accordance with the SAS Modifications to the Opinion in the Independent
Auditor’s Report or withdraw from the engagement if
(1)
the auditor concludes that sufficient doubt exists about the
integrity of management such that the written representations
required are not reliable or
(2)
management does not provide the written representations
required.
b)
Requested Written Representations Not Provided – When
management does not provide one or more of the requested written
representations, the auditor should
(1)
discuss the matter with management;
(2)
re-evaluate the integrity of management and evaluate the
effect that this may have on the reliability of representations (oral
or written) and audit evidence in general; and
(3)
take appropriate actions, including determining the
possible effect on the opinion in the auditor’s report in accordance
with the SAS Modifications to the Opinion in the Independent
Auditor’s Report, considering the requirement in paragraph 25 of
this SAS.
9.
Examples –You may find the following examples in this SAS useful
a)
Exhibit A: Illustrative Representation Letter
26
b)
M.
Exhibit B: Examples of Specific Written Representations
Statement On Auditing Standards Terms of Engagement
1.
Objective of the auditor
a)
Is to accept an audit engagement for a new or existing audit client
only when the basis upon which it is to be performed has been agreed upon
through:
(1)
establishing whether the preconditions for an audit are
present and
(2)
confirming that a common understanding of the terms of
the audit engagement exists between the auditor and
management and, when appropriate, those charged with
governance.
2.
Definitions–The following terms have the meanings attributed as follows:
a)
Preconditions for an audit. The use by management of an
acceptable financial reporting framework in the preparation of the financial
statements and the agreement of management and, when appropriate,
those charged with governance, to the premise on which an audit is
conducted.
b)
Recurring audit. An audit engagement for an existing audit client
for whom the auditor performed the preceding audit.
3.
Requirements –The requirements in this SAS covers such things
a)
Preconditions for an Audit—covers whether the preconditions for
an audit are present which include
(1)
Determining whether the financial reporting framework to
be applied in the preparation of the financial statements is
acceptable
(2)
Obtaining the agreement of management that it
acknowledges and understands its responsibility for:
(a)
The preparation and fair presentation of the
financial statements in accordance with the applicable
financial reporting framework;
(b)
The design, implementation, and maintenance of
internal controls relevant to the preparation and fair
presentation of financial statements that are free from
material misstatement, whether due to fraud or error; and
27
(c)
To provide the auditor with
(i)
access to all information of which
management is aware that is relevant to the
preparation and fair presentation of the financial
statements, such as records, documentation, and
other matters;
(ii)
additional information that the auditor may
request from management for the purpose of the
audit; and
(iii)
unrestricted access to persons within the
entity from whom the auditor determines it
necessary to obtain audit evidence.
b)
Management-Imposed Limitation on Scope Prior to Audit
Engagement Acceptance That Would Result in a Disclaimer of Opinion. If
this entity:
(1)
Imposes a scope limitation on the auditor such that the
auditor believes the limitation will result in the auditor disclaiming
an opinion on the financial statements as a whole, the auditor
should not accept such a limited engagement as an audit
engagement.
(2)
However if the entity is required by law or regulation to
have an audit and it imposes such a scope limitation and a
disclaimer of opinion is acceptable under the applicable law or to
the regulator, the auditor is permitted, but not required, to accept
the engagement.
c)
Other Factors Affecting Audit Engagement Acceptance
(1)
If the preconditions for an audit are not present, and the
auditor is not required by law or regulation to accept the proposed
audit engagement, the auditor should discuss the matter with
management and decline to accept the proposed engagement.
(2)
If the auditor has determined that the financial reporting
framework to be applied in the preparation of the financial
statements is unacceptable or if the agreement referred to above
has not been obtained the auditor should not accept the
engagement.
d)
Agreement on Audit Engagement Terms
(1)
The auditor should agree upon the terms of the audit
engagement with management or those charged with governance,
as appropriate.
28
(2)
The terms of the audit engagement should be documented
in an audit engagement letter or other suitable form of written
agreement and should include the following:
(a)
The objective and scope of the audit of the financial
statements
(b)
The responsibilities of the auditor
(c)
The responsibilities of management
(d)
A statement that because of the inherent limitations
of an audit, together with the inherent limitations of internal
control, an unavoidable risk exists that some material
misstatements may not be detected, even though the audit
is properly planned and performed in accordance with
GAAS
(e)
Identification of the applicable financial reporting
framework for the preparation of the financial statements
(f)
Reference to the expected form and content of any
reports to be issued by the auditor and a statement that
circumstances may arise in which a report may differ from
its expected form and content
e)
Initial Audits, Including Reaudit Engagements –Covers steps the
auditor should take before accepting an engagement for an initial audit (or a
reaudit engagement) including requesting
(1)
Management to authorize the predecessor auditor to
respond fully to the auditor’s inquiries regarding matters that will
assist the auditor in determining whether to accept the
engagement.
(a)
Should management refuses to authorize the
predecessor auditor to respond, or limits the response, the
auditor should inquire about the reasons and consider the
implications of that refusal in deciding whether to accept
the engagement.
(b)
The auditor should evaluate the predecessor
auditor’s response, or consider the implications if the
predecessor auditor provides no response or a limited
response, in determining whether to accept the
engagement.
f) Recurring Audits – covers requirements in assessing whether
circumstances require the terms of the audit engagement to be revised.
29
g)
Acceptance of a Change in the Terms of the Audit Engagement –
covers the auditor’s consideration of changes to the terms of the audit
engagement when no reasonable justification for doing so exists.
(1)
If the terms of the audit engagement are changed by
agreement, the auditor and management should
(a)
agree on and document the new terms of the
engagement in an engagement letter or other suitable form
of written agreement.
(2)
If the auditor concludes that no reasonable justification for
a change of the terms of the audit engagement exists and is not
permitted by management to continue the original audit
engagement, the auditor should
(a)
withdraw from the audit engagement when possible
under applicable law or regulation
(b)
communicate the circumstances to those charged
with governance, and
(c)
determine whether any obligation, either legal,
contractual, or otherwise, exists to report the
circumstances to other parties, such as owners, or
regulators.
h)
Additional Considerations in Engagement Acceptance
(1)
Auditor’s Report Prescribed by Law or Regulation
(a)
If law or regulation prescribes a specific layout,
form, or wording of the auditor’s report that significantly
differs from the requirements of GAAS, the auditor should
evaluate
(i)
whether users might misunderstand the
auditor’s report and, if so,
(ii)
whether the auditor would be permitted to
reword the prescribed form to be in accordance
with the requirements of GAAS or attach a separate
report.
(b)
If the auditor determines that rewording the
prescribed form or attaching a separate report would not
be permitted or would not mitigate the risk of users
misunderstanding the auditor’s report,
30
(i)
The auditor should not accept the audit
engagement unless the auditor is required by law
or regulation to do so.
(ii)
An audit performed in accordance with such
law or regulation does not comply with GAAS.
(iii)
The auditor should not include any
reference to the audit having been performed in
accordance with GAAS within the auditor’s report.
Practical Note:
Because an engagement letter forms a contract between the reporting entity and the auditor,
and because both parties to the contract must understand its contents for it to be valid, the letter
should be delivered by the engagement leader or partner. In addition to the contents of the
letter, the entity’s business, the current economic environment, potential fraud risks and other
important planning considerations should be discussed and documented when the letter is
delivered.
N.
Statement on Auditing Standards, Quality Control for an Engagement
Conducted in Accordance With Generally Accepted Auditing Standards
1.
Changes from Previous Standards
a)
Supersedes SAS No. 25, The Relationship of Generally Accepted
Auditing Standards to Quality Control Standards (AICPA, Professional
Standards, vol. 1, AU sec. 161).
b)
The SAS contains requirements and application material that
address specific responsibilities of the auditor regarding quality control
procedures for an audit of financial statements.
c)
Quality control systems, policies, and procedures are the
responsibility of the audit firm.
d)
The SAS specifies quality control procedures at the engagement
level that assist the auditor in achieving the objectives of the quality control
standards.
e)
Since these procedures are required to be established by SQCS
No. 8, A Firm’s System of Quality Control (Redrafted) (AICPA, Professional
Standards, vol. 2, QC sec. 10), the SAS should not result in a change to
existing practice.
f)
The SAS strengthens previous standards by making it easier for
auditors to understand and apply those quality control procedures that
apply to an audit of financial statements.
31
Practical Note:
A major impact of this pronouncement relates to SQCS No. 8. This standard emphasizes the
importance of integrating quality control policies and procedures into engagement
performance. Such quality control elements as leadership involvement, client acceptance and
continuance decision-making and consultations must be documented in engagement files. The
AICPA’s practice aid, Establishing and Maintaining a System of Quality Control for a CPA Firm,
contains illustrative policies and procedures for various size firms, including sole practitioners.
O.
Statement On Auditing Standards Consideration of Omitted
Procedures After the Report Release Date
1.
Objectives of the auditor are to
a)
assess the effect of omitted procedures of which the auditor
becomes aware on the auditor’s present ability to support the previously
expressed opinion on the financial statements and
b)
respond appropriately.
2.
Definition – In this SAS the following term has the meaning attributed as
follows:
a)
Omitted procedure. An auditing procedure that the auditor
considered necessary in the circumstances existing at the time of the audit
of the financial statements but which was not performed.
3.
Requirements – This SAS covers the following requirements:
a)
If, subsequent to the report release date, the auditor becomes
aware of an omitted procedure, the auditor
(1)
Should assess the effect of the omitted procedure on the
auditor’s present ability to support the previously expressed
opinion on the financial statements.
(2)
Concludes that an omitted procedure of which the auditor
has become aware
(a)
impairs the auditor’s present ability to support a
previously expressed opinion on the financial statements
and
(b)
he or she believes that there are users currently
relying, or likely to rely, on the previously released report,
the auditor should promptly perform the omitted procedure,
or alternative procedures, to determine whether there is a
satisfactory basis for the auditor’s previously expressed
opinion.
32
(3)
Should document the procedures performed, in
accordance with the provisions of the clarified SAS Audit
Documentation (Redrafted).
b)
When, as a result of the subsequent performance of an omitted
procedure or alternative procedures, the auditor becomes aware of facts
that were unknown during the audit then the auditor should apply the
provisions of the clarified SAS Subsequent Events and Subsequently
Discovered Facts.
P.
Statement on Auditing Standards, Initial Audit Engagements,
Including Reaudits—Opening Balances
1.
Changes from Previous Standards
a)
Incorporates guidance from ISA No. 510, Initial Audit
Engagements—Opening Balances, which requires the auditor to obtain
sufficient appropriate audit evidence about whether
(1)
Opening balances contain misstatements that materially
affect the current period's financial statements;
(2)
Accounting policies reflected in the opening balances have
been consistently applied in the current period’s financial
statements, and whether changes in the accounting policies have
been properly accounted for and adequately presented and
disclosed in accordance with the applicable financial reporting
framework.
b)
Incorporates relevant guidance from SAS No. 84, as amended
c)
Clarifies that initial audit engagements include reaudits, and
eliminates from previous AU section 315 requirements and guidance
directed to reaudits that are repetitive with other generally accepted
auditing standards.
Q.
Statement on Auditing Standards, Consideration of Fraud in a
Financial Statement Audit (Redrafted)
1.
Changes from Previous Standards
a)
Does not change or expand SAS No. 99 in any significant respect.
b)
To reflect a more principles-based approach to standard setting,
certain requirements that are duplicative of broader requirements in SAS
No. 99 have been moved to application and other explanatory material,
consistent with ISA 240 (Redrafted). The ASB’s view is that this has not
changed the overall effectiveness of the SAS.
2.
Additions to the SAS
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a)
The Clarity Project of the ASB has added some sections to the
redrafted SAS’s. In this case Objectives are added. Objectives refer to the
objectives of the auditor. In this SAS objectives are to:
(1)
identify and assess the risks of material misstatement of
the financial statements due to fraud;
(2)
obtain sufficient appropriate audit evidence about the
assessed risks of material misstatement due to fraud, through
designing and implementing appropriate responses;
(3)
respond appropriately to identified or suspected fraud.
Practical Note:
When considering the possibility of misstatement due to error or fraud, professional skepticism
may be the auditor’s most important defensive weapon. A higher level of professional
skepticism requires an ongoing questioning attitude when considering the content and reliability
of audit evidence. It is considering the integrity and honesty of client personnel, the entity’s
control environment and other internal controls when evaluating evidence. The higher the risk
of potential misstatement, the more inquiries and other substantive procedures that are
required.
R.
Statement on Auditing Standards Reports on Application of
Requirements of an Applicable Financial Reporting Framework
1.
Changes From Previous Standards
a)
Does not change or expand SAS No. 50 in any significant respect.
b)
To reflect a more principles-based approach to standard setting,
certain requirements that are duplicative of broader requirements in SAS
No. 50 have been moved to application and other explanatory material.
S.
Statement on Auditing Standards Analytical Procedures (Redrafted)
1.
Changes From Previous Standards
a)
Previous AU section 329 addresses the use of analytical
procedures as planning, substantive, and overall review procedures.
(1)
The use of analytical procedures as a risk assessment
procedure is addressed in the clarified SAS Understanding the
Entity and Its Environment and Assessing the Risks of Material
Misstatement, paragraph 6 and related application guidance, and
accordingly is not addressed in SAS Analytical Procedures.
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Practical Note:
Since analytical procedures are often the most pervasive and least expensive substantive
evidence, they should be used to the maximum extent practical to gather evidence for
evaluating the appropriateness and reasonableness of relevant financial statement assertions.
Evidence from risk assessment procedures and analytical procedures may enable an auditor to
significantly reduce evidence required from the detailed tests of balances. The nature, extent
and timing of tests of balances are affected by the assessed levels of risk.
T.
Statement on Auditing Standards Using the Work of an Auditor’s
Specialist
1.
Changes From Previous Standards
a)
Previous AU section 336 addresses the use of the auditor’s
specialist and the use of management’s specialist.
b)
Previous AU section 336 specifically scopes out from the standard
use of specialists employed by the firm who participate in the audit.
(1)
The SAS does not encompass in-firm specialists, however,
the SASs, Quality Control for an Engagement Conducted in
Accordance With Generally Accepted Auditing Standards and
Planning an Audit, do address those situations.
(2)
The ASB believes that this change in the scope of the
standard will affect current practice because it will create
incremental documentation requirements.
c)
Other than the changes previously mentioned, the SAS does not
change or expand AU section 336 in any significant respect.
d)
To reflect a more principles-based approach to standard setting,
certain requirements that are duplicative of broader requirements in
previous AU section 336 have been moved to application and other
explanatory material, consistent with ISA 620. In the ASB’s view, this has
not changed the overall effectiveness of the SAS.
U.
Statement on Auditing Standards Audit Evidence⎯Selected Items
Considerations For Selected Items
1.
Changes From Previous Standards
a)
Many of the requirements of previous AU section 332 are
essentially similar to requirements in other clarified standards, primarily the
risk assessment standards and the SAS Auditing Accounting Estimates,
Including Fair Value Accounting Estimates and Related Disclosures
(Redrafted);
35
b)
The ASB concluded that the application of those requirements in
the other clarified standards to the subject matter addressed by previous
AU section 332 is most appropriately addressed as interpretative guidance
in the audit guide Auditing Derivative Instruments, Hedging Activities, and
Investments in Securities.
(1)
Consideration of these requirements and related
application guidance will be a specific focus in updating the audit
guide.
(2)
AICPA staff has prepared a supplementary schedule which
further explains how the material in the previous AU section 332
has been addressed in the SAS or what is proposed to be
addressed by a revised Audit Guide Auditing Derivative
Instruments, Hedging Activities, and Investments in Securities.
c)
In Exhibit B of the SAS, the ASB concluded that it was appropriate
to include certain requirements (primarily addressing auditing the valuation
assertion) from previous AU section 332 in this SAS.
d)
The ASB also made certain changes to the requirements from
those included in previous AU section 332 to exclude investments
accounted for using the equity method from their scope because the
auditing of equity investees is addressed more broadly by the SAS Audits
of Group Financial Statements (Including the Work of Component Auditors).
e)
The ASB believes that the incorporation of previous AU section
332 into the clarified SASs in the manner described in this section will not
have a significant effect on practice, with the possible exception of changes
that may be necessary because equity method investees now fall within the
scope of SAS Audits of Group Financial Statements (Including the Work of
Component Auditors).
f)
Paragraph 6 of previous AU section 337 states, in part, “the auditor
should request the client's management to send a letter of inquiry to those
lawyers with whom management consulted concerning litigation, claims,
and assessments.”
g)
In contrast, paragraph 18 of the SAS requires the auditor to seek
direct communication with the entity’s external legal counsel (through a
letter of inquiry) if the auditor assesses a risk of material misstatement
regarding litigation or claims, or when audit procedures performed indicate
that material litigation or claims may exist.
h)
The ASB believes that paragraph 18 of the SAS may change
existing practice because following the SAS, there potentially could be
situations when, based on the assessment of the risk of material
misstatement, the auditor might not be required to send letters of inquiry to
lawyers with whom management consulted concerning litigation, claims,
and assessments (for example, if the auditor does not assess a risk of
material misstatement regarding identified litigation or claims).
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2.
Other than the changes previously mentioned,
a)
The SAS does not change or expand extant standards in any
significant respect.
b)
To reflect a more principles-based approach to standard setting,
certain requirements that are duplicative of broader requirements in
previous standards have been moved to application and other explanatory
material, consistent with ISA 501.
V.
Statement on Auditing Standards, Auditing Accounting Estimates,
Including Fair Value Accounting Estimates and Related Disclosures
(Redrafted)
1.
Changes From Previous Standards
a)
Does not change or expand SAS No. 57 or SAS No. 101 in any
significant respect.
b)
The SAS is restructured to reflect a more principles-based
approach to standard setting.
c)
As done in other revised SASs, certain requirements that are
duplicative of broader requirements (in this case SAS No. 57 and SAS 101)
have been moved to application and other explanatory material, consistent
with ISA 540.
d)
Consistent with the approach taken by the IAASB in the
development of ISA 540 (Revised and Redrafted), Auditing Accounting
Estimates, Including Fair Value Estimates and Related Disclosures, the
SAS combines previous AU section 342, Auditing Accounting Estimates
with previous AU section 328, Auditing Fair Value Measurements and
Disclosures (AICPA, Professional Standards, vol. 1).
W.
Statement on Auditing Standards, Special Considerations—Audits of
Group Financial Statements (Including the Work of Component Auditors)
1.
Requirements —The requirements of the SAS address the following:
a)
Acceptance and continuance considerations
b)
The group engagement team’s process to assess risk
c)
The determination of materiality to be used to audit the group
financial statements
d)
The determination of materiality to be used to audit components
e)
testing
The selection of components and account balances for audit
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f)
Communications between the group engagement team and
component auditors
g)
Assessing the adequacy and appropriateness of audit evidence by
the group engagement team in forming an opinion on the financial
statements
2.
In situations when the group engagement partner does not make
reference to a component auditor in the audit report on the group financial
statements, all of the requirements of the SAS apply, when relevant in the
context of the specific group audit engagement.
Practical Note:
Documentation mentioned in the standard includes a) analysis and identification of significant
components, b) any components to which reference will be made in the auditor’s report, c)
written communications setting forth the group engagement team’s requirements for component
auditors, and d) the financial statements of components and auditors reports for those referred
to in the group auditor’s report.
X.
Statement on Auditing Standards, Engagements to Report on
Summary Financial Statements
1.
Changes From Previous Standards
In converging with ISA 810, the SAS:
a)
addresses the auditor’s responsibilities for specified procedures
and reporting formats when reporting on summary financial statements
derived from financial statements audited by that same auditor.
b)
Procedures required:
(1)
requires the auditor to determine whether the criteria
applied by management in the preparation of the summary
financial statements are acceptable.
(2)
requires the auditor to obtain management’s agreement
that it acknowledges and understands its responsibilities for the
summary financial statements, including its responsibility to make
the audited financial statements readily available to the intended
users of the summary financial statements. The audited financial
statements need not accompany the summary financial
statements.
(3)
requires the auditor to request management to provide, in
the form of a representation letter addressed to the auditor, written
representations relating to the summary financial statements.
(4)
stipulates specific procedures to be performed as the basis
for the auditor’s opinion on the summary financial statements.
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c)
Reporting requirements. In addition to standard reporting
elements in the new standard:
(1)
eliminates reporting on selected financial data
(2)
stipulates specific elements of the auditor’s report,
including management’s responsibility and a description of the
auditor’s procedures.
(3)
requires the auditor to deny an opinion on the summary
financial statements when the auditor issued an adverse opinion
or disclaimer of opinion on the audited financial statements. This
type of report will require the auditor to:
(a)
state that the auditor’s opinion on the audited
financial statements contains an adverse opinion or
disclaimer of opinion
(b)
describe the basis for that adverse or disclaimer of
opinion.
(c)
state that, as a result of the adverse opinion or
disclaimer of opinion, it is inappropriate to express, and the
auditor does not express an opinion on the summary
financial statements. The auditor is not required to include
the paragraph describing the procedures. However the
auditor should indicate that the report is prepared in
accordance with the standards established by the
American Institute of Certified Public Accountants.
d)
clarifies the auditor’s responsibilities related to subsequent events
and subsequently discovered facts when the date of the auditor’s report on
the summary financial statements is later than the date of the auditor’s
report on the audited financial statements.
e)
includes requirements relating to comparatives, unaudited
information presented with summary financial statements, and other
information included in a document containing the summary financial
statements and related auditor’s report.
Y.
Statements on Auditing Standards, Special Considerations—Audits
of Financial Statements Prepared in Accordance With Special Purpose
Frameworks
Special Considerations—Audits of Single Financial Statements and Specific
Elements, Accounts, or Items of a Financial Statement
1.
This Statement on Auditing Standards (SAS), contains two SASs. Those
SASs were issued as:
39
a)
Special Considerations—Audits of Financial Statements Prepared
in Accordance with Special Purpose Frameworks, and
b)
Special Considerations—Audits of Single Financial Statements
and Specific Elements, Accounts, or Items of a Financial Statement.
2.
Changes From Previous Standards
a)
SAS Special Considerations—Audits of Financial Statements
Prepared in Accordance with Special Purpose Frameworks is converged
with ISA 800. It
(1)
Addresses special considerations in the application of the
previous AU sections to an audit of financial statements prepared
in accordance with a special purpose framework, which now
includes cash, tax, regulatory, or contractual basis of accounting.
(a)
The cash, tax, and regulatory bases of accounting
were commonly referred to as other comprehensive bases
of accounting (OCBOA).
(b)
The term OCBOA was replaced with the term
special purpose framework. The new term no longer
includes the broader concept of a definite set of criteria
having substantial support that is applied to all material
items appearing in financial statements.
(2)
Requires the auditor to obtain an understanding of:
(a)
the purpose for which the financial statements are
prepared,
(b)
the intended users, and
(c)
the steps taken by management to determine that
the special purpose framework is acceptable in the
circumstances.
(3)
Requires the auditor to obtain the agreement of
management that it acknowledges and understands its
responsibility to include all informative disclosures that are
appropriate for the special purpose framework being used.
(4)
Requires the explanation of management’s responsibility
for the financial statements in the auditor’s report, and if
management has a choice of financial reporting frameworks in the
preparation of the financial statements, to make reference to
management’s responsibility for determining that the applicable
financial reporting framework is acceptable in the circumstances.
(5)
Requires the auditor, if the financial statements are
prepared in accordance with a contractual basis of accounting, to
40
obtain an understanding of any significant interpretations of the
contract that management made in the preparation of those
financial statements and to evaluate whether the financial
statements adequately describe such interpretations.
(6)
Requires the auditor’s report, if the financial statements are
prepared in accordance with a regulatory or contractual basis of
accounting, to describe the purpose for which the financial
statements are prepared or refer to a note in the special purpose
financial statements that contains that information.
(7)
Requires the auditor’s report to include specific elements if
the auditor is required by law or regulation to use a specific layout,
form, or wording of the auditor’s report.
b)
SAS Special Considerations—Audits of Single Financial
Statements and Specific Elements, Accounts, or Items of a Financial
Statement is converged with ISA 805. It
(1)
Addresses special considerations in the application of the
previous AU sections to an audit of a single financial statement or
of a specific element, account, or item of a financial statement.
(2)
Clarifies that a single financial statement and a specific
element of a financial statement includes the related notes.
(3)
Related notes ordinarily comprise a summary of significant
accounting policies and other explanatory information relevant to
the financial statement or to the element.
(4)
Requires the auditor, if the auditor is not also engaged to
audit the entity’s complete set of financial statements,
(a)
To determine whether the audit of a single financial
statement or of a specific element of those financial
statements in accordance with generally accepted auditing
standards is practicable and
(b)
To determine whether the auditor will be able to
perform procedures on interrelated items.
(c)
In the case of an audit of a specific element that is,
or is based upon, the entity’s stockholders’ equity or net
income or the equivalent, the SAS requires the auditor to
perform procedures necessary to obtain sufficient
appropriate audit evidence about financial position, or
financial position and results of operations, respectively.
(5)
Requires the auditor to determine the acceptability of the
financial reporting framework, including whether application of the
financial reporting framework will result in a presentation that
41
provides adequate disclosures to enable the intended users to
understand the information conveyed in the financial statement or
the element, and the effect of material transactions and events on
the information conveyed in the financial statement or the
element.
(6)
Requires the auditor, if, in conjunction with an engagement
to audit the entity’s complete set of financial statements, the
auditor undertakes an engagement to audit a single financial
statement or a specific element of a financial statement, to issue a
separate auditor’s report and express a separate opinion for each
engagement.
(7)
Requires the auditor, if an audited single financial
statement and an audited specific element of a financial statement
are published together with the entity’s audited complete set of
financial statements, to inform management that it may not publish
the auditor’s report containing the opinion on the single financial
statement or on the specific element of a financial statement
together with the entity’s complete set of financial statements
unless the auditor is satisfied with the differentiation or separation
from the complete set of financial statements.
(8)
Requires the auditor, if the opinion in the auditor’s report
on an entity’s complete set of financial statements is modified, or
that report includes an emphasis of matter or an other matter
paragraph,
(a)
To determine the effect that this may have on the
auditor’s report on a single financial statement or on a
specific element of those financial statements.
(b)
In the case of an audit of a specific element of a
financial statement, if the modified opinion on the entity’s
complete set of financial statements is relevant to the audit
of the specific element or an interrelated item of the
specific element, the SAS requires the auditor to:
(i)
Express an adverse opinion on the specific
element when the modification on the complete set
of financial statements arises from a material
misstatement.
(ii)
Disclaim an opinion on the specific element
when the modification on the complete set of
financial statements arises from an inability to
obtain sufficient appropriate audit evidence.
(c)
Allows the auditor, if the auditor concludes that it is
necessary to express an adverse opinion or disclaim an
opinion on the entity’s complete set of financial statements
42
as a whole but, in the context of a separate audit of a
specific element that is included in those financial
statements, the auditor nevertheless considers it
appropriate to express an unmodified opinion on that
element, to do so only if
(i)
That opinion is expressed in an auditor’s
report that is neither published together with nor
otherwise accompanies the auditor’s report
containing the adverse opinion or disclaimer of
opinion; and
(ii)
The specific element does not constitute a
major portion of the entity’s complete set of
financial statements or the specific element is not,
or is not based upon, the entity’s stockholders’
equity or net income or the equivalent.
Z.
Statements on Auditing Standards, Forming an Opinion and Reporting on
Financial Statements
1.
This SAS promotes consistency in the auditor’s report. Consistency
a)
when the audit has been conducted in accordance with GAAS,
promotes credibility in the marketplace
b)
helps promote users’ understanding and identification of unusual
circumstances when they occur.
2.
Objectives of the auditor
a)
to form an opinion on the financial statements based on an
evaluation of the audit evidence obtained, including evidence obtained
about comparative financial statements or comparative financial
information, and
b)
to express clearly that opinion on the financial statements through
a written report that also describes the basis for that opinion.
3.
Most significant changes to previous standards. This clarified statement
lists the most significant changes as:
a)
A requirement to describe management’s responsibility for the
preparation and fair presentation of the financial statements in more detail
than what was required in previous AU section 508.
b)
The description includes an explanation that management is
responsible for
43
(1)
The preparation and fair presentation of the financial
statements in accordance with the applicable financial reporting
framework, and
(2)
The 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.
c)
The ASB believes that this addition to the auditor’s report will
communicate more clearly the responsibilities of management for the
preparation of the financial statements.
d)
The SAS requires the use of headings throughout the auditor’s
report to clearly distinguish each section of the report.
4.
This clarified SAS contains sections on
a)
Requirements – The “shoulds” for the auditor including such
things as
(1)
Forming an opinion on the financial statements
(2)
The auditor’s evaluations of the financial statements.
b)
Form of Opinion–When and how the auditor should express his or
her opinion on the financial statements, in particular:
(1)
Unmodified opinion–Is expressed when the auditor
concludes that the financial statements are presented fairly, in all
material respects, in accordance with the applicable financial
reporting framework.
(2)
Modified opinion–Is expressed when in the auditor’s report,
in accordance with the clarified SAS Modifications to the Opinion
in the Independent Auditor’s Report, he or she
(a)
concludes that, based on the audit evidence
obtained, the financial statements as a whole are
materially misstated or
(b)
is unable to obtain sufficient appropriate audit
evidence to conclude that the financial statements as a
whole are free from material misstatement.
(c)
If the auditor concludes that the financial
statements do not achieve fair presentation, he or she
should discuss the matter with management and,
depending on how the matter is resolved, should
determine whether it is necessary to modify the opinion in
the auditor’s report in accordance with the clarified SAS
44
Modifications to the Opinion in the Independent Auditor’s
Report.
5.
Auditor’s Report–Contains the requirements for the form of the auditor’s
report, including the sections of the report and that it should be in writing.
a)
GAAS
Form of Auditor’s Report for Audits Conducted in Accordance With
(1)
Title – that includes the word independent to clearly
indicate that it is the report of an independent auditor.
(2)
Addressee – Addressed as required by the circumstances
of the engagement.
(3)
Introductory Paragraph–should
(a)
identify the entity whose financial statements have
been audited,
(b)
state that the financial statements have been
audited,
(c)
identify the title of each statement that the financial
statements comprise, and
(d)
specify the date or period covered by each financial
statement that the financial statements comprise.
(4)
Management’s Responsibility for the Financial
Statements–
(a)
Describes management’s responsibility for the
preparation and fair presentation of the financial
statements, including
(i)
explanation that management is
responsible for the preparation and fair
presentation of the financial statements in
accordance with the applicable financial reporting
framework;
(ii)
and this responsibility includes the 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.
(b)
Should not be referenced to a separate statement
by management about such responsibilities if such a
45
statement is included in a document containing the
auditor’s report.
b)
Auditor’s Responsibility– The auditor’s report should state
(1)
That the responsibility of the auditor is to express an
opinion on the financial statements based on the audit.
(2)
That the audit was conducted in accordance with
(a)
generally accepted auditing standards and should
identify the United States of America as the country of
origin of those standards.
(b)
should also explain that those standards require
that the auditor plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free from material misstatement.
(c)
should describe an audit by stating that
(i)
an audit involves performing procedures to
obtain audit evidence about the amounts and
disclosures in the financial statements.
(ii)
the procedures selected depend on the
auditor’s judgment, including the assessment of the
risks of material misstatement of the financial
statements, whether due to fraud or error (unless
the auditor has a responsibility to opine on the
effectiveness of internal control. Se paragraph (3)
below.)
(iii)
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 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, and accordingly, no such
opinion is expressed.
(iv)
an audit also includes evaluating the
appropriateness of the accounting policies used
and the reasonableness of significant accounting
estimates made by management, as well as the
overall presentation of the financial statements.
(3)
Internal Control–If the auditor also has a responsibility to
express an opinion on the effectiveness of internal control in
46
conjunction with the audit of the financial statements, he or she
should omit the phrase concerning internal control above that the
auditor’s consideration of internal control is not for the purpose of
expressing an opinion on the effectiveness of internal control, and
accordingly, no such opinion is expressed.
(4)
The auditor’s report should state whether the auditor
believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s
opinion.
c)
Auditor’s Opinion – The section with the heading “Opinion.”
(1)
Unmodified opinion on financial statements–the auditor’s
opinion should state that the financial statements present fairly, in
all material respects, the financial position of the entity as of the
balance sheet date and the results of its operations and its cash
flows for the period then ended, in accordance with the applicable
financial reporting framework.
(2)
The auditor’s opinion should identify the applicable
financial reporting framework and its origin.
6.
Other Reporting Responsibilities – A separate section
a)
Should be included if the auditor addresses other reporting
responsibilities in the auditor’s report on the financial statements that are in
addition to the auditor’s responsibility under GAAS
b)
Should be subtitled “Report on Other Legal and Regulatory
Requirements” or otherwise, as appropriate to the content of the section.
Note: If the auditor’s report contains a separate section on other reporting
responsibilities, the headings, statements, and explanations referred to above
should be under the subtitle “Report on the Financial Statements” and the
“Report on Other Legal and Regulatory Requirements” should follow the “Report
on the Financial Statements.”
7.
Signature of the Auditor –Should include the manual or printed signature
of the auditor’s firm.
8.
Auditor’s Address – should name the city and state where the auditor
practices.
9.
Date of the Auditor’s Report
a)
Dated no earlier than the date on which the auditor has obtained
sufficient appropriate audit evidence on which to base the auditor’s opinion
on the financial statements, including evidence that
(1)
the audit documentation has been reviewed;
47
(2)
all the statements that the financial statements comprise,
including the related notes, have been prepared; and
(3)
management has asserted that they have taken
responsibility for those financial statements.
10.
This clarified SAS also contains the following sections:
a)
Auditor’s report for audits conducted in accordance with both
GAAS and another set of auditing standards
b)
Comparative financial statements and comparative information
c)
Audit procedures
d)
Prior period financial statements audited by a predecessor auditor
e)
Prior period financial statements not audited
11. Application and Other Explanatory Material – Clarified SASs contain a
section devoted to application of the requirements of the SAS and additional
explanatory material. This clarified SASs contains examples of the Auditor’s
opinion.
12.
Note: Exhibit A contains a number of such examples:
.
Illustration 1—An Auditor's Report on Consolidated Comparative Financial Statements Prepared in Accordance With Accounting Principles Generally Accepted in the United States of America
Illustration 2—An Auditor's Report on a Single Year Prepared in Accordance With Accounting Principles Generally Accepted in the United
States of America
Illustration 3—An Auditor's Report on Consolidated Comparative Financial Statements Prepared in Accordance With Accounting Principles Generally Accepted in the United States of America When the Audit Has Been Conducted in Accordance With Both Auditing Standards
Generally Accepted in the United States of America and International
Standards on Auditing
Illustration 4—An Auditor's Report on a Single Year Prepared in Accordance With Accounting Principles Generally Accepted in the United
States of America When Comparative Summarized Financial Information Derived From Audited Financial Statements for the Prior Year Is
Presented
Illustration 5—An Auditor's Report on a Single Year Prepared in Accordance With Accounting Principles Generally Accepted in the United
States of America When Comparative Summarized Financial Information Derived From Unaudited Financial Statements for the Prior Year
48
Is Presented
49
INDEPENDENT AUDITOR’S REPORT
[Appropriate Addressee]
Report on the Financial Statements
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.
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.
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.
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 their cash flows
50
for the years then ended in accordance with accounting principles generally accepted in
the United States of America.
Report on Other Legal and Regulatory Requirements
[Form and content of this section of the auditor’s report will vary depending on the nature
of the auditor’s other reporting responsibilities.]
[Auditor’s signature]
[Auditor’s city and state]
[Date of the auditor’s report]
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AA.
Statement on Auditing Standards Modifications to the Opinion in the
Independent Auditor’s Report
1.
Types of Modified Opinions – three types of modified opinions:
a)
a qualified opinion,
b)
an adverse opinion, and
c)
a disclaimer of opinion.
d)
The type of modified opinion is determined by considering the
nature of the matter giving rise to the modification (that is, whether the
financial statements are materially misstated or, in the case of an inability to
obtain sufficient appropriate audit evidence, may be materially misstated)
e)
The auditor’s judgment about the pervasiveness of the effects or
possible effects of the matter on the financial statements
f) The clarified SAS Emphasis-of-Matter Paragraphs and Other-Matter
Paragraphs in the Independent Auditor’s Report addresses situations when
the auditor considers it necessary, or is required, to include additional
communications in the auditor’s report that are not modifications to the
auditor’s opinion.
2.
Objective of the auditor
a)
is to express clearly an appropriately modified opinion on the
financial statements that is necessary when he or she
(1)
concludes, based on the audit evidence obtained, that the
financial statements as a whole are materially misstated or
(2)
is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from
material misstatement.
3.
Definitions applicable to this clarified SAS include:
a)
Modified opinion. A qualified opinion, an adverse opinion, or a
disclaimer of opinion.
b)
Pervasive. A term used in the context of misstatements to
describe the effects on the financial statements of misstatements that are
known or the possible effects on the financial statements of misstatements
if any that are undetected due to an inability to obtain sufficient appropriate
audit evidence.
(1)
Pervasive effects on the financial statements are those
that, in the auditor’s judgment
52
(a)
are not confined to specific elements, accounts, or
items of the financial statements;
(b)
if so confined, represent or could represent a
substantial proportion of the financial statements; or
4.
(c)
in relation to disclosures, are fundamental to users’
understanding of the financial statements.
This clarified SAS contains a number of requirements including:
a)
Circumstances When a Modification to the Auditor’s Opinion Is
Required
b)
Determining the Type of Modification to the Auditor’s Opinion (See
the table at the end of this section)
c)
Qualified Opinion– when to express a qualified opinion.
(1)
The auditor should express a qualified opinion when
(a)
Having obtained sufficient appropriate audit
evidence, he or she concludes that misstatements,
individually or in the aggregate, are material but not
pervasive to the financial statements or
(b)
He or she is unable to obtain sufficient appropriate
audit evidence on which to base the opinion, but the
auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be
material but not pervasive.
d)
Adverse Opinion – When to express an adverse opinion
(1)
The auditor should express an adverse opinion when
(a)
He or she, having obtained sufficient appropriate
audit evidence, concludes that misstatements, individually
or in the aggregate, are both material and pervasive to
the financial statements.
e)
Disclaimer of Opinion–When to disclaim an opinion.
(1)
He or she should disclaim an opinion when the auditor
(a)
is unable to obtain sufficient appropriate audit
evidence on which to base the opinion, and
(b)
concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be
both material and pervasive.
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f)
Inability to Obtain Sufficient Appropriate Audit Evidence Due to a
Management-Imposed Limitation After the Auditor Has Accepted the
Engagement. This condition should result in compunctions with those
charged with governance to request that management remove the limitation
or withdrawal from the engagement if the limitation remains and appropriate
alternative procedures are not performed.
g)
Other Considerations Relating to an Adverse Opinion or
Disclaimer of Opinion. If it is necessary for the auditor to express an
adverse or disclaimer of opinion, the auditor should not separately provide
an unmodified opinion related to the same financial reporting framework on
a single financial statement or one or more specific elements, accounts, or
items of a financial statement.
h)
Form and Content of the Auditor’s Report When the Opinion Is
Modified
(1)
Basis for Modification Paragraph – modifying the opinion
on the financial statements requires the auditor to, in addition to
the specific elements required by the clarified SAS Forming an
Opinion and Reporting on Financial Statements, include a
paragraph in the auditor’s report that provides a description of the
matter giving rise to the modification. The auditor should place this
paragraph immediately before the opinion paragraph in the
auditor’s report and use a heading that includes “Basis for
Qualified Opinion,” “Basis for Adverse Opinion,” or “Basis for
Disclaimer of Opinion,” as appropriate.
(2)
Note: The application section of this clarified SAS
contains this example of the auditor’s qualified opinion in Exhibit
A: Illustrations of Auditors’ Reports With Modifications to the
Opinion, Illustration 1: An Auditor’s Report Containing a Qualified
Opinion Due to a Material Misstatement of the Financial
Statements. We include only the paragraphs concerning the
qualified opinion:
(a)
Basis for Qualified Opinion
(i)
The Company has stated inventories at cost
in the accompanying balance sheets. Accounting
principles generally accepted in the United States
of America require inventories to be stated at the
lower of cost or market. If the Company stated
inventories at the lower of cost or market, a write
down of $xxx and $xxx would have been required
as of December 31, 20X1 and 20X0, respectively.
Accordingly, cost of sales would have been
increased by $xxx and $xxx, and net income,
income taxes, and stockholders’ equity would have
been reduced by $xxx, $xxx, and $xxx, and $xxx,
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$xxx, and $xxx, as of and for the years ended
December 31, 20X1 and 20X0, respectively.
(b)
Qualified Opinion
(i)
In our opinion, except for the effects of the
matter described in the Basis for Qualified Opinion
paragraph, the financial statements referred to
above present fairly, in all material respects, the
financial position of ABC Company as of December
31, 20X1 and 20X0, and the results of its
operations and its cash flows for the years then
ended in accordance with accounting principles
generally accepted in the United States of America.
i)
Form and Content of the Auditor’s Report When the Opinion Is
adverse. Section A of the statement contains an illustration of an auditor’s
report containing an adverse opinion. We have included the paragraphs
which would be included in the adverse opinion.
(1)
Illustration 3: An Auditor’s Report Containing an Adverse
Opinion Due to a Material Misstatement of the Financial
Statements
(2)
Basis for Adverse Opinion
(3)
(a)
As described in Note X, the Company has not
consolidated the financial statements of subsidiary XYZ
Company that it acquired during 20X1 because it has not
yet been able to ascertain the fair values of certain of the
subsidiary’s material assets and liabilities at the acquisition
date. This investment is therefore accounted for on a cost
basis by the Company. Under accounting principles
generally accepted in the United States of America, the
subsidiary should have been consolidated because it is
controlled by the Company. Had XYZ Company been
consolidated, many elements in the accompanying
consolidated financial statements would have been
materially affected. The effects on the consolidated
financial statements of the failure to consolidate have not
been determined.
Adverse Opinion
(a)
In our opinion, because of the significance of the
matter discussed in the Basis for Adverse Opinion
paragraph, the consolidated financial statements referred
to above do not present fairly the financial position of ABC
Company and its subsidiaries as of December 31, 20X1, or
the results of their operations or their cash flows for the
year then ended.
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j)
This clarified SAS, in the Application section paragraph A1,
contains a table that you may find useful. It illustrates how the auditor’s
judgment about the nature of the matter giving rise to the modification and
the pervasiveness of its effects or possible effects on the financial
statements affects the type of opinion to be expressed:
Nature of Matter Giving
Rise to the Modification
Auditor’s Judgment About the Pervasiveness of
the Effects or Possible Effects on the Financial
Statements
Material But Not
Pervasive
Material and Pervasive
Financial statements are
materially misstated
Qualified opinion
Adverse opinion
Inability to obtain
sufficient appropriate
audit evidence
Qualified opinion
Disclaimer of opinion
BB.
Statement On Auditing Standards Emphasis-of-Matter Paragraphs and
Other-Matter Paragraphs in the Independent Auditor’s Report
1.
Objective of the auditor–if after the auditor has formed an opinion on the
financial statements, he or she decides it is necessary to draw users’ attention,
by way of clear additional communication in the auditor’s report, to draw a
user’s attention
a)
To a matter, although appropriately presented or disclosed in the
financial statements, that is of such importance that it is fundamental to
users’ understanding of the financial statements or
b)
As appropriate, any other matter that is relevant to users’
understanding of the audit, the auditor’s responsibilities, or the auditor’s
report.
c)
A separate paragraph should be added tot the auditor’s report.
2.
Definitions–In this SAS the following terms have the meanings attributed
to them:
a)
Emphasis-of-matter paragraph. A paragraph included in the
auditor’s report that is required by GAAS, or is included at the auditor’s
discretion, and that refers to a matter appropriately presented or disclosed
in the financial statements that, in the auditor’s judgment, is of such
56
importance that it is fundamental to users’ understanding of the financial
statements.
b)
Other-matter paragraph. A paragraph included in the auditor’s
report that is required by GAAS, or is included at the auditor’s discretion,
and that refers to a matter other than those presented or disclosed in the
financial statements that, in the auditor’s judgment, is relevant to users’
understanding of the audit, the auditor’s responsibilities, or the auditor’s
report
3.
Requirements
a)
Emphasis-of-Matter Paragraphs in the Auditor’s Report is included
(1)
If the auditor considers it necessary to draw users’
attention to emphasize a matter that is appropriately presented or
disclosed in the financial statements that, in the auditor’s
judgment, is of such importance that it is fundamental to users’
understanding of the financial statements,
(2)
Provided that the auditor has obtained sufficient
appropriate audit evidence that the matter is not materially
misstated in the financial statements.
(3)
Such a paragraph should refer only to information already
presented or disclosed in the financial statements.
(4)
When the auditor includes an emphasis-of-matter
paragraph in the auditor’s report, the auditor should
(a)
include it immediately after the opinion paragraph
in the auditor’s report,
(b)
use the heading “Emphasis of Matter” or other
appropriate heading,
(c)
include in the paragraph a clear reference to the
matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in
the financial statements, and
(d)
indicate that the auditor’s opinion is not modified
with respect to the matter emphasized.
b)
Other-Matter Paragraphs in the Auditor’s Report
(1)
If the auditor considers it necessary to communicate a
matter other than those that are presented or disclosed in the
financial statements that, in the auditor’s judgment, is relevant to
users’ understanding of the audit, the auditor’s responsibilities, or
the auditor’s report, the auditor should do so in a paragraph in the
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auditor’s report with the heading “Other Matter” or other
appropriate heading.
(2)
The auditor should include this paragraph immediately
after the opinion paragraph and any emphasis-of-matter
paragraph or elsewhere in the auditor’s report if the content of the
other-matter paragraph is relevant to the “Other Reporting
Responsibilities” section.
4.
Communication With Those Charged With Governance
a)
If the auditor expects to include an emphasis-of-matter or othermatter paragraph in the auditor’s report, he or she should communicate
with those charged with governance regarding this expectation and the
proposed wording of this paragraph.
5.
Application and Other Explanatory Material–This clarified SAS contains
examples of
a)
Applications and other explanatory material.
b)
Examples of emphasis-of-matter paragraphs in the auditor’s report
c)
Examples of other-matter paragraphs in the auditor’s report.
CC. Statement on Auditing Standards Consistency of Financial
Statements
1.
Objectives of the Auditor – The objectives of the auditor are to
a)
Evaluate the consistency of the financial statements for the
periods presented and
b)
Communicate appropriately in the auditor’s report when the
comparability of financial statements between periods has been materially
affected by a change in accounting principle or by adjustments to correct a
material misstatement in previously issued financial statements.
2.
Requirements — This SAS covers the following areas:
a)
Evaluating Consistency—The auditor should evaluate whether
the comparability of the financial statements between periods has been
materially affected by a change in accounting principle or by adjustments to
correct a material misstatement in previously issued financial statements.
The periods included in the auditor’s evaluation of consistency depend on
the periods covered by the auditor’s opinion on the financial statements and
include the year prior to the reporting period.
b)
Change in Accounting Principle—The auditor should evaluate a
change in accounting principle to determine whether the newly adopted
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accounting principle is in accordance with the applicable financial reporting
framework, the method of accounting for the effect of the change is in
accordance with the applicable financial reporting framework, the
disclosures related to the accounting change are appropriate and adequate,
and the entity has justified that the alternative accounting principle is
preferable.
(1)
If the auditor concludes that the criteria above has been
met, and the change in accounting principle has a material effect
on the financial statements, the auditor should include an
emphasis-of-matter paragraph in the auditor’s report that
describes the change in accounting principle and provides a
reference to the entity’s disclosure.
(2)
If the criteria above are not met, the auditor should
evaluate whether the accounting change results in a material
misstatement and whether the auditor should modify the opinion
accordingly.
c)
Correction of a Material Misstatement in Previously Issued
Financial Statements—The auditor should include an emphasis-of-matter
paragraph in the auditor’s report when there are adjustments to correct a
material misstatement in previously issued financial statements. The auditor
should include this type of emphasis-of-matter paragraph in their report
when the related financial statements are restated to correct the prior
material misstatement. The paragraph need not be repeated in subsequent
periods. The emphasis-of-matter paragraph should include
(1)
A statement that the previously issued financial statements
have been restated for the correction of a material misstatement in
the respective period and
(2)
A reference to the entity’s disclosure of the correction of
the material misstatement.
d)
Change in Classification—The auditor should evaluate a
material change in financial statement classification and the related
disclosure to determine whether such a change is also either a change in
accounting principle or an adjustment to correct a material misstatement in
previously issued financial statements. If so, the requirements of the
paragraphs above apply.
SAS No. 126 (AU-C 570)—GOING CONCERN
Effective Date
The SAS is effective for audits of financial statements for periods ending on or after December
15, 2012.
59
Changes From SAS No. 59 (AU 341)
 There are no significant changes to practice.
 Paragraph 18 of the SAS requires the auditor to obtain written representations from
management if conditions or events have been identified that indicate there could be
substantial doubt about the entity's ability to continue as a going concern.
 Interpretation No. 1, "Eliminating a Going-Concern Explanatory Paragraph From a
Reissued Report," of AU section 341, The Auditor's Consideration of an Entity's Ability to
Continue as a Going Concern (AICPA, Professional Standards, AU sec. 9341 par. .01–
.02), which addresses the auditor's responsibilities when the auditor agrees to reissue an
audit report that contained a going-concern explanatory paragraph, has been
incorporated into the SAS. Paragraph 20 of the SAS requires the auditor to reassess the
going-concern status of the entity by performing certain procedures when determining
whether to eliminate the going-concern emphasis-of-matter paragraph.
SAS NO. 127—Omnibus Statement on Auditing Standards (Amendments to SAS
No. 122, Sections 600 and 800)
Amendments to SAS No. 122, Section 600—Audits of Group Financial Statements
The existing SAS precludes making reference to the audit of a component auditor in the
auditor’s report on group financial statements unless the component’s financial statements are
prepared using the same financial reporting framework as that used for the group financial
statements. These amendments permit such reference under certain conditions. In these
circumstances the group auditor’s reports must disclose that the group auditor is taking
responsibility for evaluating the appropriateness of the conversion adjustments.
Amendments to SAS No. 122, Section 800—Special Purpose Frameworks
This existing section introduced the term “special purpose frameworks,” which is a cash, tax,
regulatory or contractual basis of accounting (previously known as an other comprehensive
basis of accounting). This amendment adds an other basis of accounting that uses a definite
set of logical, reasonable criteria that is applied to all material items appearing in financial
statements. This would include, of course, the AICPA’s new financial reporting framework for
small and medium-sized entities.
SAS No. 128—Using the Work of Internal Auditors
SAS No. 128 addresses the external auditor’s responsibilities if using the work of internal
auditors. Using the work of internal auditors includes (a) using the work of the internal audit
function in obtaining audit evidence and (b) using internal auditors to provide direct assistance
under the direction, supervision, and review of the external auditor.
SAS No. 128 introduces the concept of a systematic and disciplined approach, which is not
included in SAS No. 65. Paragraph 13 of SAS No. 128 would require, among other things, as a
prerequisite to being able to use the work of the internal audit function, that the external auditor
evaluate the application by the internal audit function of a systematic and disciplined
60
approach, including quality control. Paragraphs A12–A14 of SAS No. 128 provide
application guidance with regard to the evaluation of the application of a systematic and
disciplined approach by the internal audit function. The ASB believes that relative to SAS No.
65, this requirement represents an additional and explicit evaluation that the external auditor is
required to determine whether the work of internal auditors can be used in obtaining audit
evidence.
CONCLUSION
Details of each of these pronouncements summarized above are available in the Auditing
Standards Board pages of the AICPA’s website.
Live and on-demand webcasts on practical applications of the auditing standards are available
by clicking the applicable box on the left side of the home page at www.cpafirmsupport.com.
Larry Perry’s weekly articles and blog on www.accountingweb.com, entitled Today’s World of
Audits, also contain practical discussions of applications of auditing standards to comply with
the standards’ requirements and to, at the same time, maximize audit efficiency.
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COSO
I.
Introduction
1.
In 2013, the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) released an updated internal control framework designed
to help organizations perform with more agility and confidence. An Executive
Summary may be downloaded from COSO’s website, www.coso.org.
2.
COSO has updated its nearly 20-year-old framework for new technology
demands and capabilities, in addition to globalization. COSO has
provided greater clarity on how to design and maintain an effective system of
internal control.
3.
The updated framework doesn’t change core objectives or definitions, but
explicitly specifies 17 guiding principles divided among the five components of
internal control that were put into place with the initial framework in 1992.
4.
The original five components of the framework, control environment, risk
assessment, control activities, information and communications, and monitoring
remain the same.
5.
Enhancements to the Framework
a)
Now includes enhancements that clarify concepts and ease use
and application.
b)
Most important enhancement:
(1)
Is the codification of internal control concepts from the
original framework into principles and attributes
(2)
Provides clarity for the user in the design and development
of systems of internal control.
(3)
Principles and attributes can be used to support the
assessment of the effectiveness of internal controls.
c)
Other updates and enhancements to the Framework
(1)
Help the user address changes in business and operating
environments, including
(a)
Expectations for governance oversight
(b)
Globalization of markets and operations
(c)
Changes in business models
(d)
Demands and complexities in laws, rules,
regulations, and standards.
62
(e)
Expectations for competencies and accountabilities
(f)
Use of, and reliance on, evolving technologies
(g)
Expectations relating to preventing and detecting
corruption.
6.
The Framework provides:
a)
assistance to managers, boards of directors, external stakeholder,
and other interacting with the entity without being overly prescription.
7.
b)
greater understanding of what constitutes internal control
c)
insight into when internal control is being applied effectively.
For management and boards of directors the Framework provides:
a)
An opportunity to expand the application of a recognized
framework beyond financial reporting and to support a universal framework
of internal control
b)
A means to apply internal control to any type of entity, regardless
of industry or legal structure, the entity, level of entity, operating unit, or
function.
c)
A principles–based approach that provides flexibility and allows for
judgement in maintaining and improving internal control–principles that can
be applied at the entity, operating and functional levels.
d)
A basis for evaluating the effectiveness of internal control systems
by considering components, principles, and attributes.
e)
A means to identify and analyze risk, and develop and manage
appropriate responses to risks within acceptable levels and with a greater
focus on anti-fraud measures.
f)
An opportunity to reduce costs by eliminating ineffective,
redundant, or inefficient controls that provide minimal value in reducing
risks to the achievement of the entity’s objectives.
8.
For external stakeholders of an entity and others that interact with the
entity, the Framework provides:
a)
Greater confidence in the board of directors’ oversight over
internal control systems
b)
Greater confidence in the organization’s ability to responds to risk
and changes in the business and operating environments.
63
c)
A greater understanding of the criteria used to design, implement,
and evaluate internal control.
d)
Recognition that through the use of appropriate judgment
management may be able to reduce costs by eliminating ineffective,
redundant or inefficient controls.
e)
A means to align internal control with other standards to develop
an integrated view of specific functions and other areas of focus.
ETHICS
CPA Ethics Codification Project
The Professional Ethics Executive Committee (PEEC) has updated the AICPA Code of
Professional Conduct. The American Institute of Accountants the predecessor of the AICPA
adopted eight rules of conduct on only one sheet of paper. In 2009, the AICPA launched the
Codification Project to reformat and enhance its ethics literature. The AICPA will continue to
converge the Code with international standards where appropriate.
Revised AICPA Code of Professional Conduct
The PEEC has revised the AICPA Code of Professional Conduct (Code) so that members and
others can apply the rules and reach correct conclusions more easily and intuitively.
SSARS
On November 15, 2012, the Accounting and Review Services Committee issued these
exposure drafts:
 Review of Financial Statements
 Review of Financial Statements—Special Considerations
These exposure drafts were issued as redrafts to apply the ARSC’s clarity drafting conventions
(similar to those of the Auditing Standards Board) and include some addition changes from
existing standards. More important changes are:
 To permit reviews of specified elements, accounts, or items of a financial statement,
supplementary information, required supplementary information, financial information in
a tax return and other historical information.
 To require a signed engagement letter.
 To require the use of section headings in the accountant’s report.
 To add several requirements for reviews of financial statements prepared with special
purpose frameworks.
64
 To require emphasis-of-matter reports when special purpose frameworks are presented
or when financial statements are revised for subsequently discovered facts.
 To define “required supplementary information” and require an other-matter paragraph to
refer to such information along with various reporting requirements.
On October 23, 2013 the Accounting and Review Services Committee issued these exposure
Drafts:

The proposed SSARS, Preparation of Financial Statements, would provide
requirements and guidance when an accountant is engaged to prepare financial
statements for an entity but has not been engaged to perform a compilation,
review, or audit with respect to those financial statements.

The proposed SSARS, Compilation Engagements, would provide requirements
and guidance that would apply only when an accountant is engaged to perform a
compilation of historical financial statements.

The proposed SSARS, Association With Financial Statements, would provide
requirements and guidance when an accountant agrees to permit the use of the
accountant’s name in a report document, or written communication that includes
financial statements with respect to which the accountant did not issue a
compilation, review, or audit report.
On November 26, 2013, the Accounting and Review Services Committee issued the exposure
draft, Framework for Performing and Reporting on Compilation and Review Engagements. This
exposure draft applies the Clarity Project drafting conventions and the Committee believes that
there would be no significant changes to existing section AR 60 if the proposed SSARS is
issued as a final standard.
Copies of exposure drafts and comment deadlines may be obtained at www.aicpa.org, under
the Research tab.
65