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Opening Remarks. Clarifying the Clarity Standards: An Overview. February 29, 2012. Speaker Randy C. Roberts, CPA, CGFM Professional Practice Director AZ Office of the Auditor General [email protected] Moderator R. Kinney Poynter Executive Director NASACT [email protected]

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Clarifying the clarity standards an overview

Opening Remarks

Clarifying the Clarity Standards: An Overview

February 29, 2012

SpeakerRandy C. Roberts, CPA, CGFM

Professional Practice Director

AZ Office of the Auditor General

[email protected]

ModeratorR. Kinney Poynter

Executive Director

NASACT

[email protected]


Our objectives for this webinar

Our Objectives for this Webinar

  • Identify the major revisions of the new clarity standards

  • Understand where the new requirements differ from the previous standards

  • Apply the new standards in future audits


Clarity project status

Clarity Project Status

  • “Clarified standards” issued in October 2011

    • Most of them in one Statement on Auditing Standards – SAS No. 122

    • Omnibus Statement to catch up – SAS No. 123

  • Alert that Restricts the Use – SAS No. 125 issued in December 2011

  • Effective CY 2012/FY 2013 financial statement audits

  • The standards not to be implemented piecemeal


Overall objectives au 200

Overall Objectives (AU 200)


Clarity format

Clarity Format

  • Introduction

  • Objectives

  • Definitions

  • Requirements

  • Application Material

  • Appendices and Exhibits


Considerations for audits of governmental entities

Considerations for Audits of Governmental Entities

  • Guidance includes information about:

    • Uniqueness of governmental entities

    • Uniqueness of state audit organizations

    • Opinion units

    • Materiality

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

  • Accounting standards neutrality


Terms of engagement au 210

Terms of Engagement (AU 210)

  • Preconditions for an audit

    • Determine the financial reporting framework is acceptable

    • Obtain management’s acknowledgement of its responsibility for

      • Preparing financial statements

      • Designing and implementing internal control

      • Providing the auditor access to information and persons


Terms of engagement au 2101

Terms of Engagement (AU 210)

  • Factors to consider:

  • Management misunderstands scope or objective

  • Revised or special terms

  • Change in senior management

  • Change in reporting requirements

  • Change in nature of operations or services

  • Change in financial reporting framework

Practice Issues

Q. Do you need an annual engagement letter?

A. Only if terms change. If not, still need to remind them.

Q. Does the reminder need to be in writing?

A. No, can be reminded in writing or orally.


Audit documentation au 230

Audit Documentation (AU 230)

  • Pretty much the same as the current standard

  • One potential change in practice new paragraph

    • For audit procedures related to the inspection of significant contracts or agreements, the auditor should include abstracts or copies of those contracts or agreements in the audit documentation


Materiality in planning and performing an audit au 320

Materiality in Planning and Performing an Audit (AU 320)

Audit procedures

Planning and evaluation

Materiality

Performance materiality

$ or %


Performing procedures and evaluating audit evidence au 330

Performing Procedures and Evaluating Audit Evidence (AU 330)

  • The auditor is required to use external confirmations for accounts receivable, except when one or more is applicable:

    • Overall account balance is immaterial

    • External confirmations would be ineffective

    • The assessed level of RMM at the relevant assertion level is low, and other planned substantive procedures address the assessed risk


Audit evidence specific consider ations for selected items au 501

Audit Evidence—Specific Consider-ations for Selected Items (AU 501)

  • Covers:

    • Investments in Securities and Derivatives

    • Inventory

    • Litigation, Claims and Assessments

    • Segment Information

  • Only one significant change

    • Requires the auditor to send attorney letters if there is a relevant risk of material misstatement or an indication that material litigation exists


Opening balances initial audit engagements au 510

Opening Balances—Initial Audit Engagements (AU 510)


Opening balances initial audit engagements au 5101

Opening Balances—Initial Audit Engagements (AU 510)


Opening balances initial audit engagements au 5102

Opening Balances—Initial Audit Engagements (AU 510)

  • Whether prior period closing balances brought forward correctly

  • Whether opening balances reflect appropriate application of accounting principles

  • Evaluating evidence about opening balances from current period audit procedures and one or both:

    • Review predecessor auditor’s work

    • Perform specific procedures about opening balances


Special considerations audit of group financial statements au 600

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

E.G.,

Group financial statements

Group management

Group-wide controls

Group audit

Group auditor

Group audit opinion

Key definitions

__ Group

__ Component

__ Component auditor

__ Component materiality

__ Significant component


Special considerations audit of group financial statements au 6001

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


Special considerations audit of group financial statements au 6002

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

Identifying components – why is it important?


Special considerations audit of group financial statements au 6003

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

  • Governance structure

  • Management structure

  • How centralized is financial reporting

  • Centralized operations

  • Physical locations

  • Control environment

  • Nature of activity

  • Uniqueness to entity

  • Physical location of assets

  • Financial information prepared by others

  • Existence of multiple general ledgers or records

  • Whether information is booked in summary form

  • If risk assessments vary

  • Legal or regulatory requirements/oversight

Factors to Consider

Other Indicators


Special considerations audit of group financial statements au 6004

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

  • Preconditions to making reference to others’ work

    • Component f/s prepared on same GAAP basis*

    • Component auditor (CA) followed GAAS

    • Component auditor report is not restricted as to use

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


Special considerations audit of group financial statements au 6005

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

  • Materiality – the Group Auditor (GA) should determine:

    • Materiality, including performance materiality, for group financial statements

    • Whether circumstances exist that something less than materiality influences users; if so, apply different materiality to those transactions, balances, or disclosures

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

    • Threshold above which misstatements are trivial


Group versus component materiality

Group versus Component Materiality

Audit procedures

Planning and evaluation

Materiality

Performance materiality

$ or %

Component materiality

Component performance materiality


Special considerations audit of group financial statements au 6006

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

Performing procedures

  • Just like the Risk Assessment Standards and the rest of the other SASs

  • Significant components– an audit of its financial statements performed

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

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


Special considerations audit of group financial statements au 6007

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

Practice Issues:

Group-wide controls & Consolidation Process

  • Test group-wide controls – but who – GA or CA?

  • Test consolidation process – but who – GA or CA?

    Subsequent events (SE) issues:

  • How often does component audit work finish before group audit team is done?

  • Who is responsible for SE work – GA or CA?


Special considerations audit of group financial statements au 6008

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

Final Thought:

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

    • Current guidance on the matter

    • When making reference under this new AU section


Forming an opinion and reporting au 700

Forming an Opinion and Reporting (AU 700)

Headings and Subheadings

Opinion

Other auditor reporting responsibilities (Yellow Book Report reference)


Modifications to the opinion au 705

Modifications to the Opinion (AU 705)

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

Modified opinion (Qualified, Adverse, or Disclaimer


Emphasis of matter and other matter paragraphs au 706

Emphasis of Matter and Other Matter Paragraphs (AU 706)

  • Going concern

  • Contractual or regulatory reporting frameworks

  • Consistency

Emphasis of Matter

Other Matter

-Litigation uncertainty

-Major catastrophe

-Significant related parties

-Subsequent events

Audit reports of prior periods presented

Materially inconsistent “other information”

“In relation to” opinion

RSI

General use regulatory F/S

“In connection with” compliance reporting

-“Other” supplementary information


Emphasis of matter and other matter paragraphs au 7061

Emphasis of Matter and Other Matter Paragraphs (AU 706)

  • Emphasis of Matter

  • Matters appropriately presented or disclosed

  • Other Matter

  • To understand audit matters (Combining statements, SI, RSI, SEFA)


Special considerations special purpose frameworks au 800

Special Considerations—Special Purpose Frameworks (AU 800)


Alert that restricts the use of auditor s written communication au 905

Alert that Restricts the Use of Auditor’s Written Communication (AU 905)

  • Restricted use language

    • Criteria suitable for limited parties

    • Criteria available to limited parties

    • Matters outside primary objective of audit

Important Elements of Requirements

“This [report, letter, or communication] is intended solely for the information and use of [list or refer to the specified parties] and is not intended to be and should not be used by anyone other than these specified parties.”


Alert that restricts the use of auditor s written communication au 9051

Alert that Restricts the Use of Auditor’s Written Communication (AU 905)

  • Communicating internal controls

  • Communications with governance

  • Supplementary information “in relation to” (optional)

  • Summary F/S

  • Single F/S or Elements

  • Compliance with Aspects of Agreements

  • Reports on application of GAAP

  • Letters for Underwriters

  • Compliance audits

  • Special purpose frameworks

  • Group audits


Alert that restricts the use of auditor s written communication au 9052

Alert that Restricts the Use of Auditor’s Written Communication (AU 905)

  • Restricted use language

    • Criteria suitable for limited parties

    • Criteria available to limited parties

    • Matters outside primary objective of audit

  • Names specific parties in language

  • Inability for others to use

    • Currently implicit/ overlooked

    • Under Group Audits AU600, not allowed

  • (For governments) Huge disconnect

Requirements Elements

Impact on Practice


Alert that restricts the use of auditor s written communication au 9053

Alert that Restricts the Use of Auditor’s Written Communication (AU 905)

  • Restricted use language

    • Criteria suitable for limited parties

    • Criteria available to limited parties

    • Matters outside primary objective of audit

  • Now uses language about “intended purpose”

  • Exception for 3rd criteria if also following GAGAS

    • Don’t name specific parties

    • Removes disconnect

    • Removes Group Audits conflict

Requirements Elements

What’s Different


Alert that restricts the use of auditor s written communication au 9054

Alert that Restricts the Use of Auditor’s Written Communication (AU 905)

“Restricted” Use

“Restricted” Purpose

“This [report, letter, or communication] is intended solely for the information and use of [list or refer to the specified parties] and is not intended to be and should not be used by anyone other than these specified parties.”

“The purpose of this [report, letter, or communication] is to [describe the purpose of the communication]. Accordingly, this [report, letter, or communication] is not intended to be and should not be used for any other purpose.”


Alert that restricts the use of auditor s written communication au 9055

Alert that Restricts the Use of Auditor’s Written Communication (AU 905)

Remember when we combined restricted use reports with general use reports?

=

=

+

+

General use reportwith a restricted use section

General use report

Restricted use report

General use report

Restricted use report

Restricted use report


Summary of changes sass 1 120 versus clarified sass

Summary of Changes – SASs 1 – 120 versus Clarified SASs

Really good summary on AICPA web site for more complete comparison

  • www.aicpa.org/interestareas/frc/auditattest/downloadabledocuments/clarity/clarity_sas_summary_of_differences.pdf

    Two essential Clarified AU sections

  • AU 200 Overall Objectives

  • AU 600 Group Audits


Summary of changes sass 1 120 versus clarified sass1

Summary of Changes – SASs 1 – 120 versus Clarified SASs

  • Little-some change

  • 510-Opening Balances

  • 550-Related Parties

  • 560-Subsequent Events

  • 620-Auditor’s Specialist

  • 700-Forming an Opinion

  • 706-Emphasis of Matter & Other Matter

  • 708-Consistency

  • 800-Special Purpose Framework

  • 805-Single F/S

  • 810-Summary F/S

  • 905-Restricted Use

  • 210-Terms of Engagement

  • 250-Laws and Regulations

  • 265-Communicating IntCtrls

  • 320-Materiality Plan/Perform Audits

  • 330-Performing Audit Procedures in Response

  • 402-Auditing Considerations for Entity Use of Service Organizations

  • 501-Audit Evidence Selected Items

  • 505-External Confirmations


Summary of changes sass 1 120 versus clarified sass2

Summary of Changes – SASs 1 – 120 versus Clarified SASs

Essentially no/little change

  • 585-Omitted Procedures

  • 610 Internal Audit (coming)

  • 705-Modifications to Opinion

  • 720-Other Information

  • 725-Suppl Information

  • 730-Required Suppl Info

  • 806-Reports on Compliance

  • 910-Repts of Another Country

  • 915-Rept Appl of AcctgPrinc

  • 920-Underwriters

  • 925-SEC Filings

  • 930-Interim Fin Info

  • 935-Compliance Audits

  • 220-Quality Control

  • 230-Audit Documentation

  • 240-Consider Fraud

  • 260-Comm with Governance

  • 300-Planning

  • 315-Understanding the Entity

  • 450-Evaluate Misstatements

  • 500-Audit Evidence

  • 520-Analytical Procedures

  • 530-Audit Sampling

  • 540-Auditing Estimates

  • 570-Going Concern (ED status)

  • 580-Written Representations


Summary of changes sass 1 120 versus clarified sass3

Summary of Changes – SASs 1 – 120 versus Clarified SASs

BUT WHETHER THERE IS SOME, LITTLE, OR EVEN NO CHANGE, YOU STILL NEED TO GO THROUGH ALL OF THE NEW CLARIFIED AU SECTIONS BECAUSE WITH CLARITY . . .

YOU MAY FIND THAT YOU NEED TO CHANGE OR TWEAK HOW YOU DO THINGS!!!


Formula for implementation success

Formula for Implementation Success

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

  • Read summary of changes between extant standards and new clarified standards

  • Begin “project management”

    • Appoint a person or team to be in charge

    • Consider small task forces of staff at different levels

    • Training, training, training

    • Review your types of auditees to determine who will be affected/first

    • Explain to auditee management how the engagement may change

  • Add, tweak, move, change audit guidance and methodology


Thank you for joining us

Questions and Answers

Thank You for Joining Us!

SpeakerRandy C. Roberts, CPA, CGFM

Professional Practice Director

AZ Office of the Auditor General

[email protected]

ModeratorR. Kinney Poynter

Executive Director

NASACT

[email protected]


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