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Audit and Attest Standards Update. Ensuring Integrity: 4 th Annual Audit Conference Harold L. Monk, Jr. CPA, CFE Davis, Monk & Company. Session Objectives. Discuss the recent activities of the ASB Clarity project

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audit and attest standards update

Audit and Attest Standards Update

Ensuring Integrity: 4th Annual Audit Conference

Harold L. Monk, Jr. CPA, CFE

Davis, Monk & Company

session objectives
Session Objectives

Discuss the recent activities of the ASB

Clarity project

SAS No. 115, Communicating Internal Control Related Matters Identified in an Audit

SAS No. 116, Interim Financial Information

SQCS No. 7, A Firm’s System of Quality Control

2

session objectives3
Session Objectives

Newly approved SASs:

Compliance Audits

Required Supplementary Information

Other Information in Documents Containing Audited Financial Statements

Supplemental Information in Relation to the Financial Statements as a Whole

clarity
Clarity
  • Background
    • Discussion paper issued March 2007
    • ASB considered comments received and approved direction forward August 2007
  • Goals:
    • Address concerns over length and complexity of standards
    • Make standards easier to read, understand and implement
    • Will lead to enhancements in audit quality
clarity drafting conventions
Clarity Drafting Conventions
  • Introduction
  • Objective
  • Definitions
    • Terms used in the SAS are defined
    • Establish separate glossary of terms
  • Requirements and Application Material
objective
Objective
  • Create objectives for each standard
      • Provide a framework for the application of professional judgment
      • Outcome based goal
      • Difficult to achieve the overall objective of the audit if individual objectives are not achieved
requirements and application material
Requirements and Application Material
  • Application and other explanatory material presented in a separate section that follows the requirements
  • Application and other explanatory material paragraphs numbered using an A prefix
  • Cross-referencing between requirements and related application material
clarity and convergence
Clarity and Convergence
  • Convergence with ISAs
    • Removal of unnecessary differences
  • Supplemental materials with EDs
    • Mapping of the requirements and guidance contained within extant AU section to the proposed SAS; and
    • Schedule of proposed changes in requirements and explanatory material as a result of redrafting.
    • Schedule of detailed changes in language between the proposed SAS and the ISA.
    • Exhibit of substantive differences with ISA
audit and attest update clarity project
Audit and Attest UpdateClarity Project
  • Once finalized, they’ll be made available to practitioners.
  • However, the standards will not become effective piecemeal.
  • With limited exceptions, all “clarified standards” will become effective at the same time
    • Most likely 2011
slide11
Implementation Issues

Of Risk Assessment Standards

q a use of walkthroughs
Q&A—Use of Walkthroughs
  • Question—How often do walkthroughs need to occur?
  • Answer—Auditors will most likely perform walkthroughs annually to document their understanding of internal control and to establish the continued reliance of audit evidence obtained in prior periods.

TIS 8200.12

q a journal entries
Q&A—Journal Entries
  • Question—Paragraph 52 of SAS No. 110 refers to “adjustments made during the course of preparing the financial statements” to address entries prepared by the client during the process of drafting the financial statements (rather than all entries posted in the accounting system at year end). Is this correct?
  • Answer—Yes, this requirement relates to entries posted during the financial statement closing process. SAS 99 establishes requirements to test journal entries during the audit period. TIS8200.16
recently issued standards
Recently Issued Standards

Statement on Auditing Standards No. 115, Communicating Internal Control Related Matters Identified in an Audit

14

sas 115
SAS 115

Effective for periods ending after 12/15/09

Early adoption is allowed

Supersedes SAS 112 of the same title

sas 11516
SAS 115

Why revised? –

To eliminate differences resulting from the issuance of SSAE No. 15, An Examination of an Entity’s Internal Control Over Financial Reporting That is Integrated With an Audit of Financial Statements

SSAE 15 conform definitions of control deficiency, material weakness and significant deficiency to AS 5

Provide for more professional judgment

Not intended to reduce quality of communication

control deficiency
Control Deficiency

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.

material weakness
Material Weakness

A material weakness is 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 on a timely basis.

Reasonable possibility = the likelihood of the event is either "reasonably possible" or "probable," as those terms are used in SFAS No. 5, Accounting for Contingencies

the significant deficiency
The Significant Deficiency

A significant deficiency is 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.

deficiencies
Deficiencies

As with SAS 112, nothing is an automatic material weakness or significant deficiency

Preparation of financial statements

Professional judgment must be applied

deficiencies21
Deficiencies

Revises the list of deficiencies in internal control that are indicators of a material weaknesses to consist of:

Identification of fraud, whether or not material, on the part of senior management

Restatement of previously issued financial statements to reflect the correction of a material misstatement due to fraud or error

deficiencies22
Deficiencies

Identification by the auditor of a material misstatement of the financial statements under audit in circumstances that indicate that the misstatement would not have been detected by the entity’s internal control; and

Ineffective oversight of the entity’s financial reporting and internal control by those charged with governance

deficiencies23
Deficiencies

SAS 115 does not include the list of deficiencies that ordinarily would be considered at least significant deficiencies

communication
Communication

Needs to be in writing

SAS 115 contains a revised illustrative written communication to management and those charged with governance of material weaknesses and significant deficiencies

Prior year comments can be communicated by reference to the prior year letter

Best made by report release date but needs to be made by 60 days from release date

recently issued standards25
Recently Issued Standards

Statement on Auditing Standards No. 116, Interim Financial Information

25

sas 116
SAS 116

Effective for reviews of interim financial information for interim periods beginning after December 15, 2009. Early application is permitted

Supercedes SAS 100

sas 11627
SAS 116

Amends SAS 100/AU 722 to accommodate reviews of interim financial information of nonissuers.

Would apply when the interim financial information is intended to provide a periodic update of year end reporting

sas 11628
SAS 116

Applies when:

The entity’s latest annual financial statements have been audited by the accountant or a predecessor;

The accountant has been engaged to audit the entity’s current year financial statements, or the accountant audited the entity’s latest annual financial statements and expects to be engaged to audit the current year financial statements

sas 11629
SAS 116

The client prepares its interim financial information in accordance with the same financial reporting framework as that used to prepare the annual financial statements

If any of the following are not met, the review should be performed in accordance with SSARSs.

sas 11630
SAS 116

If the interim financial information is condensed all of the following are met:

The condensed interim financial statements purport to conform with an appropriate financial reporting framework

The condensed interim financial information includes a note that the financial information does not represent complete financial statements and should be read in conjunction with the entity’s latest annual audited financial statements

sas 11631
SAS 116

The condensed interim financial information accompanies the entity’s latest audited financial statements or such audited annual financial statements are made readily available by the entity.

Readily available = a third party can obtain the financial statements without any further action by the entity.

F/S on the web may be readily available

“Available upon request” are not readily available

sas 117 compliance audits
SAS 117 - Compliance Audits
  • Revises AU 801 by:
    • Changing the title
    • Clarifying its Applicability
    • Establishing a requirement for the auditor to adapt and apply GAAS to a compliance audit
    • Identifies AU sections applicable to compliance audits
    • Defines terms related to a compliance audit
sas 117 compliance audits33
SAS 117 - Compliance Audits
  • Revisions to AU 801 (continued)
    • Identifies auditor requirements unique to compliance audits
      • Design and perform further audit procedures, including tests of details, to obtain sufficient appropriate audit evidence about the entity’s compliance with each of the applicable compliance requirements in response to assessed risks of material noncompliance.
sas 117 compliance audits34
SAS 117 - Compliance Audits
  • Requirements (continued)
    • Identify audit requirements specified in the government audit requirement that is supplementary to GAAS and GAS and perform appropriate procedures
    • If audit guidance provided by government agency has not been updated or conflicts with current GAAS or GAS, comply with the most current applicable GAAS and GAS instead of the outdated or conflicting guidance
audit and attest standards update35
Audit and Attest Standards Update

Other Current ASB Projects

audit and attest standards update other current asb projects
Audit and Attest Standards UpdateOther Current ASB Projects
  • Revisions to SAS 70
    • Move Service Organization examination to AT Standards
  • Revisions to auditing estimates and fair value
  • Withdrew SAS 69 to remove GAAP hierarchy for FASB, GASB and FASAB incorporation
  • Revise AU 534 “Financial Statements Prepared for Use in Other Countries” because IFRS is now recognized as equivalent U.S. GAAP
audit and attest standards update other current asb projects37
Audit and Attest Standards Update-Other Current ASB Projects
  • Newly approved standard – Proposed Preface to the Codification of Statements on Auditing Standards and
  • Proposed Statement on Auditing Standards – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards
proposed preface
Proposed Preface
  • Supersede SAS 95, Generally Accepted Auditing Standards
    • Currently contains the general, field work, and reporting standards
  • If an auditor fulfills the overall objective of the auditor and meets applicable ethical requirements, the ASB believes they will have fulfilled the requirements of the 10 standards. Accordingly the new SAS does not contain the equivalent of the 10 standards.
    • They are restated in guiding fundamental principles.
proposed preface39
Proposed Preface
  • Proposed Preface
    • An audit is conducted on the premise that management and those charged with governance have responsibility
      • For the preparation and presentation of the financial statements which includes the design, implementation and maintenance of internal control
      • To provide the auditor with all information required or requested and unrestricted access to those within the entity
slide40

Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards

  • Establishes the auditors overall responsibilities when conducting an audit
  • Sets out the overall objectives
  • Explains the nature and scope of an audit
  • Explains the scope, authority and structure of GAAS
  • Includes requirements establishing the general responsibilities of the auditor in all audits
slide41

Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards

  • Purpose of an audit is to enhance the degree of confidence that intended users can place in the financial statements
    • Achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework
      • FASB, GASB, FASAB, OCBOA, IFRS (General Purpose / Fair Presentation) or Special Purpose Framework
slide42

Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards

  • Opinion based on obtaining reasonable assurance financial statements are free from material misstatement
  • Opinion deals with financial statements as a whole so auditor is not responsible for the detection of misstatements not considered material.
slide43

Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards

  • Auditor should comply with relevant ethical requirements including independence and due care
  • Auditor should plan and perform the audit with professional skepticism
  • Comply with all relevant AU sections
  • Auditor should have an understanding of the entire text of an AU section
  • Auditor may make suggestions about or draft in whole or in part the financial statements
au 558 supplementary information
AU 558 –Supplementary Information
  • Broken into three separate standards:
    • Required Supplementary Information
    • Other Information in Documents Containing Audited Financial Statements
    • Supplemental Information in Relation to the Financial Statements as a Whole
slide45
RSI
  • Required Supplementary Information is defined as information that a designated accounting standard setter requires to accompany an entity’s basic financial statemetns
  • Objective is to communicate through a written report if the auditor has identified any material modifications that should be made to the RSI for it to conform with standard
slide46
RSI
  • Required procedures:
    • Inquire of management about methods of preparing
    • Compare information for consistency with management responses to inquiries, audited financial statements, other knowledge obtained during the audit
    • Obtain written representations
slide47
RSI
  • Provides Reporting Guidance
    • When all RSI is included
    • When a portion of RSI has been omitted
    • When none of the RSI is included
  • Auditors’ opinion on the basic financial statements is not affected by any of the above
other information oi in documents containing audited financial statements
Other Information (OI) in Documents Containing Audited Financial Statements
  • Eliminates distinction between OI included in an auditor submitted document and in a client-prepared document
  • Auditor must read the OI to identify material inconsistencies, if any
  • Arrange to obtain the OI before release of the report
  • Provides guidance if inconsistencies are identifed
proposed sas oi
Proposed SAS - OI

Eliminates the distinction between OI that is included in an auditor submitted document that contains the client’s basic financial statements and the auditor’s report thereon and OI that is in a client prepared document

Auditor should read the OI to identify material inconsistencies with the financial statements

proposed sas oi50
Proposed SAS - OI

Auditor should make appropriate arrangements with management or those charged with governance to obtain the OI prior to the report release date

Auditor should communicate with those charged with governance

The auditor’s responsibility with respect to OI

Any procedures performed relating to the OI

Results

When revision of the OI is necessary but management refuses to make the revision

proposed sas oi51
Proposed SAS - OI

If material inconsistencies are identified, the auditor should determine whether the financial statements or the OI needs to be revised

If prior to the report release date and management refuses to make the revision:

Modify the report on the AFS

Communicate with those charged with governance

Where permitted, withhold the report or withdraw from the engagement

proposed sas oi52
Proposed SAS - OI

If subsequent to the report release date

Follow the requirements in AU 561

If management refuses to make the revision, the auditor should communicate with those charged with governance

proposed sas irt
Proposed SAS - IRT

Establish as a condition for opining on the fair presentation of other information in relation to the financial statements as a whole that:

The other information was derived from and relates directly to the underlying accounting records used to prepare the financial statements

The other information relates to the same period as the financial statements

The financial statements were audited and the auditor served as the principal auditor

Neither an adverse opinion or a disclaimer of opinion was issued on the financial statements

proposed sas irt54
Proposed SAS - IRT

In addition to the audit procedures, the auditor should

Inquire of management about the purpose of the other information and the criteria under which it was prepared

Obtain an understanding about the methods for preparing the other information

proposed sas irt55
Proposed SAS - IRT

Compare and reconcile the other information to the underlying accounting records and other records used in preparing the financial statements or to the financial statements themselves

Inquire of management whether there were any significant assumptions or interpretations underlying the measurement or presentation of the other information

proposed sas irt56
Proposed SAS - IRT

Evaluate the appropriateness and the completeness of the other information considering procedures and other knowledge obtained during the audit

Obtain written representations from management

proposed sas irt57
Proposed SAS - IRT

Include an explanatory paragraph in the auditor’s report that includes

A statement that the audit was performed for the purpose of forming an opinion on the financial statements as a whole

A statement that the other information is presented for the purpose of additional analysis and is not a required part of the financial statements

proposed sas irt58
Proposed SAS - IRT

A statement that the other information was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements

A statement that the other information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures

proposed sas irt59
Proposed SAS - IRT

A statement that the purpose of the additional procedures is to provide the auditor with a basis for expressing an opinion on whether the other information is not misstated by an amount that would be material to the financial statements

If an unqualified opinion on the financial statements is being issued, a statement that, in the auditor’s opinion, the other information is fairly stated in all material respects in relation to the financial statements as a whole

proposed sas exposure draft quality control for an audit of financial statements
Proposed SAS (Exposure Draft) – Quality Control for an Audit of Financial Statements
  • Supersedes SAS No. 25, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards
  • Contains requirements and application material that address specific responsibilities of the auditor regarding quality control procedures
proposed sas exposure draft quality control for an audit of financial statements61
Proposed SAS (Exposure Draft) – Quality Control for an Audit of Financial Statements

Engagement partner should:

  • form a conclusion on compliance with independence requirements
  • Be satisfied that appropriate procedures regarding acceptance & continuance have been followed
  • Be satisfied engagement team has appropriate competence and capabilities
  • Proper reviews are performed
  • Sufficient evidence has been obtained
documentation required by qc sas
Documentation Required by QC SAS
  • Conclusions on compliance with independence requirements
  • Conclusions regarding acceptance & continuance of clients
  • Nature & scope of and conclusions resulting from consultations
documentation required by qc sas63
Documentation Required by QC SAS

Engagement Quality Control Reviewer should document:

  • Procedures required by firm’s QC policies have been performed
  • Date QCR was completed
  • Reviewer is not aware of any unresolved matters concerning significant judgments and conclusions
new sqcs exposure draft
New SQCS Exposure Draft
  • Some requirements that are duplicative of broader requirements have been moved to application material
  • Requirement previously included in SAS 108, Planning and Supervision has been included in revised SQCS to make it applicable to all engagements
    • Procedures established for dealing with differences of opinion should enablel a member of the engagement team to document that member’s disagreement with conclusions reached after appropriate consultation
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