Audit and Attest Standards Update

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Audit and Attest Standards Update

• Ensuring Integrity 4th Annual Audit Conference
• Harold L. Monk, Jr. CPA, CFE
• Davis, Monk Company

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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 Firms System of Quality Control

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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

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Recent Auditing Standards Board Activities

• Clarity Project

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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

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Clarity Drafting Conventions

• Introduction
• Objective
• Definitions
• Terms used in the SAS are defined
• Establish separate glossary of terms
• Requirements and Application Material

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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

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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

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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

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Audit and Attest UpdateClarity Project

• Once finalized, theyll 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

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• Implementation Issues
• Of Risk Assessment Standards

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QAUse of Walkthroughs

• QuestionHow often do walkthroughs need to occur?
  
• AnswerAuditors 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

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QAJournal Entries

• QuestionParagraph 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?
• AnswerYes, 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

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Recently Issued Standards

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

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SAS 115

• Effective for periods ending after 12/15/09
• Early adoption is allowed
• Supersedes SAS 112 of the same title

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SAS 115

• Why revised?
• To eliminate differences resulting from the
  issuance of SSAE No. 15, An Examination of an
  Entitys 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

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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.

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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 entitys 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

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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.

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Deficiencies

• As with SAS 112, nothing is an automatic material
  weakness or significant deficiency
• Preparation of financial statements
• Professional judgment must be applied

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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

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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
  entitys internal control and
• Ineffective oversight of the entitys financial
  reporting and internal control by those charged
  with governance

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Deficiencies

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

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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

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Recently Issued Standards

• Statement on Auditing Standards No. 116, Interim
  Financial Information

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SAS 116

• Effective for reviews of interim financial
  information for interim periods beginning after
  December 15, 2009. Early application is
  permitted
• Supercedes SAS 100

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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

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SAS 116

• Applies when
• The entitys latest annual financial statements
  have been audited by the accountant or a
  predecessor
• The accountant has been engaged to audit the
  entitys current year financial statements, or
  the accountant audited the entitys latest annual
  financial statements and expects to be engaged to
  audit the current year financial statements

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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.

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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
  entitys latest annual audited financial
  statements

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SAS 116

• The condensed interim financial information
  accompanies the entitys 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

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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

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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 entitys
  compliance with each of the applicable compliance
  requirements in response to assessed risks of
  material noncompliance.

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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

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Audit and Attest Standards Update

• Other Current ASB Projects

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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

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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

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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.

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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

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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

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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

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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.

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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

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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

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RSI

• Required Supplementary Information is defined as
  information that a designated accounting standard
  setter requires to accompany an entitys 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

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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

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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

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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

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Proposed SAS - OI

• Eliminates the distinction between OI that is
  included in an auditor submitted document that
  contains the clients basic financial statements
  and the auditors report thereon and OI that is
  in a client prepared document
• Auditor should read the OI to identify material
  inconsistencies with the financial statements

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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 auditors 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

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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

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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

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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

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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

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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

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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

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Proposed SAS - IRT

• Include an explanatory paragraph in the auditors
  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

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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

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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 auditors opinion, the other information is
  fairly stated in all material respects in
  relation to the financial statements as a whole

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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

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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

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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

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Documentation Required by QC SAS

• Engagement Quality Control Reviewer should
  document
• Procedures required by firms QC policies have
  been performed
• Date QCR was completed
• Reviewer is not aware of any unresolved matters
  concerning significant judgments and conclusions

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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 members
  disagreement with conclusions reached after
  appropriate consultation

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Questions?