2020 ACCOUNTING AND AUDITING UPDATE FOR THE LOCAL FIRM · the amendments in Update 2016-02 as described in the table below. The amendments in this Update related to transition do

2020 ACCOUNTING AND AUDITING UPDATE FOR THE LOCAL FIRM

(WHAT THE LOCAL PRACTITIONER REALLY NEEDS TO KNOW)

JIM MARTIN, CPA, CGMA, MAcc

Real World Seminars of Georgia, LLC 6065 Roswell Rd., NE

Suite 727 Atlanta, GA 30328

[email protected]

678-705-9900

mailto:[email protected]

2020 ACCOUNTING AND AUDITING UPDATE FOR THE LOCAL FIRM

TABLE OF CONTENTS

Page SUMMARY OF QUALIFICATIONS OF JAMES D. MARTIN, CPA SUMMARY OF RECENT ASU’S 1 NEW SSARS 25 OVERVIEW 33 NEW AUDIT REPORTING REQUIREMENTS EXAMPLES 34 NEW SSAE 19 67 COVID 19 ACCOUNTING IMPLICATIONS 110

JAMES D. “JIM” MARTIN, CPA, CGMA, MAcc Real World Seminars of GA, LLC

Martin & Co., CPA, P.C. 6065 Roswell Rd. NE, Suite 727

Atlanta, GA 30328

SUMMARY OF EDUCATION AND EXPERT QUALIFICATIONS

Education: Master of Accounting, Kennesaw State University, Kennesaw, Georgia, 2008. Admitted to Beta Gamma Sigma National Honor Society. Bachelor of Business Administration in Accounting, Mercer University, Macon, Georgia, 1986. Received John Burge Outstanding Senior Award for having the highest academic average in the business school. Voting member of University Honor Council from sophomore through senior years. Relevant Work Experience: Currently manage a client base of 200 corporate, individual, partnership, and fiduciary clients. Major areas of applicable expertise include: Audits of financial statements of partnerships and corporate entities in accordance with

generally accepted auditing standards to determine conformity with generally accepted accounting principles

Reviews, compilations and preparations of financial statements of partnership and corporate entities in accordance with the Statements on Standards for Accounting and Review Services

Determination of applicability and subsequent implementation of generally accepted accounting principles to complex transactions, and assisting clients in recording such transactions in the books and records of the organization

Formation of partnerships and structuring of operating agreements from an accounting, internal control, distribution and operations management perspective

Reviews of internal control systems Preparation of hundreds of partnership income tax returns involving unusual allocations of

partnership earnings and profits, guaranteed payments and preferred return distributions and assisting clients in the determination of the amounts of such allocations

Assisting partnership and corporate clients in structuring merger and acquisition transactions Assist clients in local, state, national and international tax audits Develop and present full-day continuing professional education courses for Certified Public

Accountants throughout the United States on numerous accounting, auditing and taxation topics. Have presented over 2100 seminars to date

Prepare and present continuing professional education classes for the finance and taxation departments of such major corporations as Cox Enterprises, Inc. and The Coca Cola Companies

Serve as liaison to other certified public accounting firms in the development of appropriate audit procedures and disclosures related to difficult or unusual transactions

Perform special fraud audits to assist clients in the criminal prosecution of employees

Professional Designations and Memberships: Certified Public Accountant #10280, State of Georgia. Certified in 1988. Member, Georgia Society of Certified Public Accountants Member, American Institute of Certified Public Accountants Member, Association of Certified Fraud Examiners Member, Atlanta Chapter of Certified Fraud Examiners Past Board Member, Georgia Society of Certified Public Accountants Ethics Committee Past Board Member, Georgia Society of Certified Public Accountants CPE Committee A Sampling of Professional Presentations and Awards in the Past Ten Years: “Accounting, Auditing, Compilation and Review Update for CPAs” (8 hour presentation) –

Prepared the course text and presented it a total of approximately 400 times in the States of Georgia, Hawaii, Alabama, Alaska, Indiana, Iowa, Wisconsin, New York, Mississippi, Montana, Idaho, Tennessee, Pennsylvania, West Virginia, Nebraska, Ohio, Kentucky, South Dakota and New Mexico

“Auditing for Fraud – Multiple Methods Utilized to Distort Financial Statements and Misappropriate Assets in Small Businesses” (8 hour presentation) – Prepared the course text and presented it approximately 120 times throughout the United States

“30 Ways to Detect Financial Accounting Fraud” (8 hour presentation) – Prepared the course text and presented it approximately 75 times throughout the United States

“Financial Statement Analysis : Understanding a Financial Statement” (4 hour presentation) – Prepared the course text and presented it to the finance department of The Home Depot in Atlanta, Georgia

“Accounting & Auditing Update for Tax People” (8 hour presentation) – Prepared the course text and presented it to the Tax Department of Cox Enterprises, Inc. – 2001-2019

Awarded the 2012-2013, 2014-2015 and 2018-2019 Thomas A. Ratcliffe Outstanding Discussion Leader Award by the State of Alabama

Featured speaker at the Alabama Society of CPAs annual convention – 2010-2020 Featured speaker at the Alabama Society of CPAs annual meeting – 2012-2019 Featured speaker at the Iowa Society of CPAs annual convention – 2004, 2006, 2008, 2010 and

2015 Featured Speaker at the Georgia Spring Conferences – 2010, 2012, 2015, 2016, 2017 and 2020 Featured Speaker at the Tennessee Society of CPAs annual conference – 2011 and 2012 Published in July/August 2018 issue of Connections (ASCPA) for “The Accountant’s Right to

Work Act: The Next Three Years” Published in September/October 2016 issue of Current Accounts (GSCPA) for “The New

Leasing Standard: It’s Here and It’s Huge” Published in July/August 2014 issue of Current Accounts (GSCPA) for “Clarification Coming

to the SSARS: It’s About Time” Prepared and presented continuing professional education video on “Accounting for Derivatives

and Hedging Activities” for CPAs in Fortune 500 companies Quoted extensively in the Atlanta Business Chronicle regarding how non-traditional services

are shaping the CPA profession

SUMMARY OF RECENT ACCOUNTING STANDARDS UPDATES

• Reference Rate Reform (Topic 848) (ASU 2020-04 issued March 2020) The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.

• Codification Improvements to Financial Instruments (ASU 2020-03 issued March 2020) The amendments apply to all reporting entities within the scope of the affected accounting guidance. The amendments in this Update clarify or address stakeholders’ specific issues related to financial instruments.

• Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2020-02 issued February 2020) Various amendments to SEC paragraphs in the Codification.

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• Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 – a consensus of the FASB Emerging Issues Task Force (ASU 2020-01 issued January 2020) The amendments in this Update affect all entities that apply the guidance in Topics 321, 323, and 815 and (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting. The amendments in this Update clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815,

• Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (ASU 2019-12 issued December 2019) The amendments in this Update affect entities within the scope of Topic 740, Income Taxes. The amendments in this Update simplify the accounting for income taxes by removing the following exceptions:

1. Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income)

2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment

3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary

4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

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The amendments in this Update also simplify the accounting for income taxes by doing the following:

1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax.

2. Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.

3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority.

4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.

• Codification Improvements to Topic 326, Financial Instruments – Credit Losses (ASU 2019-11 issued November 2019) The amendments in this Update affect a variety of Topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance. The amendments in this Update clarify or address stakeholders’ specific issues about certain aspects of the amendments in Update 2016-13 (Credit Losses).

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• Financial Instruments – Credit Losses (Topic 326, Derivatives and Hedging (Topic 815), and Leases (Topic 842) – Effective Dates (ASU 2019-10 issued November 2019) Credit Losses Credit Losses currently is not effective for any entities; early application is allowed for fiscal years beginning after December 15, 2018. Its mandatory effective dates are as follows:

1. Public business entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years

2. All other public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years

3. All other entities (private companies, not-for-profit organizations, and employee benefit plans) for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

Following the effective date philosophy, the mandatory effective dates for Credit Losses in this Update are as follows:

1. Public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years

2. All other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test (Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill)). Those amendments maintain the Board’s intentional alignment of the mandatory effective dates for Goodwill with those for Credit Losses. Early application of Goodwill continues to be allowed for interim and annual goodwill impairment tests with a measurement date on or after January 1, 2017. Hedging Hedging currently is effective for some entities. Its effective dates are as follows (early application is allowed):

1. Public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years

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2. All other entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

Because Hedging already is effective for all public business entities, the Board retained the effective date for those entities, including SRCs. The Board also decided, consistent with having bucket two be at least two years after the initial effective date, to defer the mandatory effective date for Hedging for all other entities by an additional year. Therefore, Hedging is effective for entities other than public business entities for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early application continues to be allowed. Leases Leases currently is effective for some entities. Its effective dates are as follows (early application is allowed):

1. Public business entities; not-for-profit entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market; and employee benefit plans that file or furnish financial statements with or to the SEC for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years

2. All other entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

Because Leases already is effective for all entities within (1) above (that is, including not-for-profit conduit bond obligors), the Board retained the effective date for those entities, including SRCs. The Board also decided, consistent with having bucket two be at least two years after the initial effective date, to defer the effective date for all other entities by an additional year. Therefore, Leases is effective for entities within (2) above for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early application continues to be allowed.

• Financial Services – Insurance (Topic 944) – Effective Date (ASU 2019-09 issued November 2019) The amendments in this Update defer the effective date of the amendments in Update 2018-12 for all entities. For public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC, the amendments in Update 2018-12 are effective for fiscal years beginning after December 15, 2021, and

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interim periods within those fiscal years. The one-time determination of whether an entity is an SRC should be based on an entity’s most recent determination as of November 15, 2019 (the issuance date of this Update), in accordance with SEC regulations. For example, because SRC status is determined on the last business day of the most recent second quarter, the most recent determination date is June 28, 2019, for calendar-year-end companies. Early application of the amendments in Update 2018-12 is permitted. For all other entities, the amendments in Update 2018-12 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early application of the amendments in Update 2018-12 is permitted.

• Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606) – Codification Improvements – Share-Based Consideration Payable to a Customer (ASU 2019-08 issued November 2019)

The amendments in this Update affect all entities within the scope of Topic 606 that issue share-based payments to customers. The amendments in this Update require that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured on the basis of the grant-date fair value of the share-based payment award in accordance with Topic 718. The grant date is the date at which a grantor (supplier) and a grantee (customer) reach a mutual understanding of the key terms and conditions of a share-based payment award. The classification and subsequent measurement of the award are subject to the guidance in Topic 718 unless the share-based payment award is subsequently modified and the grantee is no longer a customer. For entities that have not yet adopted the amendments in Update 2018-07, the amendments in this Update are effective for (1) public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and (2) other than public business entities in fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. For entities that have adopted the amendments in Update 2018-07, the amendments in this Update are effective in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

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An entity may early adopt the amendments in this Update, but not before it adopts the amendments in Update 2018-07. See the Update for other unique adoption rules.

• Codification Updates to SEC Sections – Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (ASU 2019-07 issued July 2019)

This Accounting Standards Update amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. Other miscellaneous updates to agree to the electronic Code of Federal Regulations also have been incorporated.

• Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958) – Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities (ASU 2019-06 issued May 2019) The amendments in this Update extend the private company alternatives from Topic 350 (Update 2014-02) and Topic 805 (Update 2014-18) to not-for-profit entities. Under the amendments to the accounting alternative in Topic 350, a not-for-profit entity should amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the not-for-profit entity demonstrates that a shorter useful life is more appropriate. A not-for-profit entity that elects this accounting alternative is required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. A not-for-profit entity is required to test goodwill for impairment when a triggering event occurs that indicates that the fair value of the entity (or a reporting unit) may be below its carrying amount. Under the amendments to the accounting alternative in Topic 805, for transactions occurring after adoption of the alternative, a not-for-profit entity should subsume into goodwill and amortize customer-related intangible assets that are not capable of being sold or licensed independently from the other assets of a business and all noncompetition agreements acquired. A not-for-profit entity that elects the accounting alternative in Topic 805 is required to adopt the alternative in Topic 350 to amortize goodwill. However, a

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not-for-profit entity that elects the accounting alternative in Topic 350 is not required to adopt the accounting alternative in Topic 805. The amendments are effective upon issuance of this Update. Consistent with the existing private company alternatives for goodwill and certain intangible assets, not-for-profit entities electing to adopt these alternatives do not have to demonstrate preferability and should follow the transition guidance the first time they elect to adopt the alternatives. Not-for-profit entities have the same openended effective date and unconditional one-time election that private companies have. The transition methods for the guidance on each accounting alternative are the same for not-for-profit entities as the previous transition methods for private companies. A not-for-profit entity should apply the accounting alternative in Topic 350, if elected, prospectively for all existing goodwill and for all new goodwill generated in acquisitions by not-for-profit entities. A not-for-profit entity should apply the accounting alternative in Topic 805, if elected, prospectively upon the occurrence of the first transaction within the scope of the alternative.

• Financial Instruments – Credit Losses, Topic 326 – Targeted Transition Relief (ASU 2019-05 issued May 2019) The amendments in this Update provide targeted transition relief that is optional for, and will be available to, all reporting entities within the scope of Topic 326. The amendments in this Update provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses— Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement—Overall, and 825-10.

For entities that have not yet adopted the amendments in Update 2016-13, the effective date and transition methodology for the amendments in this Update are the same as in Update 2016-13. For entities that have adopted the amendments in Update 2016-13, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early

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adoption is permitted in any interim period after the issuance of this Update as long as an entity has adopted the amendments in Update 2016-13. The amendments in this Update should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13.

• Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (ASU 2019-04 issued April 2019) The amendments in this Update represent changes to clarify, correct errors in, or improve the Codification. The amendments should make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The amendments are effective at various dates.

• Not-for-Profit Entities (Topic 958) – Updating the Definition of Collections (ASU 2019-03 issued March 2019) The amendments in this Update apply to all entities, including business entities, that maintain collections. However, accounting for collections is primarily an issue for certain not-for-profit (NFP) entities because collections often are held by museums; botanical gardens; libraries; aquariums; arboretums; historic sites; planetariums; zoos; art galleries; nature, science, and technology centers; and similar educational, research, and public service organizations that have those divisions. The amendments in this Update modify the definition of the term collections and require that a collection-holding entity disclose its policy for the use of proceeds from when collection items are deaccessioned (that is, removed from a collection). If a collection-holding entity has a policy that allows proceeds from deaccessioned collection items to be used for direct care, it should disclose its definition of direct care. The amendments in this Update are effective for annual financial statements issued for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. Early application of the amendments is permitted. The amendments in this Update should be applied on a prospective basis.

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• Entertainment – Films – Other Assets –Film Costs (Subtopic 926-20 and Entertainment – Broadcasters – Intangibles – Goodwill and Other (Subtopic 920-350) – Improvements to Accounting for Costs of Films and License Agreements for Program Materials, a consensus of the FASB Emerging Issues Task Force (ASU 2019-02 issued March 2019) The amendments in this Update apply to broadcasters and entities that produce and distribute films and episodic television series. The amendments in this Update align the accounting for production costs of an episodic television series with the accounting for production costs of films by removing the content distinction for capitalization. The amendments also require that an entity reassess estimates of the use of a film for a film in a film group and account for any changes prospectively. The amendments in this Update require that an entity test a film or license agreement for program material within the scope of Subtopic 920-350 for impairment at a film group level when the film or license agreement is predominantly monetized with other films and/or license agreements. A film group is the lowest level at which identifiable cash flows are largely independent of the cash flows of other films and/or license agreements. The amendments also:

1. Add examples of events or changes in circumstances that indicate that an entity should assess a film group for impairment

2. Add examples of events or changes in circumstances that indicate that an entity should assess an individual film for impairment after its release

3. Require an entity to reassess the predominant monetization strategy when a significant change in the monetization strategy occurs

4. Align the impairment model in Subtopic 920-350 with the fair value model in Subtopic 926-20 5. Require an entity to write off unamortized film costs when a film is substantively abandoned.

The amendments address presentation, require that an entity provide new disclosures about content that is either produced or licensed, and address cash flow classification for license agreements. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period, (1) for public business entities for periods for which financial statements have not yet been issued and (2) for all other entities for periods for which financial statements have not yet been made available for issuance.

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The amendments in this Update should be applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the period that includes the adoption date.

• Leases (Topic 842) – Codification Improvements (ASU 2019-01 issued March 2019) The amendments in this Update for Issue 1 affect all lessors that are not manufacturers or dealers (generally financial institutions and captive finance companies). The amendments in this Update for Issue 2 affect all lessors that are depository and lending entities within the scope of Topic 942. The amendments in this Update for Issue 3 affect all entities that are lessees or lessors. Issue 1: Determining the Fair Value of the Underlying Asset by Lessors That Are Not Manufacturers or Dealers Topic 840 provides an explicit exception for lessors who are not manufacturers or dealers (generally financial institutions and captive finance companies) for determining fair value of the leased property (underlying asset under Topic 842). For those entities, fair value is ordinarily the underlying asset’s cost, reflecting any volume or trade discounts that may apply, instead of fair value as defined in Topic 820, Fair Value Measurement. Topic 842 did not carry forward this exception. Therefore, lessors previously qualifying for the exception in Topic 840 are now required to apply the definition of fair value in Topic 820, which is defined as the price that would be received to sell the underlying asset in an orderly transaction between market participants at the measurement date (exit price). Those lessors were concerned that this change in determining fair value will not provide decision useful financial information because, unlike current practice, certain acquisition costs (for example, sales taxes and delivery charges) would be expensed at lease commencement and subsequently recognized through increased interest income for sales-type and direct financing leases. Those lessors noted their belief that it was neither the Board’s intent to change those lessors’ financial reporting nor its intent to eliminate the exception. The amendments in this Update reinstate the exception in Topic 842 for lessors that are not manufacturers or dealers. Specifically, those lessors will use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset. However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors will be required to apply the definition of fair value (exit price) in Topic 820.

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Issue 2: Presentation on the Statement of Cash Flows—SalesType and Direct Financing Leases Topic 840 does not provide guidance on how cash received from leases by lessors from sales-type and direct financing leases should be presented in the cash flow statement. The Board was informed that lessors within the scope of Topic 942, Financial Services—Depository and Lending, have been presenting “principal payments received under leases” within investing activities on the basis of an illustrative example in Topic 942. Those lessors expressed a preference for continuing this presentation, which is consistent with the presentation of principal payments received on loans more generally. Topic 842 introduced guidance that requires all lessors to present all cash receipts from leases within operating activities. The illustrative example in Topic 942 was not eliminated when Topic 842 was issued. Consequently, conflicting guidance exists on the presentation of “principal payments received from leases” under sales-type and direct financing leases. The amendments in this Update address the concerns of lessors within the scope of Topic 942 about where “principal payments received under leases” should be presented. Specifically, lessors that are depository and lending institutions within the scope of Topic 942 will present all “principal payments received under leases” within investing activities. Issue 3: Transition Disclosures Related to Topic 250, Accounting Changes and Error Corrections Topic 842 requires an entity (a lessee or lessor) to provide transition disclosures under Topic 250 upon adoption of Topic 842, except for the requirements in paragraph 250-10-50-1(b)(2). That paragraph otherwise would have required an entity to disclose, in the annual period in which a change in accounting principle is made, the effect of the change on the following items for the current annual period and any prior annual periods retrospectively adjusted:

1. Income from continuing operations 2. Net income (or other appropriate captions of changes in the applicable net

assets or performance indicator) 3. Any other affected financial statement line item 4. Any affected per-share amounts.

However, the Topic 842 transition disclosures do not explicitly exempt entities from applying paragraph 250-10-50-3, which requires entities to provide in the fiscal year in which a new accounting principle is adopted the identical disclosures for interim periods after the date of adoption. Several large practitioners were concerned that entities could be required to provide those disclosures for the interim periods after adoption (for example, the first quarter of the adoption year) that they are not required to provide for the first full annual

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period after the date of adoption. Consequently, they requested that the Board clarify whether its intent was to require those interim disclosures. The amendments in this Update clarify the Board’s original intent by explicitly providing an exception to the paragraph 250-10-50-3 interim disclosure requirements in the Topic 842 transition disclosure requirements. The transition and effective date provisions for this Update apply to Issue 1 and Issue 2. They do not apply to Issue 3 because the amendments for that Issue are to the original transition requirements in Topic 842. The amendments in this Update amend Topic 842. That Topic has different effective dates for public business entities and entities other than public business entities. The effective date of those amendments is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years for any of the following:

1. A public business entity 2. A not-for-profit entity that has issued, or is a conduit bond obligor for,

securities that are traded, listed, or quoted on an exchange or an overthe-counter market

3. An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).

For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted. An entity should apply the amendments as of the date that it first applied Topic 842, using the same transition methodology in accordance with paragraph 842-10-65-1(c).

• Leases (Topic 842) – Narrow-Scope Improvements for Lessors (ASU 2018-20 issued December 2018) The amendments in this Update related to sales taxes and other similar taxes collected from lessees affect all lessors that elect the accounting policy election. The amendments in this Update related to lessor costs affect all lessor entities that have lease contracts that either require lessees to pay lessor costs directly to a third party or require lessees to reimburse lessors for costs paid by lessors directly to third parties.

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The amendments in this Update related to recognition of variable payments for contracts with lease and nonlease components affect all lessor entities with variable payments that relate to both lease and nonlease components. The amendments in this Update permit lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs (as described in paragraph 842-10-15-30(b)) or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. Consequently, a lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures. The amendments in this Update related to certain lessor costs require lessors to exclude from variable payments, and therefore revenue, lessor costs paid by lessees directly to third parties. The amendments also require lessors to account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor will record those reimbursed costs as revenue. The amendments in this Update related to recognizing variable payments for contracts with lease and nonlease components require lessors to allocate (rather than recognize as currently required) certain variable payments to the lease and nonlease components when the changes in facts and circumstances on which the variable payment is based occur. After the allocation, the amount of variable payments allocated to the lease components will be recognized as income in profit or loss in accordance with Topic 842, while the amount of variable payments allocated to nonlease components will be recognized in accordance with other Topics, such as Topic 606. The amendments in this Update affect the amendments in Update 2016-02, which are not yet effective but can be early adopted. The effective date and transition requirements for the amendments in this Update for entities that have not adopted Topic 842 before the issuance of this Update are the same as the effective date and transition requirements in Update 2016-02 (for example, January 1, 2019, for calendar-year-end public business entities). For entities that have adopted Topic 842 before the issuance of this Update, the transition and effective date of the amendments in this Update are as follows:

1. An entity should apply the amendments at the original effective date of Topic 842 for the entity. Alternatively, the entity has the option to apply the amendments in either the first reporting period ending after the issuance of this Update (for example, December 31, 2018) or in the first

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reporting period beginning after the issuance of this Update (for example, January 1, 2019).

2. An entity may apply the amendments either retrospectively or

prospectively. All entities, including early adopters, must apply the amendments in this Update to all new and existing leases.

• Codification Improvements to Topic 326, Financial Instruments – Credit Losses (ASU 2018-19 issued November 2018) The amendments in this Update include items brought to the Board’s attention by stakeholders. The amendments align the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements and clarify the scope of the guidance in the amendments in Update 2016-13. The amendments in this Update mitigate transition complexity by requiring that for nonpublic business entities the amendments in Update 2016-13 are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The effective date and transition requirements for the amendments in this Update are the same as the effective dates and transition requirements in Update 2016- 13, as amended by this Update.

• Collaborative Arrangements (Topic 808) – Clarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18 issued November 2018) The amendments in this Update affect all entities that have collaborative arrangements. A collaborative arrangement, as defined by the guidance in Topic 808, is a contractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success.

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The amendments in this Update make targeted improvements to generally accepted accounting principles (GAAP) for collaborative arrangements as follows:

1. Clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of 2 a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements.

2. Add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606.

3. Require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer.

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted, including adoption in any interim period, (1) for public business entities for periods for which financial 3 statements have not yet been issued and (2) for all other entities for periods for which financial statements have not yet been made available for issuance. An entity may not adopt the amendments earlier than its adoption date of Topic 606. The amendments in this Update should be applied retrospectively to the date of initial application of Topic 606. An entity should recognize the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings of the later of the earliest annual period presented and the annual period that includes the date of the entity’s initial application of Topic 606. An entity may elect to apply the amendments in this Update retrospectively either to all contracts or only to contracts that are not completed at the date of initial application of Topic 606. An entity should disclose its election. An entity may elect to apply the practical expedient for contract modifications that is permitted for entities using the modified retrospective transition method in Topic 606.

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• Consolidation (Topic 810) – Targeted Improvements to Related Party Guidance for Variable Interest Entities (ASU 2018-17 issued October 2018) The amendments in this Update affect reporting entities that are required to determine whether they should consolidate a legal entity under the guidance within the Variable Interest Entities Subsections of Subtopic 810-10, Consolidation— Overall, including private companies that have elected the accounting alternative for leasing arrangements under common control. The amendments for the private company accounting alternative apply to all entities except for public business entities and not-for-profit entities as defined in the Master Glossary of the FASB Accounting Standards Codification® and employee benefit plans within the scope of Topics 960, 962, and 965 on plan accounting. Under the amendments in this Update, a private company (reporting entity) may elect not to apply VIE guidance to legal entities under common control (including common control leasing arrangements) if both the parent and the legal entity being evaluated for consolidation are not public business entities. The accounting alternative provides an accounting policy election that a private company will apply to all current and future legal entities under common control that meet the criteria for applying this alternative. In other words, the alternative cannot be applied to select common control arrangements that meet the criteria for applying this accounting alternative. If the alternative is elected, a private company should continue to apply other consolidation guidance, particularly the voting interest entity guidance, unless another scope exception applies. Under the accounting alternative, a private company should provide detailed disclosures about its involvement with and exposure to the legal entity under common control. Effectively, the amendments in this Update expand the private company alternative provided by Accounting Standards Update No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, not to apply the VIE guidance to qualifying common control leasing arrangements. Because the private company accounting alternative in this Update applies to all common control arrangements that meet specific criteria and not just leasing arrangements, the amendments in Update 2014-07 are superseded by the amendments in this Update. The amendments in this Update are effective for a private company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. All entities are required to apply the amendments in this Update retrospectively with a cumulative-effect adjustment to

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retained earnings at the beginning of the earliest period presented. Early adoption is permitted.

• Derivatives and Hedging (Topic 815) – Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2018-16 issued October 2018) The amendments in this Update apply to all entities that elect to apply hedge accounting to benchmark interest rate hedges under Topic 815. The amendments in this Update permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the UST, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate, and the SIFMA Municipal Swap Rate. For entities that have not already adopted Update 2017-12, the amendments in this Update are required to be adopted concurrently with the amendments in Update 2017-12. For public business entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of this Update if an entity already has adopted Update 2017-12. The amendments should be adopted on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption.

• Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15 issued August 2018) The amendments in this Update on the accounting for implementation, setup, and other upfront costs (collectively referred to as implementation costs) apply to entities that are a customer in a hosting arrangement, as defined in the Master Glossary and as further amended by this Update, that is a service contract. The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract

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with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this Update. Accordingly, the amendments in this Update require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs to develop or obtain internal-use software that cannot be capitalized under Subtopic 350-40, such as training costs and certain data conversion costs, also cannot be capitalized for a hosting arrangement that is a service contract. Therefore, an entity (customer) in a hosting arrangement that is a service contract determines which project stage (that is, preliminary project stage, application development stage, or postimplementation stage) an implementation activity relates to. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and postimplementation stages are expensed as the activities are performed. The amendments in this Update also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The term of the hosting arrangement includes the noncancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option, and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor. The entity also is required to apply the existing impairment guidance in Subtopic 350-40 to the capitalized implementation costs as if the costs were long-lived assets. The amendments in this Update clarify that the capitalized implementation costs related to each module or component of a hosting arrangement that is a service contract are also subject to the guidance in Subtopic 360-10 on abandonment. The amendments in this Update also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.

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The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, for all entities. The amendments in this Update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.

• Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20) – Disclosure Framework – Changes to the Disclsoure Requirements for Defined Benefit Plans (ASU 2018-14 issued August 2018) The amendments in this Update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The following disclosure requirements are removed from Subtopic 715-20:

1. The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.

2. The amount and timing of plan assets expected to be returned to the employer.

3. The disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law.

4. Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan.

5. For nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets.

6. For public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.

The following disclosure requirements are added to Subtopic 715-20:

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1. The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates

2. An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

The amendments in this Update also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed:

1. The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets

2. The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

The amendments in this Update are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities. An entity should apply the amendments in this Update on a retrospective basis to all periods presented.

• Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13 issued August 2018) The amendments in this Update apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. Certain of the disclosures that are required by the amendments in this Update are not required for nonpublic entities. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. Removals The following disclosure requirements were removed from Topic 820:

1. The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy

2. The policy for timing of transfers between levels 3. The valuation processes for Level 3 fair value measurements

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4. For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.

Modifications The following disclosure requirements were modified in Topic 820:

1. In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.

2. For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.

3. The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

Additions The following disclosure requirements were added to Topic 820; however, the disclosures are not required for nonpublic entities:

1. The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period

2. The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

In addition, the amendments eliminate at a minimum from the phrase an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted

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average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date.

• Financial Services – Insurance (Topic 944) – Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12 issued August 2018) The amendments in this Update apply to all insurance entities that issue long duration contracts as defined in Topic 944, Financial Services—Insurance. The amendments do not apply to (1) holders (or policyholders) of long-duration contracts and (2) noninsurance entities. The amendments in this Update:

1. Improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows

2. Simplify and improve the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts

3. Simplify the amortization of deferred acquisition costs 4. Improve the effectiveness of the required disclosures.

Although the amendments in this Update target specific aspects of the accounting for long-duration contracts, the Board anticipates that the amendments will achieve the objective of providing meaningful improvements to the financial reporting of an insurance entity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application of the amendments is permitted.

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• Leases (Topic 842) – Targeted Improvements (ASU 2018-11 issued July 2018)

The amendments in this Update provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’ requests. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The amendments do not change the existing disclosure requirements in Topic 840 (for example, they do not create interim disclosure requirements that entities previously were not required to provide).

• Codification Improvements to Topic 842, Leases (ASU 2018-10 issued July 2018)

The FASB did not create a transition resource group (TRG) to address the leases guidance because many of the concepts used in Topic 842 are similar to those currently used in Topic 840, Leases. Although a formal TRG was not created, the Board and staff have been assisting stakeholders during this transitional period by responding to inquiries received and proactively seeking feedback on potential implementation issues that could arise as organizations implement Topic 842. The amendments in this Update include items brought to the Board’s attention through those interactions with stakeholders. The amendments in this Update affect narrow aspects of the guidance issued in the amendments in Update 2016-02 as described in the table below. The amendments in this Update related to transition do not include amendments from proposed Accounting Standards Update, Leases (Topic 842): Targeted Improvements, specific to a new and optional transition method to adopt the new lease requirements in Update 2016-02. That additional transition method will be issued as part of a forthcoming and separate Update that will result in additional amendments to transition paragraphs included in this Update to conform with the additional transition method. The amendments in this Update affect the amendments in Update 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this Update, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition

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requirements will be the same as the effective date and transition requirements in Topic 842.

• Codification Improvements (ASU 2018-09 issued July 2018)

The amendments in this Update represent changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this Update do not require transition guidance and will be effective upon issuance of this Update.

• Not-for-Profit Entities (Topic 958) Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (ASU 2018-08 issued June 2018)

Accounting for contributions is an issue primarily for not-for-profit (NFP) entities because contributions are a significant source of revenue for many of those entities. However, the amendments in this Update apply to all entities, including business entities, that receive or make contributions of cash and other assets, including promises to give within the scope of Subtopic 958-605 and contributions made within the scope of Subtopic 720-25, Other Expenses—Contributions Made. The amendments do not apply to transfers of assets from government entities to business entities. The amendments in this Update clarify and improve current guidance about whether a transfer of assets (or the reduction, settlement, or cancellation of liabilities) is a contribution or an exchange transaction. The amendments clarify how an entity determines whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider is receiving commensurate value in return for the resources transferred on the basis of the following:

1. A resource provider (including a foundation, a government agency, or other) is not synonymous with the general public. A benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider.

2. Execution of a resource provider’s mission or the positive sentiment from acting as a donor does not constitute commensurate value received by a

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resource provider for purposes of determining whether a transfer of assets is a contribution or an exchange.

The amendments in this Update clarify that, consistent with current GAAP, in instances in which a resource provider is not itself receiving commensurate value for the resources provided, an entity must determine whether a transfer of assets represents a payment from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified customer. If so, other guidance (for example, Topic 606) applies. The amendments in this Update require that an entity determine whether a contribution is conditional on the basis of whether an agreement includes a barrier that must be overcome and either a right of return of assets transferred or a right of release of a promisor‘s obligation to transfer assets. Either a right of return of the assets transferred or a right of release of the promisor from its obligation to transfer assets, as described in the current FASB Accounting Standards Codification® Master Glossary definition of the term donor-imposed condition, must be determinable from the agreement (or another document referenced in the agreement). The presence of both a barrier and a right of return or a right of release indicates that a recipient is not entitled to the transferred assets or a future transfer of assets until it has overcome the barrier(s) in the agreement. After a contribution has been deemed unconditional, an entity would then consider whether the contribution is restricted on the basis of the current definition of the term donor-imposed restriction, which includes a consideration of how broad or narrow the purpose of the agreement is, and whether the resources are available for use only after a specified date. Indicators are used to guide the assessment of whether an agreement contains a barrier. Depending on the facts and circumstances, some indicators may be more significant than others, and no single indicator is determinative. The indicators include:

1. The inclusion of a measurable performance-related barrier or other measurable barrier. Examples of measurable performance-related barriers include a requirement that indicates that a recipient’s entitlement to transferred assets is contingent upon the achievement of a certain level of service, an identified number of units of output, or a specific outcome. An example of another measurable barrier is a stipulation that the recipient is entitled to the assets only upon the occurrence of an identified event (for example, a matching requirement).

2. The extent to which a stipulation limits discretion by the recipient on the conduct of an activity. Limited discretion by the recipient is more specific than the general activity being conducted by the recipient or the time frame in which the contribution must be used. Examples of limited discretion could include a requirement to follow specific guidelines about

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qualifying allowable expenses, a requirement to hire specific individuals as part of the workforce conducting the activity, or a specific protocol that must be adhered to.

3. Whether a stipulation is related to the purpose of the agreement. This indicator generally excludes administrative tasks and trivial stipulations.

The amendments in this Update provide a more robust framework to determine when a transaction should be accounted for as a contribution under Subtopic 958- 605 or as an exchange transaction accounted for under other guidance (for example, Topic 606). The amendments provide additional guidance about how to determine whether a contribution is conditional. Stakeholders indicated that additional guidance would help reduce diversity in practice and ease the application of judgment because the current guidance is open to differences in interpretation and can be difficult to apply. The amendments provide for additional clarifying guidance for the evaluation of such arrangements, resulting in greater consistency in application of the guidance, and make the accounting for contributions more operable. The amendments in this Update likely will result in more grants and contracts being accounted for as either contributions or conditional contributions than observed in practice under current guidance. For this reason, clarifying the guidance about whether a contribution is conditional is important because such classification affects the timing of contribution revenue and expense recognition. Recipients of conditional promises to give are required to comply with current disclosure requirements in paragraph 958-310-50-4. The amendments in this Update amend, for recipients, what is generally known as the simultaneous release accounting policy option in paragraphs 958-605-45-4A through 45-4B. Specifically, the amendments allow an NFP to elect that policy option for donor-restricted contributions that were initially conditional contributions without also having to elect the policy for other donor-restricted contributions. The amendments in this Update apply to both resources received by a recipient and resources given by a resource provider, except for transfers of assets from government entities to business entities. For transactions in which an entity is either a public business entity or an NFP that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource recipient, the entity should apply the amendments in this Update on contributions received to annual periods beginning after June 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments for transactions in which the entity serves as the resource recipient to

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annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. For transactions in which an entity is either a public business entity or an NFP that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource provider, the entity should apply the amendments in this Update on contributions made to annual periods beginning after December 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments for transactions in which the entity serves as the resource provider to annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption of the amendments is permitted. The amendments in this Update should be applied on a modified prospective basis. Retrospective application is permitted. Under a modified prospective basis, in the first set of financial statements following the effective date the amendments should be applied to agreements that are either:

1. Not completed as of the effective date 2. Entered into after the effective date.

A completed agreement is an agreement for which all the revenue (of a recipient) or expense (of a resource provider) has been recognized before the effective date in accordance with current guidance (for example, Topic 605, Topic 958, or other Topics). The amendments in this Update should be applied only to the portion of revenue or expense that has not yet been recognized before the effective date in accordance with current guidance. No prior-period results should be restated, and there should be no cumulative-effect adjustment to the opening balance of net assets or retained earnings at the beginning of the year of adoption. Under this approach, an entity is required to disclose both:

1. The nature of and reason for the accounting change 2. An explanation of the reasons for significant changes in each financial

statement line item in the current annual or interim period resulting from applying the amendments instead of the previous guidance.

Early adoption of the amendments is permitted.

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• Compensation – Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07 issued June 2018)

The amendments in this Update affect all entities that enter into share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.

• Codification Improvements to Topic 942, Financial Services – Depository

and Lending (ASU 2018-06 issued May 2018) The amendments in this Update remove outdated guidance related to Circular 202 and should have no effect on reporting entities. The amendments in this Update supersede the guidance in Subtopic 942-740, Financial Services—Depository and Lending—Income Taxes, that is related to Circular 202 because that guidance has been rescinded by the Office of the Comptroller of the Currency (OCC) and no longer is relevant. The amendments in this Update are effective upon issuance of this Update.

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• Income Taxes (Topic 740) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (ASU 2018-05 issued March 2018) This Accounting Standards Update adds various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118.

• Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (ASU 2018-04 issued March 2018) This Accounting Standards Update supersedes various SEC paragraphs and adds an SEC paragraph pursuant to the issuance of Staff Accounting Bulletin No. 117.

• Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2018-03 issued February 2018) The Board has an ongoing project on its agenda about improvements to clarify the Codification or to correct unintended application of guidance. Those items generally are not expected to have a significant effect on current accounting practice or to create a significant administrative cost for most entities.

• Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02 issued February 2018) The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement—Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a

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change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.

• Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842 (ASU 2018-01 issued January 2018) The amendments in this Update permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. An entity that elects this practical expedient should apply the practical expedient consistently to all of its existing or expired land easements that were not previously accounted for as leases under Topic 840. Once an entity adopts Topic 842, it should apply that Topic prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. An entity should continue to apply its current accounting policy for accounting for land easements that existed before the entity’s adoption of Topic 842. For example, if an entity currently accounts for certain land easements as leases under Topic 840, it should continue to account for those land easements as leases before its adoption of Topic 842. This Update also amends Example 10 (paragraphs 350-30-55-29 through 55-32) of Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other Than Goodwill. The amendment in this Update clarifies that an entity

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should determine whether land easements are leases in accordance with Topic 842 before applying the guidance in that example. The amendments in this Update affect the amendments in Update 2016-02, which are not yet effective but may be early adopted, and Example 10 of Subtopic 350- 30. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Update 2016-02. An entity that early adopted Topic 842 should apply the amendments in this Update upon issuance.

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SSARS OVERVIEW “CHEAT SHEET” Terms you should be familiar with:

SSARS “Statements on Standards for Accounting and Review Services” SSARS are promulgated (ie., written and maintained) by the ARSC (Accounting and Review Services Committee of the AICPA) The SSARS are found in AR-C Section of the AICPA Professional Standards

What are the sections of the SSARS:

Section 60 is the General Principles Section 70 is Preparations Section 80 is Compilations Section 90 is Reviews Section 100 is International Considerations (probably rarely, if ever, use this) Section 120 is Compilations of Pro Form Financial Statements

Changes made by SSARS 25 (effective for financial statements for periods ending on or after December 15, 2021):

Section 60: Relocated some definitions from other sections Expanded some definitions Significant discussion as to management’s responsibilities in a SSARS engagement Section 70: Requires accountant to inform management as to reasons for withdrawing from the engagement Clarifies treatment of substantially all disclosures omitted engagements Section 80: Modifies report for contractual basis framework engagements Section 90: Adds definition of limited assurance Adds option for adverse conclusion Adds definition of professional skepticism Adds requirement of defining materiality at the start of the engagement Adds requirement to remain alert for related party transactions not previously disclosed by management Changes every review report by adding wording related to independence and ethics

33

Forming an Opinion and Reporting on Financial Statements

.A81

Exhibit — Illustrations of Auditor’s Reports on Financial Statements (Ref: par. .A24, .A32, .A65, and .A71)

Illustration 1: An Auditor’s Report on Comparative Financial Statements Prepared in Accordance

With Accounting Principles Generally Accepted in the United States of America


With Accounting Principles Generally Accepted in the United States of America, Including Communication of Key Audit Matters

Illustration 3: An Auditor’s Report on Financial Statements for a Single Year Prepared in

Accordance With Accounting Principles Generally Accepted in the United States of America

Illustration 4: An Auditor’s Report on 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


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


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 Is Presented


With Accounting Principles Generally Accepted in the United States of America When the Audit Has Been Conducted by a Registered Firm in Accordance With Both Auditing Standards Generally Accepted in the United States of America and the Auditing and Professional Practice Standards of the Public Company Accounting Oversight Board

Illustration 8: An Auditor’s Report on Comparative Financial Statements Prepared in Accordance With Accounting Principles Generally Accepted in the United States of America When the Audit Has Been Conducted by a Nonregistered Firm in Accordance With Both Auditing Standards Generally Accepted in the United States of America and the Auditing Standards of the Public Company Accounting Oversight Board

34


Illustration 1: An Auditor’s Report on Comparative Financial Statements Prepared in

Accordance With Accounting Principles Generally Accepted in the United States of America

Circumstances include the following:

Audit of a complete set of general purpose financial statements (comparative). The audit is not a group audit.

Management is responsible for the preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America as promulgated by the Financial Accounting Standards Board.

The terms of the audit engagement reflect the description of management’s responsibility

for the financial statements in AU-C section 210, Terms of Engagement.

The auditor has concluded that an unmodified (that is, “clean”) opinion is appropriate

based on the audit evidence obtained.

Based on the audit evidence obtained, the auditor has concluded that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time in

accordance with AU-C section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.

The auditor has not been engaged to communicate key audit matters.

35


Independent Auditor’s Report

[Appropriate Addressee]

Report on the Audit of the Financial Statements1

Opinion

We have audited the financial statements of ABC Company, which comprise the balance sheets as of December 31, 20X1 and 20X0, and the related statements of income, changes in stockholders’

equity, and cash flows for the years then ended, and the related notes to the financial statements.

In our opinion, the accompanying financial statements 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.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the

Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are

required to be independent of ABC Company and to meet our other ethical responsibilities, in

accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for 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.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about ABC Company’s ability to continue as a going concern for [insert the time period set by the applicable financial reporting framework].

1 The subtitle “Report on the Audit of the Financial Statements” is unnecessary in circumstances in which the second

subtitle, “Report on Other Legal and Regulatory Requirements,” is not applicable.

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Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report

that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users made on the basis of these financial statements.

In performing an audit in accordance with GAAS, we:

Exercise professional judgment and maintain professional skepticism throughout the

audit.

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Obtain an understanding of internal control relevant to the audit 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 ABC Company’s internal control.

Accordingly, no such opinion is expressed.2

Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.

Conclude whether, in our judgment, there are conditions or events, considered in the

aggregate, that raise substantial doubt about ABC Company’s ability to continue as a

going concern for a reasonable period of time.

2 In circumstances in which the auditor also has a responsibility to express an opinion on the effectiveness of internal

control in conjunction with the audit of the financial statements, omit the following: “but not for the purpose of

expressing an opinion on the effectiveness of ABC Company’s internal control. Accordingly, no such opinion is

expressed.”

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We are required to communicate with those charged with governance regarding, among other

matters, the planned scope and timing of the audit, significant audit findings, and certain internal

control–related matters that we identified during the audit.

Report on Other Legal and Regulatory Requirements

[The form and content of this section of the auditor’s report would vary depending on the nature of the auditor’s other reporting responsibilities.]

[Signature of the auditor’s firm]

[City and state where the auditor’s report is issued]

[Date of the auditor’s report]

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Accordance With Accounting Principles Generally Accepted in the United States of America, Including Communication of Key Audit Matters


Audit of a complete set of general purpose financial statements (comparative). The audit is not a group audit.




The auditor has concluded that an unmodified (that is, “clean”) opinion is appropriate

based on the audit evidence obtained.

Based on the audit evidence obtained, the auditor has concluded that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time in

accordance with AU-C section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.

The auditor has been engaged to communicate key audit matters.

39





Opinion




Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the



accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Key Audit Matters

Key audit matters are those matters that were communicated with those charged with governance and, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

[Description of each key audit matter in accordance with section 701, Communicating Key Audit Matters in the Independent Auditor’s Report, of this SAS]




40








Exercise professional judgment and maintain professional skepticism throughout the

audit.


Obtain an understanding of internal control relevant to the audit 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 ABC Company’s internal control.


2 In circumstances in which the auditor also has responsibility to express an opinion on the effectiveness of internal


41




aggregate, that raise substantial doubt about ABC Company’s ability to continue as a

going concern for a reasonable period of time.










expressed.”

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Illustration 3: An Auditor’s Report on Financial Statements for a Single Year Prepared in Accordance With Accounting Principles Generally Accepted in the United States of America


Audit of a complete set of general purpose financial statements (single year). The audit is not a group audit.




The auditor has concluded that an unmodified (that is, “clean”) opinion is appropriate based

on the audit evidence obtained.

Based on the audit evidence obtained, the auditor has concluded that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability

to continue as a going concern for a reasonable period of time in accordance with AU-C section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.


43





Opinion

We have audited the financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders’ equity, and

cash flows for the year then ended, and the related notes to the financial statements.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the



accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.






44






Exercise professional judgment and maintain professional skepticism throughout the audit.


Obtain an understanding of internal control relevant to the audit 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 ABC Company’s internal control. Accordingly, no such

opinion is expressed.2



aggregate, that raise substantial doubt about ABC Company’s ability to continue as a going

concern for a reasonable period of time.




expressed.”

45










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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


Audit of a complete set of general purpose financial statements (comparative). The audit is a group audit. The auditor is not making reference to a component auditor in the auditor’s report.


The financial statements are audited in accordance with auditing standards generally accepted in the United States of America and International Standards on Auditing (ISAs).1

The terms of the audit engagement reflect the description of management’s responsibility for

the financial statements in AU-C section 210, Terms of Engagement, and ISA 210, Agreeing the Terms of Audit Engagements.



The relevant ethical requirements that apply to the audit comprise relevant ethical requirements in the United States of America and the International Ethics Standards Board for Accountants’

Code of Ethics for Professional Accountants.

Based on the audit evidence obtained, the auditor has concluded that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to

continue as a going concern for a reasonable period of time in accordance with AU-C section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.

1 Paragraph 50 of International Standard on Auditing (ISA) 700 (Revised), Forming an Opinion and Reporting on

Financial Statements, allows the auditor to use the layout or wording of the national auditing standards (in this case, GAAS), provided that (1) there are no conflicts between the requirements in GAAS and the ISAs that would lead to a different conclusion with respect to the opinion, and (2) the layout or wording addresses, and is not inconsistent with, certain of the required minimum reporting elements in ISA 700 (Revised).

47


Those responsible for oversight of the financial statements differ from those responsible for the preparation of the financial statements.



[Appropriate Addressee] Report on the Audit of the Financial Statements2

Opinion




Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS) and in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for

the Audit of the Financial Statements section of our report. We are independent of ABC Company, and

have fulfilled our other ethical responsibilities, in accordance with the relevant ethical requirements

relating to our audits, which include relevant ethical requirements in the United States of America and

the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management and Those Charged With Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for 2 The subtitle “Report on the Audit of the Financial Statements” is unnecessary in circumstances in which the second


48


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.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about ABC Company’s ability to continue as a going concern for [insert the time period set by the applicable financial reporting framework]; to disclose, as applicable, matters related to going concern; and to use the going concern basis of accounting unless management either intends to liquidate ABC Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing ABC Company’s financial

reporting process.



that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS and ISAs will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users made on the basis of these financial statements.

In performing an audit in accordance with GAAS and ISAs, we:



Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing

49


an opinion on the effectiveness of ABC Company’s internal control. Accordingly, no such

opinion is expressed.3


Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about ABC Company’s ability to continue as a going

concern for a reasonable period of time.

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the ABC Company to express an opinion on the financial statements. We are responsible for the direction, supervision, and performance of the group audit of ABC Company. We remain solely responsible for our audit opinion.4












expressed.”

4 This has been included to comply with paragraph 50(k) of ISA 700 (Revised).

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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



Prior year summarized comparative financial information derived from audited financial statements is presented.

Management is responsible for the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America as promulgated by the Financial Accounting Standards Board.

The terms of the audit engagement reflect the description of management’s responsibility for

the financial statements in AU-C section 210, Terms of Engagement.



Based on the audit evidence obtained, the auditor has concluded that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to

continue as a going concern for a reasonable period of time in accordance with AU-C section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.


51





Opinion

We have audited the financial statements of XYZ Not-for-Profit Organization, which comprise the statement of financial position as of September 30, 20X1, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of XYZ Not-for-Profit Organization as of September 30, 20X1, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion



required to be independent of XYZ Not-for-Profit Organization and to meet our other ethical

responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.



In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about XYZ Not-for-



52


Profit Organization’s ability to continue as a going concern for [insert the time period set by the applicable financial reporting framework].







Obtain an understanding of internal control relevant to the audit 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 XYZ Not-for-Profit Organization’s internal control.





expressing an opinion on the effectiveness of XYZ Not-for-Profit Organization’s internal control. Accordingly, no

such opinion is expressed.”

53


Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about XYZ Not-for-Profit Organization’s ability to

continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other



Report on Summarized Comparative Information

We have previously audited XYZ Not-for-Profit Organization’s 20X0 financial statements, and we expressed an unmodified audit opinion on those audited financial statements in our report dated December 15, 20X0. In our opinion, the summarized comparative information presented herein as of and for the year ended September 30, 20X0, is consistent, in all material respects, with the audited financial statements from which it has been derived.






54


Illustration 6: An Auditor’s Report on Financial Statements for 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 Is Presented



Prior year summarized comparative financial information derived from unaudited financial statements is presented.

Management is responsible for the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America as promulgated by the Financial Accounting Standards Board.





Based on the audit evidence obtained, the auditor has concluded that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability

to continue as a going concern for a reasonable period of time in accordance with AU-C section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.


55





Opinion

We have audited the financial statements of XYZ Not-for-Profit Organization, which comprise the statement of financial position as of September 30, 20X1, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of XYZ Not-for-Profit Organization as of September 30, 20X1, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion



required to be independent of XYZ Not-for-Profit Organization and to meet our other ethical

responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.



In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about XYZ Not-for-



56


Profit Organization’s ability to continue as a going concern for [insert the time period set by the applicable financial reporting framework].







Obtain an understanding of internal control relevant to the audit 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 XYZ Not-for-Profit Organization’s internal control. Accordingly, no such opinion is expressed.2




expressing an opinion on the effectiveness of XYZ Not-for-Profit Organization’s internal control. Accordingly, no

such opinion is expressed.”

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Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about XYZ Not-for-Profit Organization’s ability to

continue as a going concern for a reasonable period of time.




Report on Summarized Comparative Information

The summarized comparative information presented herein as of and for the year ended September 30, 20X0, derived from those unaudited financial statements, has not been audited, reviewed, or compiled, and, accordingly, we express no opinion on it.






58



Accordance With Accounting Principles Generally Accepted in the United States of America When the Audit Has Been Conducted by a Registered Firm in Accordance With Both Auditing Standards Generally Accepted in the United States of America and the Auditing and Professional Practice Standards of the Public Company Accounting Oversight Board


Audit of a complete set of general purpose financial statements (comparative) of an entity whose audit is not within the jurisdiction of the PCAOB as defined by the Sarbanes-Oxley Act of 2002, as amended. The audit is not a group audit.

The firm is registered with the PCAOB and for purposes of this engagement is required by regulation to be in compliance with the independence standards and other professional practice standards of the PCAOB and SEC.

Management is not required to report on the entity’s internal control over financial

reporting.

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.

59


Report of Independent Registered Public Accounting Firm

[To the Shareholders and the Board of Directors of X Company]1

Opinion on the Financial Statements

We have audited the accompanying balance sheets of X Company (the Company) as of December 31, 20X2 and 20X1, the related statements of income, changes in stockholders’ equity, and cash

flows for each of the three years in the period ended December 31, 20X2, and the related notes [and schedules] (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of [at] December 31, 20X2 and 20X1, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20X2, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,

1 See paragraph .07 of PCAOB Auditing Standard (AS) 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, in AICPA PCAOB Standards and Related Rules. Staff Guidance Changes to the Auditor’s Report Effective for Audits of Fiscal Years Ending on or After December 15, 2017 (PCAOB Staff Guidance sec. 300.04), states that

AS 3101 requires the auditor’s report to be addressed to the shareholders and the board of directors, or

equivalents for companies not organized as corporations. For example, if a company is not organized as a corporation, the auditor's report would generally be addressed to (1) the plan administrator and plan participants for a benefit plan; (2) the directors (or equivalent) and equity owners for a broker or dealer; and (3) the trustees and unit holders or other investors for an investment company organized as a trust. The auditor's report may include additional addressees. Since inclusion of additional addressees is voluntary, auditors can assess, based on the individual circumstances, whether to include additional addressees in the auditor's report.

60


whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.2

Critical Audit Matters (if Applicable)

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee3 and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,

2 As described in paragraphs .59–.60 of AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances, this section should be revised in situations in which management is required to report on the effectiveness of internal control over financial reporting but such report is not required to be audited, and the auditor has not been engaged to perform an audit of management’s assessment of the effectiveness of internal control over

financial reporting. The following paragraphs should replace the second paragraph in the "Basis for Opinion" section in those circumstances. A similar paragraph may voluntarily be included in the auditor’s report in situations in which

management is not required to report on internal control over financial reporting and neither is the auditor.

We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

3 AS 1301, Communications with Audit Committees, defines "audit committee" as

A committee (or equivalent body) established by and among the board of directors of a company for the purpose of overseeing the accounting and financial reporting processes of the company and audits of the financial statements of the company; if no such committee exists with respect to the company, the entire board of directors of the company.

For audits of nonissuers, if no such committee or board of directors (or equivalent body) exists with respect to the company, the person(s) who oversee the accounting and financial reporting processes of the company and audits of the financial statements of the company.

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providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

[Include critical audit matters]

[Signature]

We have served as the Company’s auditor since [year].4

[City and State or Country]

[Date]

4 As discussed in Staff Guidance Changes to the Auditor’s Report Effective for Audits of Fiscal Years Ending on or

After December 15, 2017, AS 3101 does not specify a required location within the auditor's report for the statement on auditor tenure. The sample auditor's report includes the statement on auditor tenure at the end of the report; however, auditors have discretion to present auditor tenure in the part of the auditor's report they consider appropriate.

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Accordance With Accounting Principles Generally Accepted in the United States of America When the Audit Has Been Conducted by a Nonregistered Firm in Accordance With Both Auditing Standards Generally Accepted in the United States of America and the Auditing Standards of the Public Company Accounting Oversight Board


Audit of a complete set of general purpose financial statements (comparative) of an entity whose audit is not within the jurisdiction of the PCAOB as defined by the Sarbanes-Oxley Act of 2002, as amended.

The firm is not registered with the PCAOB and for purposes of this engagement is not required to be in compliance with the independence standards and other professional practice standards of the PCAOB and SEC.

Management is not required to report on the entity’s internal control over financial

reporting.

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.

63


Report of Independent Public Accounting Firm

[To the Shareholders and the Board of Directors of X Company]1

Opinion on the Financial Statements

We have audited the accompanying balance sheets of X Company (the Company) as of December 31, 20X2 and 20X1, the related statements of income, changes in stockholders’ equity, and cash

flows for each of the three years in the period ended December 31, 20X2, and the related notes [and schedules] (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of [at] December 31, 20X2 and 20X1, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20X2, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are required to be independent with respect to the Company in accordance with the relevant ethical requirements relating to our audits.

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,

1 See paragraph .07 of PCAOB Auditing Standard (AS) 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, in AICPA PCAOB Standards and Related Rules. Staff Guidance Changes to the Auditor’s Report Effective for Audits of Fiscal Years Ending on or After December 15, 2017 (PCAOB Staff Guidance sec. 300.04), states that

AS 3101 requires the auditor’s report to be addressed to the shareholders and the board of directors, or equivalents for companies not organized as corporations. For example, if a company is not organized as a corporation, the auditor's report would generally be addressed to (1) the plan administrator and plan participants for a benefit plan, (2) the directors (or equivalent) and equity owners for a broker or dealer, and (3) the trustees and unit holders or other investors for an investment company organized as a trust. The auditor's report may include additional addressees. Since inclusion of additional addressees is voluntary, auditors can assess, based on the individual circumstances, whether to include additional addressees in the auditor's report.

64


as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.2

Critical Audit Matters (if applicable)

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee3 and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

[Include critical audit matters]

2 As described in paragraphs .59–.60 of AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances, this section should be revised in situations in which management is required to report on the effectiveness of internal control over financial reporting but such report is not required to be audited, and the auditor has not been engaged to perform an audit of management’s assessment of the effectiveness of internal control over

financial reporting. The following paragraphs should replace the second paragraph in the "Basis for Opinion" section in those circumstances. A similar paragraph may voluntarily be included in the auditor’s report in situations in which

management is not required to report on internal control over financial reporting and neither is the auditor.

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

3 AS 1301, Communications with Audit Committees, defines "audit committee" as

A committee (or equivalent body) established by and among the board of directors of a company for the purpose of overseeing the accounting and financial reporting processes of the company and audits of the financial statements of the company; if no such committee exists with respect to the company, the entire board of directors of the company.

For audits of nonissuers, if no such committee or board of directors (or equivalent body) exists with respect to the company, the person(s) who oversee the accounting and financial reporting processes of the company and audits of the financial statements of the company

65


[Signature]

We have served as the Company’s auditor since [year].4

[City and State or Country]

[Date]

4 As discussed in Staff Guidance Changes To The Auditor’s Report Effective For Audits of Fiscal Years Ending On

or After December 15, 2017, AS 3101 does not specify a required location within the auditor's report for the statement on auditor tenure. The example auditor's report includes the statement on auditor tenure at the end of the report; however, auditors have discretion to present auditor tenure in the part of the auditor's report they consider appropriate.

66

Statement on

Standards for Attestation December 2019

Engagements 19

Issued by the Auditing Standards Board

Agreed-Upon Procedures Engagements

(Supersedes Statement on Standards for Attestation Engagements [SSAE] No. 18, Attestation

Standards: Clarification and Recodification, AT-C section 215, Agreed-Upon Procedures

Engagements; Amends SSAE No. 18 AT-C section 105, Concepts Common to All

Attestation Engagements)

67

Copyright © 2019 by

American Institute of Certified Public Accountants, Inc.

New York, NY 10036-8775

All rights reserved. For information about the procedure for requesting permission to make copies of any part of

this work, please e-mail [email protected] with your request. Otherwise, requests should be

written and mailed to the Permissions Department, 220 Leigh Farm Road, Durham, NC 27707-8110.

1 2 3 4 5 6 7 8 9 0 AudS 1 9

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Auditing Standards Board

(2019–2020)

Michael J. Santay, Chair Gaylen R. Hansen

Brad C. Ames Tracy W. Harding

Monique Booker Jon Heath

Jay D. Brodish, Jr. Jan C. Herringer

Dora A. Burzenski Kristen A. Kociolek

Joseph S. Cascio G. Alan Long

Harry Cohen Sara Lord

Jeanne M. Dee Marcia L. Marien

Lawrence M. Gill Aaron Saito

Audrey A. Gramling

Attestation Standards Task Force

Denny F. Ard, Co-Chair Michael P. Manspeaker

Catherine Schweigel, Co-Chair Daniel D. Montgomery

Marne Doman Paul A. Penler

Jan C. Herringer Chad Singletary

David A. Johnson Matthew P. Zaun

Staff

Robert Dohrer

Chief Auditor

Michael P. Glynn

Senior Manager —

Audit and Attest Standards

Judith M. Sherinsky

Senior Manager —

Audit and Attest Standards

Teighlor S. March

Assistant General Counsel —

Office of General Counsel

Note: Statements on Standards for Attestation Engagements are issued by the Auditing Standards Board, the senior technical body of the AICPA designated to issue pronouncements on auditing matters. The “Compliance With Standards Rule”(ET sec. 1.310.001)1 of the AICPA Code of Professional Conduct requires compliance with these standards in an audit of a nonissuer.

1 All ET sections can be found in AICPA Professional Standards.

69

Agreed-Upon Procedures Engagements

Introduction

Scope of This Statement on Standards for Attestation Engagements

.01 This section contains performance and reporting requirements and application guidance for

all agreed-upon procedures engagements. The requirements and guidance in this section

supplement the requirements and guidance in AT-C section 105, Concepts Common to All

Attestation Engagements.*

.02 An agreed-upon procedures engagement is an attestation engagement in which a practitioner performs specific procedures on subject matter and reports the findings without providing an opinion or conclusion. The subject matter may be financial or nonfinancial information. Because the needs of an engaging party may vary widely, the nature, timing, and extent of the procedures may vary, as well. (Ref: par. .A1–.A2)

.03 Because the engaging party best understands its own needs, the engaging party is required to agree to the procedures and acknowledge that the procedures performed are appropriate for the intended purpose of the engagement prior to issuance of the practitioner’s agreed-upon procedures report. Engagement circumstances may be such that it is appropriate for parties in addition to the engaging party to agree to the procedures and acknowledge that the procedures performed are appropriate for their purposes. The engaging party and intended users assess for themselves the procedures and findings reported by the practitioner and draw their own conclusions from the work performed by the practitioner.

.04 In an engagement performed in accordance with this section, the practitioner does not perform an examination or a review engagement and does not provide an opinion or conclusion. Instead, the agreed-upon procedures report is in the form of procedures and findings.

.05 When a practitioner performs services pursuant to an engagement to apply agreed-upon

procedures to subject matter as part of or in addition to another form of service, this section

applies only to those services described herein; other professional standards would apply to

the other services. Other services may include an audit, review, or compilation of a financial

statement, another attestation service performed pursuant to the attestation standards, or a

nonattest service. A practitioner’s report on applying agreed-upon procedures to subject

matter may be combined with a report on such other services, provided the types of services

can be clearly distinguished, and the applicable standards for each service are followed.

.06 This section does not apply to engagements to issue letters (commonly referred to as comfort

letters) to underwriters and certain other requesting parties.1

Effective Date

* All AT-C sections can be found in AICPA Professional Standards.

1 See AU-C section 920, Letters for Underwriters and Certain Other Requesting Parties. All AU-C sections can be found in AICPA Professional Standards.

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.07 This section is effective for agreed-upon procedures reports dated on or after July 15, 2021.

Early implementation is permitted.

Objectives

c. Communicate further as required by relevant AT-C sections

Requirements

Conduct of an Agreed-Upon Procedures Engagement

.09 In performing an agreed-upon procedures engagement, the practitioner should comply with

this section, AT-C section 105, and any subject matter section that is relevant to the

engagement. A subject-matter AT-C section is relevant to the engagement when it is in effect,

and the circumstances addressed by the AT-C section exist. (Ref: par. .A4)

Preconditions for an Agreed-Upon Procedures Engagement

.10 AT-C section 105 indicates that a practitioner must be independent when performing an

attestation engagement in accordance with the attestation standards, unless the practitioner is

required by law or regulation to accept the engagement and report on the subject matter.2

When the practitioner is not independent but is required by law or regulation to accept an

agreed-upon procedures engagement and report on the procedures performed and findings

obtained, the practitioner’s report should specifically state that the practitioner is not

independent. The practitioner is neither required to provide, nor precluded from providing,

the reasons for the lack of independence; however, if the practitioner chooses to provide the

reasons for the lack of independence, the practitioner should include all the reasons therefor.

(Ref: par. .A5)

.11 In order to establish that the preconditions for an agreed-upon procedures engagement are

present, the practitioner should determine that the following conditions, in addition to the

preconditions identified in AT-C section 105, are present:3 (Ref: par. .A6–.A7)

2 Paragraph .24 of AT-C section 105, Concepts Common to All Attestation Engagements.

3 Paragraphs .24–.28 of AT-C section 105.

.08 In conducting an agreed-upon procedures engagement, the objectives of the practitioner are to do the following:

a. Apply specific procedures to subject matter (Ref: par. .A3)

b. Issue a written practitioner’s report that describes the procedures applied and the practitioner’s findings without providing an opinion or conclusion on the subject matter

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d. When applicable, the practitioner agrees to apply a threshold for reporting exceptions

established by the engaging party. (Ref: par. .A36)

.12 The practitioner should establish an understanding with the engaging party regarding the nature of the engagement, including the following:

a. The intended purpose of the engagement and the intended users of the agreed-upon

procedures report

b. Whether the practitioner’s agreed-upon procedures report is expected to be restricted to

the use of specified parties (Ref: par. .A8–.A10)

c. Whether the engagement to be performed is pursuant to any law, regulation, or contract

(Ref: par. .A11)

d. Whether parties in addition to the engaging party will be requested to agree to the

procedures and acknowledge that the procedures performed are appropriate for their

purposes (Ref: par. .A12–.A15)

.13 The practitioner is precluded from accepting an agreed-upon procedures engagement if the

practitioner believes the intended purpose of the engagement is not clear or the engaging party

will not have a basis for agreeing and acknowledging that the procedures are appropriate for

the intended purpose of the engagement.

Agreeing on the Terms of the Engagement

.14 The practitioner should agree upon the terms of the engagement with the engaging party. The

agreed-upon terms of the engagement should be specified in sufficient detail in an engagement

letter or other suitable form of written agreement. (Ref: par. .A16)

.15 The agreed-upon terms of the engagement should include the following:

a. The nature of the engagement established pursuant to paragraph .12

b. Identification of the subject matter and the responsible party

c. The responsibilities of the practitioner (Ref: par. .A17–.A18)

d. A statement that the engagement will be conducted in accordance with attestation standards established by the AICPA

e. A statement that the responsible party is responsible for the subject matter (Ref: par. .A19)

f. A statement that the engaging party agrees to provide the practitioner, prior to the completion of the engagement, with a written agreement and acknowledgment that the procedures performed are appropriate for the intended purpose of the engagement. (Ref:

a. The practitioner determines that procedures can be designed, performed, and reported on in accordance with this section.

b. The engaging party agrees, or will be able to agree, to the procedures and acknowledges that the procedures are appropriate for the intended purpose of the engagement. (Ref: par. .A8)

c. The procedures to be applied to the subject matter are expected to result in reasonably consistent findings.

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par. .A20)

g. A statement that the engaging party agrees to provide, at the conclusion of the engagement, a representation letter.

h. If known at the onset of the engagement, an identification of any other parties, in addition to the engaging party, that will be requested to agree to the procedures and acknowledge that the procedures performed are appropriate for their purposes. If the request is expected to be made by the engaging party, a statement that the engaging party agrees to provide, at the conclusion of the engagement, a written representation that the engaging party has obtained from all necessary other parties agreement to the procedures and acknowledgment that the procedures performed are appropriate for their purposes.

i. If the engaging party is not the responsible party, a statement that written representations may be requested from the responsible party.

j. Reference to the expected form and content of the practitioner’s agreed-upon procedures report, including any use restrictions, if applicable.

k. Disclaimers expected to be included in the practitioner’s report, if applicable

l. Assistance to be provided to the practitioner, if applicable

m. Involvement of a practitioner’s external specialist, if applicable

n. Specified thresholds for reporting exceptions, if applicable (Ref: par. .A37)

Procedures to Be Performed

.16 The practitioner should perform procedures agreed to and acknowledged by the engaging

party to meet the intended purpose of the engagement established with the engaging party

pursuant to paragraph .12a. (Ref: par. .A21–.A26).

.17 The practitioner should not perform procedures that are open to varying interpretations or that

use vague or ambiguous language. Terms of uncertain meaning (such as general review,

limited review, check, or test) should not be used in describing the procedures unless such

terms are defined within the procedures. (Ref: par. .A27)

.18 The practitioner should obtain evidence from applying the procedures to provide a reasonable

basis for the finding or findings expressed in the practitioner’s report but need not perform

additional procedures outside the scope of the engagement to gather additional evidence.

Using the Work of a Practitioner’s External Specialist

.19 The practitioner and the engaging party should explicitly agree to the involvement of a

practitioner’s external specialist if assisting a practitioner in the performance of an agreed-

upon procedures engagement. (Ref: par. .A28–.A30)

.20 The practitioner’s report should describe the nature of the assistance provided by the

practitioner’s external specialist.

Using the Work of Internal Auditors or Other Practitioners

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.21 The procedures to be enumerated or referred to in the practitioner’s report should be

performed by the engagement team or other practitioners and not by internal auditors. (Ref:

par. .A31–.A33)

Appropriateness of the Procedures Performed

.23 If the engaging party refuses to provide the written agreement and acknowledgment required by paragraph .22, the practitioner should withdraw from the engagement.

Findings

.24 A practitioner should present the results of applying procedures to specific subject matter in the form of findings. (Ref: par. .A36)

.25 The practitioner should report all findings from application of the procedures. If the engaging party has established a threshold for reporting exceptions, the practitioner should describe such threshold in the practitioner’s report. (Ref: par. .A25, .A37, and .A47)

.26 When reporting findings, the practitioner should not (Ref: par. .A41–.A42)

a. use vague or ambiguous language. (Ref: par. .A38)

b. include terms of uncertain meaning. (Ref: par. .A39)

c. express an opinion or conclusion on the subject matter or about whether the subject

matter is in accordance with (or based on) the criteria. (Ref: par. .A40)

Written Representations

.27 The practitioner should request from the engaging party written representations in the form of a letter addressed to the practitioner. The representations should include the following: (Ref: par. .A35 and .A43)

a. A statement that the responsible party is responsible for the subject matter

b. If applicable, a statement that the engaging party has obtained from all necessary parties

agreement to the procedures and acknowledgment that the procedures are appropriate for

their purposes

c. A statement that it has provided the practitioner with all relevant information and access,

as applicable, as agreed upon in the terms of the engagement

d. A statement that all known matters contradicting the subject matter and any

communication from regulatory agencies or others affecting the subject matter have been

disclosed to the practitioner, including communications received between the end of the

period addressed by the subject matter and the date of the practitioner's report

.22 Prior to the issuance of the practitioner’s agreed-upon procedures report, the practitioner should obtain a written agreement of the procedures and acknowledgment from the engaging party that the procedures performed are appropriate for the intended purpose of the engagement. (Ref: par. .A34–.A35)

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e. A statement that it is not aware of any material misstatements in the subject matter

g. Any additional representations that the practitioner determines are appropriate

.28 When the engaging party is not the responsible party, the practitioner should consider requesting the relevant written representations pursuant to paragraph .27 from the responsible party in the form of a letter addressed to the practitioner.

.29 The date of the written representations should be as of the date of the practitioner’s report. The written representations should address the subject matter and periods covered by the practitioner’s findings.

Requested Written Representations Not Provided or Not Reliable

.30 When one or more of the written representations that the practitioner has requested pursuant to paragraphs .27–.28 are not provided, or the practitioner concludes that there is sufficient doubt about the competence, integrity, ethical values, or diligence of those providing the written representations, or the practitioner concludes that the written representations are otherwise not reliable, the practitioner should do the following: (Ref: par. .A44)

a. Discuss the matter with the engaging or responsible party, as appropriate

b. Reevaluate the integrity of those from whom the representations were requested or received and evaluate the effect that this may have on the reliability of representations and evidence in general

c. If any of the matters are not resolved to the practitioner’s satisfaction, take appropriate action, including determining the possible effect on the practitioner’s agreed-upon procedures report (Ref: par. .A45)

Preparing the Practitioner’s Report

.31 The practitioner’s report should be in writing. (Ref: par. .A46)

.32 The practitioner’s report should be in the form of procedures and findings.

.33 If, as a result of performing procedures, the practitioner determines that the description of the

procedures performed or the corresponding findings, in the practitioner’s professional judgment,

are misleading in the circumstances of the engagement, the practitioner should discuss the matter

with the engaging party and take appropriate action. (Ref: par. .A47–.A48)

Content of the Practitioner’s Agreed-Upon Procedures Report

.34 The practitioner’s agreed-upon procedures report should include the following:

a. A title that includes the word independent to clearly indicate that it is the report of an independent accountant. (Ref: par. .A49)

b. An appropriate addressee as required by the circumstances of the engagement.

c. Identification of the engaging party.

f. A statement that it has disclosed to the practitioner all known events subsequent to the

period (or point in time) of the subject matter being reported on that would have a

material effect on the subject matter

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d. Identification of the subject matter to which the procedures have been applied. (Ref: par. .A50–.A51)

f. A statement that the engaging party acknowledged that the procedures performed are

appropriate to meet the intended purpose of the engagement. (Ref: par. .A53–.A54)

g. An identification of the intended purpose of the engagement in sufficient detail to enable the user to understand the nature of the work performed. (Ref: par. .A55)

h. A statement that the practitioner’s report may not be suitable for any other purpose. (Ref: par. .A56)

i. A statement that the procedures performed may not address all the items of interest to a user of the report and may not meet the needs of all users of the report and, as such, users are responsible for determining whether the procedures performed are appropriate for their purposes.

j. A statement that an agreed-upon procedures engagement involves the practitioner performing specific procedures that the engaging party has agreed to and acknowledged to be appropriate for the intended purpose of the engagement and reporting on findings based on the procedures performed.

k. A description of the procedures performed detailing the nature and extent, and if applicable, the timing, of each procedure.

l. A description of the findings from each procedure performed, including sufficient details on exceptions found.

m. If applicable, a description of any specified threshold established by the engaging party for reporting exceptions.

n. A statement that the agreed-upon procedures engagement was conducted in accordance with attestation standards established by the AICPA.

o. A statement that the practitioner was not engaged to and did not conduct an examination or review, the objective of which would be the expression of an opinion or conclusion, respectively, on the subject matter. (Ref: par. .A57)

p. A statement that the practitioner does not express such an opinion or conclusion.

q. A statement that had the practitioner performed additional procedures, other matters might have come to the practitioner’s attention that would have been reported.

r. A statement that the practitioner is required to be independent of the responsible party and to meet the practitioner’s other ethical responsibilities, in accordance with the relevant ethical requirements relating to the agreed-upon procedures engagement. (Ref: par. .A58–.A59)

s. If applicable, a description of the nature of the assistance provided by a practitioner’s external specialist, as discussed in paragraphs .19–.20.

t. When applicable, reservations or restrictions concerning procedures or findings. (Ref: par.

.A60)

e. Identification of the responsible party, including a statement that the responsible party is responsible for the subject matter. When the engaging party is not the responsible party and identification of the responsible party and its responsibility for the subject matter is based solely on representations received from the engaging party, the practitioner’s agreed-upon procedures report should include a statement to that effect. (Ref: par. .A52)

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ii. if applicable, the written presentation of the subject matter has been prepared.

Alert That Restricts the Use of the Practitioner’s Agreed-Upon Procedures Report

.35 The practitioner should consider whether to include an alert, in a separate paragraph, that restricts the use of the practitioner’s agreed-upon procedures report, taking into account the understanding with the engaging party regarding the nature of the engagement pursuant to paragraph .12a. (Ref: par. .A7 and .A65–.A69)

Adding Other Specified Parties After the Release of the Practitioner’s Report

.38 If the practitioner provides a written acknowledgment to the engaging party and the additional

party that such party has been added as a specified party, the practitioner should state in the

acknowledgment that no procedures were performed subsequent to the original date of the

practitioner’s agreed-upon procedures report.

Restrictions on the Performance of Procedures

u. The manual or printed signature of the practitioner’s firm. (Ref: par. .A61–.A63)

v. The city and state where the practitioner’s report is issued. (Ref: par. .A64)

w. The date of the report. The practitioner’s report should be dated no earlier than the date on which the practitioner completed the procedures and determined the findings, including that

i. the attestation documentation has been reviewed, and

.36 The alert should

a. state that the practitioner’s report is intended solely for the information and use of the

specified parties.

b. identify the specified parties for whom use is intended. (Ref: par. .A70)

c. state that the report is not intended to be, and should not be, used by anyone other than

the specified parties.

.37 When the practitioner issues a report that includes an alert restricting the use of the practitioner’s report to certain specified parties, and the engaging party subsequently requests the practitioner to add an additional specified party, the practitioner should determine whether to add the additional specified party. As part of this determination, the practitioner should consider whether (Ref: par. .A71)

a. the additional specified party has acknowledged or will be requested to acknowledge that the procedures performed are appropriate for their purposes. If the practitioner determines that the acknowledgment is necessary, the practitioner should either obtain such acknowledgment directly from the additional specified party or obtain a representation from the engaging party that the additional specified party has agreed to the procedures and acknowledged that the procedures performed are appropriate for their purposes, and

b. the report will be reissued to identify the additional specified party.

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.39 When circumstances impose restrictions on the performance of the procedures, the practitioner should discuss with the engaging party whether those restrictions are appropriate and, if the restrictions are appropriate, describe the restrictions in the practitioner’s report.

Knowledge of Matters Outside Procedures

.40 Although the practitioner need not perform procedures beyond the procedures agreed to and acknowledged by the engaging party to be appropriate for the intended purpose of the engagement, if in connection with the application of the procedures, and through the completion of the engagement, matters come to the practitioner’s attention by other means that significantly contradict the subject matter referred to in the practitioner’s report, the practitioner should discuss the matter with the engaging party and take appropriate action, including determining whether the practitioner’s report should be revised to disclose the matter. (Ref: par. .A72–.A73)

Communication Responsibilities

.41 In the event the practitioner encounters known or suspected fraud or noncompliance with laws

or regulations in connection with the engagement, the practitioner should consider

responsibilities under the AICPA Code of Professional Conduct and applicable law prior to

communicating such information either to the responsible party or the engaging party. (Ref:

par. .A74)

Documentation

.42 The practitioner should prepare engagement documentation on a timely basis that includes the following: (Ref: par. .A75–.A76)

a. The written agreement and acknowledgment from the engaging party regarding the

appropriateness of the procedures performed for the intended purpose of the

engagement, as required by paragraph .22

b. The nature, timing, and extent of the procedures performed to comply with relevant AT-

C sections and applicable legal and regulatory requirements, including the following:

i. The identifying characteristics of the specific items or matters tested

ii. Who performed the engagement work and the date such work was completed

c. The results of the procedures performed and the evidence obtained

iii. When the appropriate party will not provide one or more of the requested

written representations pursuant to paragraphs .27–.28 or the practitioner

concludes that there is sufficient doubt about the competence, integrity, ethical

values, or diligence of those providing the written representations, or that the

written representations are otherwise not reliable, the matters in paragraph .30a–

c

iv. Who reviewed the engagement work performed and the date and extent of such

review

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Application and Other Explanatory Material

Scope of This Statement on Standards for Attestation Engagements (Ref: par. .02)

.A1 Reference to “subject matter” in this section encompasses anything on which agreed-upon procedures are performed, including information, documents, measurements, or compliance with laws and regulations.

.A2 The procedures to be performed may be developed by the practitioner, the engaging party, another party, or a combination of these parties. Further, the procedures may be prescribed by law, regulation, or contract.

Objectives (Ref: par. .08a)

.A3 In an agreed-upon procedures engagement, the practitioner applies procedures to the subject matter of the engagement. The requirements and guidance related to the subject matter in AT-C section 105 apply.

Conduct of an Agreed-Upon Procedures Engagement (Ref: par. .09)

.A4 If a practitioner were performing an agreed-upon procedures engagement related to an entity’s compliance with requirements of specified laws, regulations, rules, contracts, or grants, AT-C section 105, this section, and AT-C section 315, Compliance Attestation, would be relevant. In addition, there may be interpretative publications applicable to the subject matter, such as, for example, AICPA Statement of Position 17-1, Performing Agreed-Upon Procedures Related to Rated Exchange Act Asset-Backed Securities Third-Party Due Diligence Services as Defined by SEC Release No. 34-72936.†

Preconditions for an Agreed-Upon Procedures Engagement (Ref: par. .10–.11 and .35)

.A5 The “Agreed-Upon Procedure Engagements Performed in Accordance With Statements on Standards for Attestation Engagements” interpretation (ET sec. 1.297.020)‡ of the “Independence Rule” (ET sec. 1.200.001) establishes independence requirements unique to agreed-upon procedures engagements.

.A6 In determining whether procedures can be designed, performed, and reported on in accordance with this section, the practitioner may consider whether such procedures

• are or will be subjective or require judgment to apply,

• will be selected to result only in findings that show the subject matter in a favorable light,

and

• will meet the intended purpose of the engagement.

.A7 In determining whether procedures can be designed, performed, and reported on in accordance with this section, the practitioner may need to obtain an understanding of the criteria or measurement framework used in developing the subject matter.

† All AUD sections can be found in AICPA Professional Standards.

‡ All ET sections can be found in AICPA Professional Standards.

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.A10 The restriction to specified parties may or may not include parties that have agreed to the

procedures and acknowledged that the procedures performed are appropriate for their

purposes.

.A11 Law or regulation may require an agreed-upon procedures engagement to be performed (for example, to demonstrate compliance with requirements of specific laws or regulations). Further, the procedures to be performed may be prescribed by law, regulation, or contract. Regulatory expectations may also be set out as part of a regulatory audit or communications or requests from regulators. Law or regulation may prescribe the nature, timing, and extent of the procedures to be performed and, in some cases, the way the procedures or findings are to be described in the practitioner’s report. In other circumstances, law or regulation may prescribe only the nature of the procedures to be performed or may use terms that are unclear about whether an agreed-upon procedures engagement is an acceptable service (for example, terms requiring an audit, review, examination, validation, or certification).

.A12 Based on the practitioner’s understanding with the engaging party, the practitioner may consider it necessary to request a regulator to agree to the procedures and acknowledge that the procedures performed are appropriate for their purposes.

.A13 A contract may require an agreed-upon procedures engagement to be performed. Given that the procedures are being performed to satisfy the obligations or expectations of the parties to the contract, unless the procedures, or a detailed description of the nature of the procedures, are included in the contract, all users of the practitioner’s agreed-upon procedures report ordinarily would agree to the procedures and acknowledge that the procedures performed are appropriate for their purposes.

.A14 For example, a practitioner may be engaged to perform procedures relating to a securitization transaction. In such circumstances, the practitioner and engaging party may identify other parties, such as underwriters, to request to agree to the procedures and acknowledge that the procedures performed are appropriate for their purposes.

.A15 Nothing precludes the practitioner and engaging party from agreeing to the type of

communication or acknowledgment to be used to obtain the agreement and acknowledgment

of parties other than the engaging party that the procedures performed are appropriate for

their purposes and who would make the communication. If the practitioner intends to

communicate directly with a party other than the engaging party, the rules regarding

confidential information as set forth in the AICPA Code of Professional Conduct apply.

.A8 The intended purpose of the engagement is determined by the engaging party. Consideration of the intended purpose of the engagement and the intended users of the practitioner’s agreed-upon procedures report informs the practitioner’s professional judgment about whether it is practical or necessary to obtain the agreement of those intended users and whether to restrict the use of the report as discussed in paragraphs .35–.36.

.A9 The engagement may be required by law, regulation, or contract or may arise as a result of a request by a third party or the engaging party’s intent to provide information to a broad class of users, such as customers.

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Agreeing on the Terms of the Engagement (Ref: par. .14–.15)

.A16 It is in the interests of both the engaging party and the practitioner to document the agreed-upon terms of the engagement before the commencement of the engagement to help avoid misunderstandings. The form and content of the engagement letter or other suitable form of written agreement will vary with the engagement circumstances.

.A17 The responsibility of the practitioner is to carry out the procedures and report the findings in accordance with the attestation standards. The practitioner assumes the risk that misapplication of the procedures may result in inappropriate findings being reported. Furthermore, the practitioner assumes the risk that appropriate findings may not be reported or may be reported inaccurately. The practitioner’s risks can be reduced through adequate planning and supervision and due professional care in performing the procedures, accumulating the findings, and preparing the practitioner’s report.

.A18 The practitioner has no responsibility to determine the differences between the procedures to be performed and the procedures that the practitioner would have determined to be necessary had the practitioner been engaged to perform another form of attestation engagement. The procedures that the practitioner performs pursuant to an agreed-upon procedures engagement may be more or less extensive than the procedures that the practitioner would determine to be necessary had the practitioner been engaged to perform another form of engagement.

.A19 There may be circumstances in which the party responsible for the subject matter is not a party to the engagement. For example, the practitioner may be engaged to perform procedures with respect to benchmarking certain information in which multiple entities may be responsible for certain aspects of the information, or the information may be publicly available, such as subject matter that appears on the internet or in a public building, such as a grocery or retail store. If the practitioner is engaged to benchmark the prices of 10 products at 3 different stores on a certain date, each of the stores may be responsible for the source of the subject matter and the price that is published on the shelf.

.A20 If the procedures are prescribed or otherwise developed by parties other than the practitioner, the agreed-upon terms of the engagement may include the procedures to be performed.

Procedures to Be Performed (Ref: par. .16–.17 and .25)

.A21 Mere reading of specified information about the subject matter does not constitute a procedure sufficient to permit a practitioner to report on the results of applying procedures.

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.A23 Examples of inappropriate procedures include the following:

• Mere reading of the work performed by others solely to describe their findings

• Evaluating the competency or objectivity of another party

• Obtaining an understanding about a particular subject

• Interpreting documents outside the scope of the practitioner’s professional expertise

.A25 In certain circumstances, it may be appropriate for a planned procedure to be modified because the results of applying the procedure indicate that the procedure was not appropriately designed, and the findings would be inconsistent with the intended purpose of the engagement. However, any revisions to the descriptions of procedures performed or findings that are intended to mislead users would be inappropriate.

.A26 Examples of other information the practitioner may include are the date the procedure was performed and the sources of information used in performing the procedure.

.A27 To avoid vague or ambiguous language, the procedures to be performed are characterized by the action to be taken at a level of specificity sufficient for a reader to understand the nature and extent of the procedures performed. Examples of descriptions of acceptable actions are as follows:

• Inspect

• Confirm

• Compare

• Agree

• Trace

• Inquire

• Recalculate

• Observe

• Mathematically check

.A22 Examples of appropriate procedures include the following:

• Inspection of specified documents evidencing certain types of transactions or detailed

attributes thereof

• Confirmation of specific information with third parties

• Comparison of documents, schedules, or analyses with certain specified attributes

• Performance of specific procedures on work performed by others

• Performance of mathematical computations

.A24 If the practitioner selects a sample, stating the size of the sample and how the sample was selected contributes to the specificity of the description of procedures performed (for example, 50 items starting at the 8th item and selecting every 15th item thereafter or invoices issued from May 1 to July 31, 20XX).

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Conversely, the following descriptions of actions (unless defined to indicate the nature, timing, and extent of the procedures associated with these actions) generally are not acceptable because they are not sufficiently precise or have an uncertain meaning:

Using the Work of a Practitioner’s External Specialist (Ref: par. .19)

.A29 The agreement regarding the involvement of a practitioner’s external specialist may be reached when agreeing upon the terms of the engagement or as part of obtaining the engaging party’s agreement to the procedures and acknowledgment that the procedures performed are appropriate for the intended purpose of the engagement.

.A30 A practitioner may apply procedures to the report or work product of a practitioner’s external specialist that does not constitute assistance by the external specialist to the practitioner in an agreed-upon procedures engagement. For example, the practitioner may reference information contained in a report of a practitioner’s external specialist in describing a procedure. However, it is inappropriate for the practitioner to merely read the external specialist’s report solely to describe or repeat the findings or to take responsibility for all or a portion of any procedures performed by a practitioner’s external specialist or the external specialist’s work product.

• Note

• Review

• General review

• Limited review

• Evaluate

• Analyze

• Check

• Test

• Interpret

• Verify

• Examine

.A28 The practitioner’s education and experience enable the practitioner to be knowledgeable about business matters in general, but the practitioner is not expected to have the expertise of a person trained for or qualified to engage in the practice of another profession or occupation. In certain circumstances, it may be appropriate to involve a practitioner’s external specialist to assist the practitioner in the performance of one or more procedures. The following are examples of such circumstances:

• An attorney who helps with the interpretation of legal terminology in laws, regulations,

rules, contracts, or grants

• A medical specialist who assists with understanding the characteristics of diagnosis codes

documented in patient medical records

• An environmental engineer who assists with the interpretation of environmental remedial

action regulatory directives that may affect the procedures applied to an environmental

liabilities account in a financial statement

• A geologist who helps distinguish between the physical characteristics of a generic

minerals group related to information to which the procedures are applied

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Using the Work of Internal Auditors or Other Practitioners (Ref: par. .21)

.A31 Internal auditors may prepare schedules and accumulate data or provide other information for the practitioner’s use in performing the procedures. Also, internal auditors may perform and report separately on procedures that they have carried out. Such procedures may be similar to those that a practitioner may perform under this section.

Appropriateness of the Procedures Performed (Ref: par. .22 and .27)

.A35 The written agreement of the procedures and acknowledgment that the procedures

performed are appropriate for the intended purpose of the engagement may be documented in

the engagement letter, an addendum to the engagement letter, a representation letter, or some

other form of written communication.

Findings (Ref: par. .11d, .15n, and .24–.26)

.A36 Findings are the factual results of procedures performed. Findings are capable of being

objectively verified and objectively described, which means that procedures to be applied to

the subject matter are expected to result in reasonably consistent findings. Accordingly,

findings exclude opinions or conclusions in any form as well as any recommendations that

the practitioner may make.

.A37 A threshold for reporting exceptions does not apply to findings reported in an agreed-upon

procedures engagement unless such threshold is established by the engaging party. An

example of language that describes a threshold for reporting exceptions is as follows: “For

purposes of performing these procedures, no exceptions were reported for differences of

$1,000 or less resulting solely from the rounding of amounts disclosed.”

.A32 A practitioner may perform procedures on information documented in the working papers of internal auditors. For example, the practitioner may do the following:

• Repeat all or some of the procedures

• Determine whether the internal auditors’ documentation indicates procedures performed

and whether the findings documented are presented in a report by the internal auditors

.A33 It is inappropriate for the practitioner to do the following:

• Merely read the internal auditors’ report solely to describe or repeat their findings

• Take responsibility for all or a portion of any procedures performed by internal auditors

by reporting those findings as the practitioner’s own

• Report in any manner that implies shared responsibility for the procedures with the

internal auditors

.A34 The practitioner’s communication with the engaging party enables the engaging party, if not already aware, to be made aware of the specific procedures performed and affords the engaging party an opportunity to suggest alternative or additional procedures that the engaging party may feel are appropriate in order to meet the intended purpose of the engagement.

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.A40 An example of language that should not be used in reporting findings is as follows:

“Nothing came to our attention that caused us to believe that the subject matter is not in

accordance with (or based on) the criteria, in all material respects.”

.A41 The following table provides examples of appropriate and inappropriate descriptions of findings resulting from the application of certain procedures.

Appropriate Procedures Appropriate Description

of Findings

Inappropriate Description

of Findings

Inspect the shipment dates

for a sample (agreed upon)

of specified shipping

documents and determine

whether any such dates

were subsequent to [date].

No shipment dates shown on the sample of shipping documents were subsequent to [date].

Nothing came to my attention as a result of applying that procedure.

Recalculate the number of

blocks of streets paved

during the year ended

[date], shown on

contractors’ certificates of

project completion;

compare the resultant

number to the number in an

identified chart of

performance statistics as of

[date].

The number of blocks of streets paved in the chart of performance statistics was Y blocks more than the number calculated from the contractors’ certificates of project completion.

The number of blocks of streets paved approximated the number of blocks included in the chart of performance statistics.

Recalculate the rate of

return on a specified

investment (according to an

agreed-upon formula) and

determine whether the

resultant percentage agrees

to the percentage in an

identified schedule.

No exceptions were found as a result of applying the procedure.

The resultant percentage approximated the predetermined percentage in the identified schedule.

Inspect the quality standards

classification codes in

identified performance test

All classification codes inspected in the identified documents were the same as

All classification codes appeared to comply with

.A38 To avoid vague or ambiguous language, the findings are described at a level of specificity sufficient for a user to understand the nature, timing, and extent of the procedures and findings.

.A39 If, in the practitioner’s judgment, certain terms are potentially uncertain in meaning, the practitioner may consider whether a glossary is appropriate in the circumstances.

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documents for products

produced during [specified

period]; compare such

codes to those shown in the

[identified] computer

printout for [specified

period] as of [date].

those shown in the computer printout, except for the following:

[List all exceptions.]

such performance documents.

Trace all outstanding checks appearing on a bank reconciliation as of [date] to checks cleared in the bank statement of the subsequent month.

All outstanding checks appearing on the bank reconciliation were traced to the list of cleared checks in the subsequent month’s bank statement, except for the following: [List all exceptions.]

Nothing came to my attention as a result of applying the procedure.

Compare the amounts of the

invoices included in the

“over 90 days” column

shown in an identified

schedule of aged accounts

receivable of a specific

customer as of [date] to the

amount and invoice date

shown on the corresponding

outstanding invoice.

Determine whether the

dates on the corresponding

outstanding invoices

precede the date indicated

on the schedule by more

than 90 days.

All outstanding invoice amounts agreed with the amounts shown on the schedule in the “over 90 days” column, and the dates shown on such outstanding invoices preceded the date indicated on the schedule by more than 90 days.

The outstanding invoice amounts agreed within approximation of the amounts shown on the schedule in the “over 90 days” column, and nothing came to our attention that the dates shown on such outstanding invoices preceded the date indicated on the schedule by more than 90 days.

Obtain from XYZ Company [personnel specified by management], the [date] bank reconciliations. Confirm with the bank the cash on deposit as of [date]. Compare the balance confirmed by the bank to the amount shown on the bank reconciliations.

Obtained from XYZ Company [personnel specified by management], the [date] bank reconciliations. Obtained bank confirmations of the cash on deposit as of [date]. Compared the balance confirmed by the bank to the amount shown on the bank reconciliations. [List all exceptions.]

No exceptions were identified in the confirmations received, and nothing came to our attention as a result of applying the procedures.

.A42 When a procedure is written in sufficient detail, the finding may be very brief because the

practitioner does not need to repeat the procedure in describing the result. When there are no

exceptions, common descriptions of results are the following:

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• No exceptions were noted.

• No exceptions were [noted/found/identified] as a result of applying the procedure.

It is acceptable to repeat part of the procedure in the finding, such as in the following

examples:

• No shipment dates shown on the sample of shipping documents were subsequent to

[date].

• All outstanding invoice numbers, dates, and amounts agreed with the corresponding

fields on the “over 90 days” column of the schedule.

If the practitioner identifies exceptions in applying the procedures, the report states them and

provides some detail about the item or items involved, such as in the following examples:

• We found 14 out of the 15 items to be in agreement; the address on one item on the

schedule did not agree to the [source document].

• The amount recalculated as a result of performing the procedure was $XXX, which

did not agree with the amount of $YYYY on the [describe supporting document].

• Of the 30 selections made, two [insert attribute, such as amounts, dates, names] did

not agree from the [describe the supporting documentation] to the [describe the

supporting documentation].

A finding written to appear to be a fact or a conclusion would not be appropriate, such as in

the following examples:

• A result stating, “We determined the current ratio of X Company at December 31,

20X4, was 2:1,” could be considered a fact and is not appropriate. An appropriate

description of the result could be stated as, “We recalculated the current ratio of X

Company at December 31, 20X4, as 2:1.”

• A result stating, “We have [observed/found/determined] the net sales of X Company

for the year 20X4 were $X,” could be considered a fact and is not appropriate. An

appropriate description of the result could be stated as, “We recalculated the net sales

of X Company for the year 20X4 based on totaling the list of invoices in the sales

journal as $X.”

Additionally, terms that might be construed as communicating assurance — such as

reasonable or adequate, or that the results of applying the procedure were close enough —

would not be appropriate. For example, it is inappropriate to state the following:

• The [number of blocks of streets paved] per the [supporting documentation]

approximated the [number of blocks of streets paved] included in the chart of

performance statistics for the year ended [date].

• All [classification codes] appear to comply with the requirements in the contract.

Terms such as minor, immaterial, material, or significant, unless the measures of relevance

comprehended by such terms are clearly defined in both the engagement letter and the

practitioner’s report, are not appropriate for use in expressing results of procedures. It is also

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inappropriate to word a finding to convey negative assurance. For example, it is inappropriate

to state the following:

Written Representations (Ref: par. .27)

.A43 Written confirmation of oral representations reduces the possibility of misunderstandings between the practitioner and the engaging party. The person from whom the practitioner requests written representations is ordinarily a member of senior management or those charged with governance depending on, for example, the management and governance structure of the engaging party, which may vary by entity, reflecting influences such as size and ownership characteristics.

Requested Written Representations Not Provided or Not Reliable (Ref: par. .30c)

.A44 Circumstances in which the practitioner may be unable to obtain requested written representations include, for example, when

• the engaging party does not have a relationship with the responsible party, and

• the agreed-upon procedures engagement is undertaken against the wishes of the

responsible party, for example, when required by law or regulation.

In these or similar circumstances, the practitioner may need to reconsider whether the responsible party is able to take responsibility for the subject matter.

.A45 Although it is expected that the practitioner will be able to obtain all the requested written

representations from the engaging party and, if applicable, the responsible party pursuant to

paragraphs .27–.28, appropriate actions the practitioner might consider in the circumstances

described in paragraph .30c include the following:

a. Determining the effect on the practitioner’s report, including whether to restrict the

use of the practitioner’s report or whether to disclose in the practitioner’s report that

the engaging party or the responsible party did not provide one or more of the

requested written representations

b. Withdrawing from the engagement

Preparing the Practitioner’s Report (Ref: par. .25, .31, and .33)

.A46 This section does not require a standardized format for reporting on all agreed-upon procedures engagements. Instead, it identifies the basic elements that the report is to include.

• Nothing came to our attention as a result of applying the procedure.

• Nothing came to our attention that caused us to believe that [the subject matter] is not

presented in accordance with [the criteria].

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The report is tailored to the specific engagement circumstances. The practitioner may use headings, separate paragraphs, paragraph numbers, typographical devices (for example, boldface text), and other mechanisms to enhance the clarity and readability of the report.

c. withdrawing from the engagement.

Content of the Practitioner’s Agreed-Upon Procedures Report

Title (Ref: par. .34a)

.A49 A title indicating that the practitioner’s report is the report of an independent practitioner (for example, “Independent Practitioner’s Report,” “Report of Independent Certified Public Accountant,” or “Independent Accountant’s Report”) affirms that the practitioner has met all the relevant ethical requirements regarding independence and, therefore, distinguishes the independent practitioner’s report from reports issued by others.

Identification of the Subject Matter to Which the Procedures Have Been Applied (Ref: par. .34d)

.A50 In identifying the subject matter to which the procedures have been applied, the practitioner

may describe the criteria or measurement framework used by the responsible party to develop

the subject matter. For example, the identification of the subject matter may be “the cash and

accounts receivable of XYZ Company as of December 31, 20XX in accordance with

accounting principles generally accepted in the United States of America.” Including

additional information in the practitioner’s report, particularly a general-use report, about the

criteria or measurement framework used by the responsible party to develop the subject matter

may assist users in determining whether the procedures are appropriate for their purposes.

.A51 A practitioner may be asked to apply procedures to more than one subject matter. In these

engagements, the practitioner may issue one practitioner’s report that refers to all subject

matter covered. AT-C section 315 contains an example of language that may be used in the

introductory paragraph to address such circumstances.4

4 Paragraph .A32 of AT-C section 315, Compliance Attestation.

.A47 Findings may be misleading, for example, if the responsible party revises the subject matter

as a result of initial findings from procedures performed, and the findings to be expressed in

the report do not indicate that the subject matter was changed. In such instances, the findings

may indicate that the subject matter was revised as a result of initial findings from the

procedures performed and that there are no findings with respect to the revised subject matter.

.A48 Appropriate actions that the practitioner might consider in the circumstances described in

paragraph .33 include

a. performing revised procedures,

b. rewording a procedure or a finding, or

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Identification of the Responsible Party (Ref: par. .34e)

.A52 The following is an example of a statement that the practitioner may include in the

practitioner’s report when the engaging party is not the responsible party, and identification

of the responsible party and its responsibility for the subject matter is based solely on

representations received from the engaging party: “In performing our agreed-upon procedures

engagement, we have relied solely on representations provided by [the engaging party]

relating to the responsible party and its responsibility for [the subject matter].”

Agreement to and Acknowledgment of the Appropriateness of the Procedures (Ref: par. 34f)

.A53 Although not required, the practitioner may consider adding one or more of the following statements to address the risk that a user (particularly of a general-use agreed-upon procedures report) may inappropriately conclude that parties in addition to the engaging party agreed to and acknowledged the appropriateness of the procedures:

• A statement that no other party acknowledged the appropriateness of the procedures

• An identification of any other parties who agreed to and acknowledged the

appropriateness of the procedures for their purposes and a statement that these parties

have acknowledged that the procedures performed are appropriate for their purposes

• A statement that the procedures are specified in a contract, law, or regulation and a

reference to the contract, law, or regulation that clearly indicates that additional parties

are parties to the contract, law, or regulation

.A54 Although not required, the practitioner may make an explicit statement that the practitioner makes no representation regarding the appropriateness of the procedures either for the purpose for which the practitioner’s report has been requested or for any other purpose. The practitioner might make this statement to address the risk that a user may conclude that the practitioner represents that the procedures performed are appropriate for the intended purpose of the engagement or for any other purpose.

Description of the Intended Purpose of the Agreed-Upon Procedures Engagement (Ref: par. 34g)

.A55 Because the practitioner is precluded from expressing an opinion or conclusion, it would not be appropriate to state that the intended purpose of the engagement was to determine whether the subject matter was prepared or is stated in accordance with specified criteria or that the practitioner performed the engagement to conclude whether the entity complied with specified criteria.

Practitioner’s Report Not Suitable for Any Other Purpose (Ref: par. .34h)

.A56 The practitioner may advise users regarding inappropriate uses of the practitioner’s agreed-upon procedures report. For example, the practitioner may advise that the report is not intended for making investment decisions or for use by potential lenders or investors.

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Statement When the Subject Matter Consists of Elements, Accounts, or Items of a Financial Statement (Ref: par. .34o)

.A57 If the subject matter consists of elements, accounts, or items of a financial statement, the practitioner’s report might, instead, state that the procedures do not constitute an audit (or a review) of financial statements or any part thereof, the objective of which is the expression of an opinion (or conclusion) on the financial statements or a part thereof.

Relevant Ethical Requirements (Ref: par. .34r)

.A58 Relevant ethical requirements consist of the AICPA Code of Professional Conduct together

with rules of state boards of accountancy and applicable regulatory agencies that are more

restrictive. When the Code of Professional Conduct applies, the practitioner’s other ethical

responsibilities relate to the “Principles of Professional Conduct” (ET sec. 0.300).

.A59 Relevant ethical requirements may exist in several different sources, such as ethical codes

and additional rules and requirements within law and regulation. When independence and

other relevant ethical requirements are contained in a limited number of sources, the

practitioner may choose to name the relevant sources (for example, the name of the code, rule,

or applicable regulation, or Government Auditing Standards promulgated by the Comptroller

General of the United States) or refer to a term that appropriately describes those sources.

Reservations or Restrictions Concerning Procedures or Findings (Ref: par. .34t)

.A60 Examples of reservations or restrictions procedures or findings may include the following:

• Disclosure of stipulated facts, assumptions, or interpretations (including the source thereof) used in the application of procedures

• Description of the condition of records, controls, or data to which the procedures were applied

• Explanation that the practitioner has no responsibility to update the practitioner’s report

• Explanation that the sample may not be representative of the population

Signature of the Practitioner (Ref: par. 34u)

.A61 In some cases, law or regulation may allow for the use of electronic signatures in the practitioner’s report.

.A62 In certain situations, the practitioner’s report may be required by law or regulation to include the personal name and signature of the practitioner, in addition to the practitioner’s firm.

Considerations Specific to Governmental Entities

.A63 This section would not preclude a governmental practitioner from including the personal name and signature of the practitioner in the practitioner’s report when, in certain situations, the governmental practitioner is required by law or regulation or chooses to do so.

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.A64 In the United States, the location of the issuing office is the city and state. In another country,

it may be the city and country. The city and state where the practitioner practices may be

indicated on letterhead that contains the issuing office’s location.

Alert That Restricts the Use of the Practitioner’s Agreed-Upon Procedures Report (Ref:

par. .35–.36)

.A65 Based on the circumstances of the engagement, the practitioner may consider it appropriate to include an alert, in a separate paragraph, that restricts the use of the practitioner’s agreed-upon procedures report. Examples of situations in which the practitioner, using professional judgment, may decide to include an alert, in a separate paragraph, that restricts the use of the practitioner’s agreed-upon procedures report include the following:

• When the engaging party requests that the use of the report be restricted.

• When agreed-upon procedures are performed on compliance with aspects of

contractual agreements, the practitioner may determine to restrict the use of the report

to the parties to the contract or agreement.

• When agreed-upon procedures are performed to comply with regulatory requirements,

the practitioner may determine to restrict the use of the report to the engaging party

and the regulator.

• When agreed-upon procedures are performed relating to certain subject matter (for

example, subject matter addressed in the AT-C section 300 series), the practitioner

may determine to restrict the use of the report to parties that are known to understand

the subject matter.

• When agreed-upon procedures are performed on subject matter that is intended to be

used by or is only available to a limited number of parties, the practitioner may

determine to restrict the use of the report to such parties.

• When the procedures that the practitioner is engaged to perform are prescribed and the

practitioner does not have the ability to perform or design additional procedures, the

practitioner may determine to restrict the use of the report to those parties that

prescribed the procedures.

.A66 A practitioner's report that includes an alert that restricts the use of the report may be included in a document that also contains a practitioner's report that is for general use. The inclusion of the separate restricted-use report does not affect the intended use of the general-use report nor does the inclusion of the general-use report affect the intended use of the restricted-use report. The restricted-use report remains restricted as to use, and the general-use report continues to be for general use.

.A67 A practitioner may also issue a single combined practitioner's report that includes (a) a practitioner's report that includes an alert that restricts its use and (b) a report that is for general use. If these two types of reports are clearly differentiated within the combined report, such as through the use of appropriate headings, the alert that restricts the use of the report may be

Practitioner’s Address (Ref: par. .34v)

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limited to the report that includes the alert that restricts its use. In such circumstances, the use of the general-use report is not affected.

.A68 Law or regulation may require that a practitioner’s report be made available to the public as a matter of public record.

.A69 A practitioner is not responsible for controlling, and cannot control, distribution of the

practitioner’s report after its release. The alert that restricts the use of the practitioner’s report

is designed to avoid misunderstandings related to the use of the practitioner’s report,

particularly if the practitioner’s report is taken out of the context in which the practitioner’s

report is intended to be used. A practitioner may consider informing the engaging party or

other specified parties that the practitioner’s report is not intended for distribution to parties

other than those specified in the practitioner’s report. The practitioner may, in connection with

establishing the terms of the engagement, reach an understanding with the engaging party that

the intended use of the practitioner’s report will be restricted and may obtain the engaging

party’s agreement that the engaging party and specified parties will not distribute such

practitioner’s report to parties other than those identified therein.

.A70 The practitioner may identify the specified parties by naming them, referring to a list of

those parties, or identifying the class of parties, for example, “all customers of XYZ Company

during some or all of the period January 1, 20XX, to December 31, 20XX.” The method of

identifying the specified parties is determined by the practitioner.

Adding Other Specified Parties After the Release of the Practitioner’s Report (Ref: par. .37)

.A71 When the practitioner is requested to add an additional specified party, the practitioner

may agree to add the additional specified party based on the practitioner’s consideration of

factors such as the identity of the other parties and the intended use of the practitioner’s report.

The practitioner is not required to reissue the report to identify the additional specified party

in the alert that restricts the use of the report, or if applicable, indicate that the additional

specified party agreed to the procedures and acknowledged that the procedures performed are

appropriate for their purposes. If the practitioner’s report is reissued, the practitioner is not

required to change the date of the report.

Knowledge of Matters Outside Procedures (Ref: par. .40)

.A72 For example, if, during the course of applying procedures regarding an entity’s internal control, the practitioner becomes aware of a material weakness by means other than performance of the procedures, such matter may be included in the practitioner’s report.

.A73 When the practitioner applies procedures to an element, account, or item of a financial statement and has performed an audit or review of the entity’s related financial statements, and the practitioner’s audit or review report on such financial statements includes a departure from the standard report, the practitioner may include a reference to the audit or review report and the departure from the standard report in the practitioner’s agreed-upon procedures report.

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Communication Responsibilities (Ref: par. .41)

.A74 Disclosure of confidential information as defined in the Code of Professional Conduct

requires the explicit consent of the engaging party or the responsible party, as appropriate. In

circumstances in which such matters are identified, the practitioner may consider discussing

with legal counsel or others prior to communicating or taking further action.

Documentation (Ref: par. .42)

.A75 Documentation prepared at the time work is performed or shortly thereafter is likely to be more accurate than documentation prepared at a much later time.

.A76 The practitioner need not include in the engagement file superseded drafts of working papers, notes that reflect incomplete or preliminary thinking, previous copies of documents corrected for typographical or other errors, and duplicates of documents.

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.A77

Appendix — Amendment to AT-C Section 105, Concepts Common to All Attestation Engagements

1. This amendment is effective for practitioners’ reports dated on or after July 15, 2021. Early implementation is permitted.

(Boldface italics denotes new language. Deleted text is shown in strikethrough.)

[No amendment to paragraph .01.]

.02 An attestation examination or review engagement is predicated on the concept that a party other than the practitioner makes an assertion about whether the subject matter is measured or evaluated in accordance with suitable criteria. Section 205, Examination Engagements; and section 210, Review Engagements; and section 215, Agreed-Upon Procedures Engagements, require the practitioner to request such an assertion in writing when performing an examination, or review, or agreed-upon procedures engagement.1 In examination and review engagements, when the engaging party is the responsible party, the responsible party's refusal to provide a written assertion requires the practitioner to withdraw from the engagement when withdrawal is possible under applicable laws and regulations2 In examination and review engagements, when the engaging party is not the responsible party and the responsible party refuses to provide a written assertion, the practitioner need not withdraw from the engagement but is required to disclose that refusal in the practitioner's report and restrict the use of the report to the engaging party.3 In an agreed-upon procedures engagement, the responsible party's refusal to provide a written assertion requires the practitioner to disclose that refusal in the report.4The purpose of an examination or review attestation engagement is to provide users of information with an opinion or conclusion regarding subject matter or an assertion about the subject matter, as measured against suitable and available criteria. An examination engagement results in an opinion, and a review engagement results in a conclusion. The purpose of an agreed-upon procedures engagement is to provide users of information with the results of procedures performed by the practitioner on subject matter. An agreed-upon procedures engagement results in findings.

.03 This section is not applicable to professional services for which the AICPA has established

other professional standards, for example, services performed in accordance with (Ref: par. .A2–

.A3)

a. Statements on Auditing Standards,

b. Statements on Standards for Accounting and Review Services, or c. Statements on Standards for Tax Services., or

d. Statements on Standards for Consulting Services, including litigation services that involve pending or potential legal or regulatory proceedings before a trier of fact. (Ref: par. .A3)

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1 Paragraph .10 of section 205, Examination Engagements; and paragraph .11 of section 210, Review Engagements; and paragraph .15 of section 215, Agreed-Upon Procedures.

2 Paragraph .82 of section 205 and paragraph .59 of section 210.

3 Paragraph .84 of section 205 and paragraph .60 of section 210.

4 Paragraph .36 of section 215.

[No amendment to paragraphs .04–.08.]

Objectives

.09 In conducting an attestation engagement, the overall objectives of the practitioner are to as

follows:

a. Aapply the requirements relevant to the attestation engagement.;

b. In an examination or review engagement, report on the subject matter or assertion, and in an agreed-upon procedures engagement, report on the procedures performed and related findings without providing an opinion or conclusion on the subject matter.

c. and cCommunicate as required by the applicable AT-C section, in accordance with the results of the practitioner's procedures.; and

cd. Iimplement quality control procedures at the engagement level that provide the practitioner with reasonable assurance that the attestation engagement complies with professional standards and applicable legal and regulatory requirements.

Definitions

.10 For purposes of the attestation standards, the following terms have the meanings attributed as follows:

…

Attestation engagement. An examination, review, or agreed-upon procedures engagement performed under the attestation standards related to subject matter or an assertion that is the responsibility of another party. The following are the three types of attestation engagements:

a. Examination engagement. An attestation engagement in which the practitioner obtains reasonable assurance by obtaining sufficient appropriate evidence about the measurement or evaluation of subject matter against criteria in order to be able to draw reasonable conclusions on which to base the practitioner's opinion about whether the subject matter is in accordance with (or based on) the criteria or the assertion is fairly stated, in all material respects. (Ref: par. .A7)

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b. Review engagement. An attestation engagement in which the practitioner obtains limited assurance by obtaining sufficient appropriate review evidence about the measurement or evaluation of subject matter against criteria in order to express a conclusion about whether any material modification should be made to the subject matter in order for it be in accordance with (or based on) the criteria or to the assertion in order for it to be fairly stated.(Ref: par. .A8)

c. Agreed-upon procedures engagement. An attestation engagement in which a practitioner performs specific procedures on subject matter or an assertion and reports the findings without providing an opinion or a conclusion on it. The parties to the engagement (specified party), as defined later in this paragraph, agree upon and are responsible for the sufficiency of the procedures for their purposes.

…

Subject matter. In an examination or review engagement, Tthe phenomenon that is measured or evaluated by applying criteria. In an agreed-upon procedures engagement, the phenomenon upon which procedures are performed.

[No amendment to paragraphs .11–.24.]

.25 In order to establish that the preconditions for an attestation engagement are present, the practitioner should determine both of the following:

a. Whether tThe responsible party is a party other than the practitioner and takes responsibility for the subject matter. (Ref: par. .A35–.A37)

b. Whether tThe engagement exhibits all of the following characteristics:

i. The subject matter is appropriate. (Ref: par. A36.A38–.A41.A43)

ii. In an examination or review engagement, Tthe criteria to be applied in the preparation and evaluation of the subject matter are suitable and will be available to the intended users. (Ref: par. A42.A44–.A52.A54)

iii. The practitioner expects to be able to obtain the evidence needed to arrive at the practitioner's opinion, conclusion, or findings, including (Ref: par. A53.A55–.A54 A56)

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(1) access to all information of which the responsible appropriate party is aware that is relevant to the measurement, evaluation, or disclosure of the subject matter;

(2) access to additional information that the practitioner may request from the responsible appropriate party for the purpose of the engagement; and

(3) unrestricted access to persons within the appropriate party(ies) from whom the practitioner determines it necessary to obtain evidence.

iv. The practitioner's opinion, conclusion, or findings, in the form appropriate to the engagement, is to be contained in a written practitioner's report.

[No amendment to paragraphs .26–.A1.]

.A2A3 The attestation standards do not apply to litigation services that involve pending or potential legal or regulatory proceedings before a trier of fact when the practitioner has not been engaged to issue, and does not issue, a practitioner's examination, review, or agreed-upon procedures report on subject matter or an assertion that is the responsibility of another party and any of the following Examples of litigation services include the following circumstancesexist:

a. The service comprises being an expert witness.

b. The service comprises being a trier of fact or acting on behalf of one.

c. The practitioner's work under the rules of the proceedings is subject to detailed analysis and challenge by each party to the dispute.

d. The practitioner is engaged by an attorney to do work that will be protected by the attorney's work product or attorney-client privilege, and such work is not intended to be used for other purposes.

.A3A2 Because performance audits performed pursuant to Government Auditing Standards do not require a practitioner’s examination, review, or agreed-upon procedures report as described in this section, this section does not apply to performance audits unless the practitioner engaged to conduct a performance audit is also engaged to conduct an AICPA attestation engagement or issues such an examination, review, or agreed-upon procedures report.

[No amendment to paragraphs .A4–.A27.]

.A28 Some report forms can be made acceptable by inserting additional wording to include the elements required by sections 205, 210, and 215.6 Some report forms required by law or regulation can be made acceptable only by complete revision because the prescribed language of the practitioner's report calls for statements by the practitioner that are not consistent with the practitioner's function or responsibility, for example, a report form that requests the practitioner to "certify" the subject matter.

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6 Paragraphs .63–.66 of section 205, paragraphs .46–.49 of section 210, and paragraphs .35 .32–.33 of section 215.

[No amendment to paragraphs .A29–.A34.]

Roles and Responsibilities (Ref: par. .25)

.A35 All attestation engagements have an engaging party, a responsible party, the practitioner, and intended users. In some attestation engagements, the engaging party is different from the responsible party. In other attestation engagements, the engaging party, the responsible party, and the intended users may all be the same.

[Paragraph .A35 is renumbered to paragraph .A36. The content is unchanged.]

.A37 Evidence that the appropriate relationship exists with respect to responsibility for the subject matter may be obtained through an acknowledgment provided by the responsible party. Such an acknowledgment also establishes a basis for a common understanding of the responsibilities of the responsible party and the practitioner. A written acknowledgment is the most appropriate form of documenting the responsible party’s understanding. In the absence of a written acknowledgment of responsibility, it may still be appropriate for the practitioner to accept the engagement if, for example, other sources, such as legislation or a contract, indicate responsibility. In other cases, it may be appropriate to decline the engagement depending on the circumstances or disclose the circumstances in the attestation report.


.A37 A39 An appropriate subject matter

a. is identifiable and, in an examination or review engagement, is capable of consistent measurement or evaluation against the criteria and

b. can be subjected to procedures for obtaining sufficient appropriate evidence to support an opinion, conclusion, or findings, as appropriate.


.A39 A41 Different subject matters have different characteristics, including the degree to which information about them is qualitative versus quantitative, objective versus subjective, historical versus prospective, and relates to a point in time or covers a period. Such characteristics affect the following:

a. In an examination or review engagement, the Pprecision with which the subject matter can be measured or evaluated against criteria

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b. The persuasiveness of available evidence

[Paragraphs .A40–.A53 are renumbered to paragraphs .A42–.A55. The content is unchanged.]

.A54 A56 The quantity or quality of available evidence is affected by both of the following:

a. The characteristics of the subject matter, for example, less objective evidence might be expected when the subject matter is future-oriented, rather than historical

b. Other circumstances, such as when evidence that could reasonably be expected to exist is not available, for example, because of the timing of the practitioner's appointment, an entity's document retention policy, inadequate information systems, or a restriction imposed by the responsible or engaging party

[Paragraphs .A55–.A74 are renumbered to paragraphs .A57–.A76. The content is unchanged.]

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.A78

Exhibit — Illustrative Practitioner’s Agreed-Upon Procedures Reports

The illustrative practitioner’s agreed-upon procedures reports in this exhibit meet the applicable reporting requirements in paragraphs .34–.37. A practitioner may use alternative language in drafting an agreed-upon procedures report, provided that the language meets the applicable requirements in paragraphs .34–.37.

Example 1: Practitioner’s Agreed-Upon Procedures Report Related to a Statement of Investment Performance Statistics


• The engaging party is the responsible party.

• The practitioner has assisted in the development of the procedures.

• No party other than the engaging party has agreed to the procedures and acknowledged

that the procedures are appropriate for their purposes.

Independent Accountant’s Report


We have performed the procedures enumerated below on [identify the subject matter, for example, the accompanying Statement of Investment Performance Statistics of XYZ Fund for the year ended December 31, 20X1]. [The responsible party, for example, XYZ Fund] is responsible for [the subject matter].

[The engaging party, for example, XYZ Fund] has agreed to and acknowledged that the procedures performed are appropriate to meet the intended purpose of [identify the intended purpose of the engagement, for example, assisting users in understanding the Statement of Investment Performance Statistics of XYZ Fund for the year ended December 31, 20X1]. This report may not be suitable for any other purpose. The procedures performed may not address all the items of interest to a user of this report and may not meet the needs of all users of this report and, as such, users are responsible for determining whether the procedures performed are appropriate for their purposes.

The procedures and the associated findings are as follows:

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[Include paragraphs to describe the procedures performed detailing the nature and extent, and if applicable, the timing, of each procedure and to describe the findings from each procedure performed, including sufficient details on exceptions found.]

We were engaged by [the engaging party, for example, XYZ Fund] to perform this agreed-upon procedures engagement and conducted our engagement in accordance with attestation standards established by the AICPA. We were not engaged to and did not conduct an examination or review engagement, the objective of which would be the expression of an opinion or conclusion, respectively, on [identify the subject matter, for example, the accompanying Statement of Investment Performance Statistics of XYZ Fund for the year ended December 31, 20X1]. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.

We are required to be independent of XYZ Fund and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements related to our agreed-upon procedures engagement.

[Additional paragraphs may be added to describe other matters.]

[Signature of the practitioner’s firm]

[City and state where the practitioner’s report is issued]

[Date of the practitioner’s report]

Example 2: Practitioner’s Agreed-Upon Procedures Report Related to Cash and Accounts Receivable


• The engaging party is not the responsible party.

• Other than the engaging party, no other party has agreed to the procedures and

acknowledged that the procedures are appropriate for their purposes.



We have performed the procedures enumerated below on [identify the subject matter, for example, the cash and accounts receivable of XYZ Company as of December 31, 20XX, included in the accompanying information provided to us by management of XYZ Company]. [The responsible party, for example, XYZ Company] is responsible for [the subject matter].

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[The engaging party, for example, ABC Company] has agreed to and acknowledged that the procedures performed are appropriate to meet the intended purpose of [identify the intended purpose of the engagement, for example, assisting users in understanding cash and accounts receivable of XYZ Company as of December 31, 20XX, included in the accompanying information provided to us by management of ABC Company]. This report may not be suitable for any other purpose. The procedures performed may not address all the items of interest to a user of this report and may not meet the needs of all users of this report and, as such, users are responsible for determining whether the procedures performed are appropriate for their purposes.


Cash

1. For the four bank accounts listed below, we obtained from XYZ Company management

a. the December 31, 20XX, bank reconciliations and

b. the December 31, 20XX, general ledger.

2. We performed the following procedures:

a. Obtained a bank confirmation directly from each bank of the cash on deposit as of December 31, 20XX

b. Compared the balance confirmed by the bank to the amount shown on the respective bank reconciliations

c. Mathematically recomputed the bank reconciliations

d. Compared the cash balances per book listed in the reconciliations below to the respective general ledger account balances

Cash, December 31, 20XX

Bank

Cash Balance per Book

DEF National Bank, general ledger account 123 $ 5,000

LMN State Bank, general ledger account 124 3,776

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RST Trust Company regular account, general ledger account 125

86,912

RST Trust Company payroll account, general ledger account 126

5,000

$ 110,688

We found no exceptions as a result of the procedures.

Accounts Receivable

3. We obtained the accounts receivable aged trial balance as of December 31, 20XX, from XYZ Company (attached as exhibit A). We mathematically checked that the individual customer account balance subtotals in the aged trial balance of accounts receivable agreed to the total accounts receivable per the aged trial balance. We compared the total accounts receivable per the accounts receivable aged trial balance to the total accounts receivable per general ledger account 250.


4. We obtained the accounts receivable subsidiary ledger as of December 31, 20XX, from XYZ Company. We compared the individual customer account balance subtotals shown in the accounts receivable aged trial balance (exhibit A) as of December 31, 20XX, to the balances shown in the accounts receivable subsidiary ledger.


5. We selected 50 customer account balances from exhibit A by starting at the 8th item and selecting every 15th item thereafter until 50 were selected. The sample size selected represents 9.8% of the aggregate amount of the customer account balances. We obtained the corresponding invoices from XYZ Company and traced the aging (according to invoice dates) for the 50 customer account balances shown in exhibit A to the details of outstanding invoices in the accounts receivable subsidiary ledger.


6. We mailed confirmations directly to the customers representing the 150 largest customer account balance subtotals selected from the accounts receivable aged trial balance, and we received responses as indicated below. As agreed, any individual differences in a customer account balance of less than $300 were to be considered minor, and no further procedures were performed.

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Of the 150 customer balances confirmed, we received responses from 140 customers; 10 customers did not reply.

No exceptions were identified in 120 of the confirmations received. The differences in the remaining 20 confirmation replies were less than $300.

For the 10 customers that did not reply, we traced the items constituting the outstanding customer account balance to invoices and supporting shipping documents.

A summary of the confirmation results according to the respective aging categories is as follows.

Accounts Receivable December 31, 20XX

Aging Categories Customer Account Balances

Confirmations Requested

Confirmations Received

Current $ 156,000 $ 76,000 $65,000

Past due:

Less than 1 month 60,000 30,000 19,000

1–3 months 36,000 18,000 10,000

Over 3 months 48,000 48,000 8,000

$300,000 $172,000 $102,000

We were engaged by [the engaging party, for example, ABC Company] to perform this agreed-upon procedures engagement and conducted our engagement in accordance with attestation standards established by the AICPA. We were not engaged to and did not conduct an examination or review engagement, the objective of which would be the expression of an opinion or conclusion, respectively, on [identify the subject matter]. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.

We are required to be independent of XYZ Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements related to our agreed-upon procedures engagement.





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Example 3: Practitioner’s Agreed-Upon Procedures Report in Connection With Claims of Creditors


• The engaging party is the responsible party.

• The engaging party and one specified party have prescribed the procedures for the

practitioner to perform. The engaging party and the specified party have both agreed the

procedures and have acknowledged that the procedures are appropriate for the intended

purpose of the engagement and their purposes, respectively.

• The practitioner has determined to disclose in the agreed-upon procedures report that the

specified party has agreed to and acknowledged that the procedures are appropriate for

their purposes.

• The practitioner has determined to restrict the use of the agreed-upon procedures report

to the parties that prescribed the procedures.



We have performed the procedures enumerated below on [identify the subject matter, for example, the claims of creditors of XYZ Company as of May 31, 20XX, as set forth in the accompanying Schedule A]. [The responsible party, for example, XYZ Company] is responsible for [the subject matter].

[The engaging party, for example, XYZ Company] has agreed to and acknowledged that the procedures performed are appropriate to meet the intended purpose of [identify the intended purpose of the engagement, for example, assisting users in understanding the claims of creditors of XYZ Company as of May 31, 20XX, as set forth in the accompanying Schedule A]. Additionally, [identify the other party or parties that has or have agreed to and acknowledged that the procedures performed are appropriate to meet their purposes, for example, the Trustee of XYZ Company] has agreed to and acknowledged that the procedures performed are appropriate to meet for their purposes. This report may not be suitable for any other purpose. The procedures performed may not address all the items of interest to a user of this report and may not meet the needs of all users of this report and, as such, users are responsible for determining whether the procedures performed are appropriate for their purposes.

The procedures and associated findings are as follows:

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1. Obtained the general ledger and the accounts payable trial balance as of May 31, 20XX, from XYZ Company. Compared the total of the accounts payable trial balance to the total accounts payable balance in general ledger account 450.

The total of the accounts payable trial balance agreed with the total accounts payable balance in the general ledger account number 450.

2. Obtained the claim form submitted by creditors in support of the amounts claimed from XYZ Company. Compared the creditor name and amounts from the claim form to the respective name and amounts shown in the accounts payable trial balance obtained in procedure 1. For any differences identified, requested XYZ Company to provide supporting detail. Compared such identified differences to the supporting detail provided.

All differences noted are presented in column 3 of Schedule A. Except for those amounts shown in column 4 of Schedule A, all such differences were agreed to [describe supporting detail].

3. Using the claim form obtained in procedure 2, compared the name and amount to invoices, and if applicable, receiving reports, provided by XYZ Company.

No exceptions were found as a result of this procedure.

We were engaged by [the engaging party, for example, XYZ Company] to perform this agreed-upon procedures engagement and conducted our engagement in accordance with attestation standards established by the AICPA. We were not engaged to and did not conduct an examination or review engagement, the objective of which would be the expression of an opinion or conclusion, respectively, on [identify the subject matter, for example, the claims of creditors of XYZ Company as of May 31, 20XX, as set forth in the accompanying Schedule A]. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.

We are required to be independent of XYZ Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements related to our agreed-upon procedures engagement.

This report is intended solely for the information and use of [identify the specified parties, for example, XYZ Company and the Trustee of XYZ Company], and is not intended to be, and should not be, used by anyone other than these specified parties.



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Example 4: Practitioner’s Agreed-Upon Procedures Report in Which Procedures Are Specified in Regulation


• The engaging party has agreed to the procedures and acknowledged that the procedures

are appropriate for the intended purpose of the engagement.

• The procedures are prescribed in regulation.

• The practitioner has determined to restrict the use of the agreed-upon procedures report

to the engaging party and the regulator.



We have performed the procedures enumerated below on [identify the subject matter, for example, the financial accounts of the engaging party during the year ended December 31, 20XX]. [The responsible party] is responsible for [the subject matter].

[The engaging party] has agreed to and acknowledged that the procedures performed are appropriate to meet the intended purpose of [identify the intended purpose of the engagement, for example, assisting users in understanding the financial accounts of the engaging party during the year ended December 31, 20XX]. This report may not be suitable for any other purpose. The procedures performed may not address all the items of interest to a user of this report and may not meet the needs of all users of this report and, as such, users are responsible for determining whether the procedures performed are appropriate for their purposes.


[Include paragraphs to describe the procedures performed detailing the nature and extent, and if applicable, the timing, of each procedure and to describe the findings from each procedure performed, including sufficient details on exceptions found.]

We were engaged by [the engaging party] to perform this agreed-upon procedures engagement and conducted our engagement in accordance with attestation standards established by the AICPA. We were not engaged to and did not conduct an examination or review engagement, the

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objective of which would be the expression of an opinion or conclusion, respectively, on [identify the subject matter]. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.

We are required to be independent of [the responsible party] and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements related to our agreed-upon procedures engagement.

This report is intended solely for the information and use of [identify the specified parties, for example, the engaging party and the State of XXX], and is not intended to be, and should not be, used by anyone other than these specified parties.





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Second edition, updated April 15, 2020

Created April 3, 2020

©2020 American Institute of Certified Public Accountants Inc. All rights reserved.

For information about the procedure for requesting permission to make copies of any part of this work, please email copyright‐permissions@aicpa‐cima.com with your request.

Table of Contents Introduction .............................................................................................................................................. 4

General Accounting, Auditing, and Reporting Matters ............................................................................. 4

Risks and Uncertainties ......................................................................................................................... 4

Financial Reporting Considerations Related to COVID‐19 ................................................................. 4

What should auditors be aware of as it relates to disclosures of risks and uncertainties related to COVID‐19? ......................................................................................................................................... 6

Subsequent Events ................................................................................................................................ 6


What should auditors keep in mind as it relates to subsequent events disclosures related to COVID‐19? ......................................................................................................................................... 8

Going Concern ...................................................................................................................................... 9


What about auditing going concern assumptions and disclosures related to COVID‐19? ................. 9

What if management is struggling with some of the assumptions and forecasts related to going concern given the volatility of our current environment? .............................................................. 10

Audit and Auditor Reporting Specific Matters ........................................................................................ 11

Inventory Observations ....................................................................................................................... 11

What if my client’s warehouses are closed down during COVID‐19 and they are unable to perform their year‐end inventory counts? .................................................................................................... 11

What could auditors do if they are unable to attend (in person) a client’s inventory counts due to travel restrictions caused by COVID‐19? ......................................................................................... 11

Can auditors use cameras and other technologies to observe inventory if they are unable to attend in person? ............................................................................................................................ 12

After considering the options above, what if the auditor still is unable to attend the inventory counts virtually or perform alternative procedures? ...................................................................... 12

Fraud Inquiries .................................................................................................................................... 12

What about fraud risk during these uncertain times? ..................................................................... 12

What if the auditor is unable to conduct fraud interviews in person with the client due to the impacts of COVID‐19? ..................................................................................................................... 13

Access to Books and Records .............................................................................................................. 13

What if the auditor has trouble gaining access to the client’s books and records during the pandemic?....................................................................................................................................... 13

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Internal Control ................................................................................................................................... 13

What should auditors be thinking about with regard to a client’s internal control with many audits taking place remotely due to travel and social distancing restrictions? .......................................... 13

Use of SOC 1® Reports by User Auditors [New] .................................................................................. 14

What are the requirements for an auditor when an entity uses a service organization as part of its system of internal control? ............................................................................................................. 14

Can an understanding of the nature of services provided by a service organization be obtained remotely? ........................................................................................................................................ 15

Is it necessary to obtain a SOC 1 report in all cases when an entity outsources to a service organization functions that are integral to its business operations? .............................................. 15

Can user auditors obtain the required understanding of the design and implementation of controls at the service organization when a SOC 1 report is delayed or not available? .................. 15

Can user auditors obtain sufficient appropriate audit evidence about the operating effectiveness of controls at the service organization when a SOC 1 type 2 report is delayed or not available? ... 16

Use of External Confirmations ............................................................................................................ 17

How should auditors handle situations where responses to account confirmations might be limited due to COVID‐19? ............................................................................................................... 17

Is it permissible for auditors to send electronic account confirmations in lieu of traditional paper ones? ............................................................................................................................................... 17

Planning Meetings .............................................................................................................................. 17

How should auditors perform audit planning in the current environment? ................................... 17

Management Representation Letters ................................................................................................. 18

Should auditors be adding additional representations related to COVID‐19 to the management representation letter? ..................................................................................................................... 18

What if my client in unable to provide the signed original management representation letter with an original signature on their company letterhead? ....................................................................... 18

Emphasis‐of‐Matter Paragraphs and Types of Auditor’s Reports ....................................................... 19

Should auditors be including emphasis‐of‐matter paragraphs related to COVID‐19 in their audit reports? ........................................................................................................................................... 19

What if the auditor encounters situations where an unmodified auditor’s report is not appropriate? What type of auditor’s report should be issued? ...................................................... 19

Accountant’s Compilation Report ........................................................................................................... 20

Modified Compilation Reports [New] ................................................................................................. 20

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Should a separate paragraph be included in the accountant’s compilation report on financial statements that omit substantially all the disclosures required by U.S. GAAP disclosing uncertainties related to COVID‐19? ................................................................................................ 20

Accounting and Financial Reporting Specific Matters ............................................................................. 20

Fair Value of Investments ................................................................................................................... 20

Financial Reporting Considerations Related to COVID‐19 ............................................................... 20

Asset Impairments .............................................................................................................................. 21


Unusual or Infrequent Events ............................................................................................................. 25


Deferred Tax Assets ............................................................................................................................ 26


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FAQs — Audit Matters and Auditor Reporting Issues Related to COVID‐19

Introduction In our desire to serve AICPA members in the United States and throughout the world during this pandemic, and the public in general, the following list of representative frequently asked questions (FAQs) and topics has been compiled to aid (1) practitioners as they perform audit engagements in these uncertain times, and (2) preparers of financial statements. The guidance offered in this document is not applicable to preparation and issuance of audit reports within the jurisdiction of the Public Company Accounting Oversight Board (PCAOB). Additionally, this document does not focus on accounting, disclosure, and reporting nuances for public companies.

This document provides nonauthoritative guidance on accounting and auditing matters as develop by AICPA staff. Official AICPA positions are determined through certain specific committee procedures, due process, and extensive deliberation. The AICPA staff views expressed in this report are intended to provide member services, but not for the purposes of providing accounting services or practicing public accounting. The AICPA makes no warranties or representations concerning the accuracy of information issued.

This document will be updated as additional questions are collected through various AICPA sources and channels.

General Accounting, Auditing, and Reporting Matters

Risks and Uncertainties

Financial Reporting Considerations Related to COVID‐19

Financial Accounting Standards Board (FASB) Accounting Standards Codification® (ASC) 275, Risks and Uncertainties, requires disclosures that focus primarily on risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term or the near‐term

Please note the following FAQs are new as of April 15, 2020:

Use of SOC 1® Reports by User Auditors

Accountant’s Compilation Report — Modified Compilation Reports

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functioning of the reporting entity. The risks and uncertainties addressed can stem from the nature of an entity’s operations, the use of significant estimates, and current vulnerabilities due to certain concentrations. The effects of COVID‐19 may negatively impact significant estimates and exacerbate a vulnerability due to certain concentrations (e.g., business concentration in a market or geographical area severely affected by the effects of COVID‐19), as discussed in the following paragraphs.

Significant Estimates. FASB ASC 275‐10‐50‐8 states that:

Disclosure regarding an estimate shall be made when known information available before the financial statements are issued or are available to be issued … indicates that both of the following criteria are met:

a. It is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events.

b. The effect of the change would be material to the financial statements.

Current Vulnerabilities Due to Certain Concentrations. FASB ASC 275‐10‐50‐16 states that:

Vulnerability from concentrations arises because an entity is exposed to risk of loss greater than it would have had it mitigated its risk through diversification. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. Financial statements shall disclose the concentrations described in paragraph 275‐10‐50‐18 if, based on information known to management before the financial statements are issued or are available to be issued…, all of the following criteria are met:

a. The concentration exists at the date of the financial statements. b. The concentration makes the entity vulnerable to the risk of a near‐term severe impact. c. It is at least reasonably possible that the events that could cause the severe impact will

occur in the near term.

FASB ASC 275‐10‐50‐18 provides the following examples of concentrations that should be disclosed if they meet the preceding criteria:

a. Concentrations in the volume of business transacted with a particular customer, supplier, lender, grantor, or contributor. The potential for the severe impact can result, for example, from total or partial loss of the business relationship. For purposes of this Subtopic, it is always considered at least reasonably possible that any customer, grantor, or contributor will be lost in the near term.

b. Concentrations in revenue from particular products, services, or fund‐raising events. The potential for the severe impact can result, for example, from volume or price changes or the loss of patent protection for the particular source of revenue.

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c. Concentrations in the available sources of supply of materials, labor, or services, or of licenses or other rights used in the entity's operations. The potential for the severe impact can result, for example, from changes in the availability to the entity of a resource or a right.

d. Concentrations in the market or geographic area in which an entity conducts its operations. The potential for the severe impact can result, for example, from negative effects of the economic and political forces within the market or geographic area. For purposes of this Subtopic, it is always considered at least reasonably possible that operations located outside an entity's home country will be disrupted in the near term.

Examples of concentrations that are likely to be affected by COVID‐19 include specific markets or geographical areas in which the entity conducts its operations, diminishing volume of transactions with a particular customer or a supplier, or limited supply of material or availability of labor or services.

What should auditors be aware of as it relates to disclosures of risks and uncertainties related to COVID‐19?

FASB ASC 275 requires disclosures that focus primarily on risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term or the near‐term functioning of the reporting entity. The risks and uncertainties addressed can stem from the nature of an entity’s operations, the use of significant estimates, and current vulnerabilities due to certain concentrations. The effects of COVID‐19 may meaningfully impact significant estimates and exacerbate a vulnerability due to certain concentrations (e.g., business concentration in a market severely affected by the effects of COVID‐19). Finally, COVID‐19 may pose risks to the actual functioning of entities in certain industries (e.g., restaurants, hotels, airlines, etc.).

Due to the effects of COVID‐19, for entities with year‐ends that fall after the declaration of the state of emergency, the necessity for and robustness of the disclosures may require additional scrutiny by the auditor.

Subsequent Events


Entities may need to evaluate whether the consequences of COVID‐19 represent subsequent events. FASB ASC 855, Subsequent Events, defines subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.1 There are two types of subsequent events:

1 Financial Accounting Standards Board Accounting Standards Codification® 855, Subsequent Events, requires that, when a reporting entity meets either of the following criteria, subsequent events need to be evaluated through the date that the financial statements are issued:

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The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events).

The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (that is, nonrecognized subsequent events).

For calendar year‐end 2019 financial statements, any COVID‐19 related subsequent events identified likely are to be nonrecognized subsequent events.

Some nonrecognized subsequent events may be of such a nature that financial statement disclosure is required to keep the statements from being misleading. In these situations, financial statements need to include disclosure of the following:

The nature of the event or events

An estimate of the financial statement effect of the event or events, or a statement that the estimate cannot be made

Occasionally such an event may be so significant that disclosure can best be made by supplementing the historical financial statements with pro forma financial data giving effect to the event as if it had occurred on the date of the balance sheet. It may be desirable to present pro forma statements, usually a balance sheet only, in columnar form on the face of the historical statements.

Judgment is required and each entity will need to carefully evaluate its relevant facts and circumstances to determine the appropriate treatment for events related to COVID‐19, and determine whether COVID‐19 is viewed as a current period event based on their financial reporting year end.

Subsequent Events — Market‐Value Declines

Given the recent stock market volatility, consider the guidance in paragraph .06 of Q&A section 9070, Subsequent Events, of Technical Questions and Answers:

The reporting entity is an SEC filer

The reporting entity is a conduit bond obligor for conduit debt securities that are traded in a public market

When a reporting entity does not meet either of the above‐noted criteria (e.g., typical private company), subsequent events need to be evaluated through the date that the financial statements are available to be issued.

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Refer to the AICPA CPEA Special Report "Consequences of COVID‐19: Illustrative Public Company Disclosures" and the AICPA CPEA Special Report “Consequences of COVID‐19” for examples of financial statement subsequent events disclosures as of mid‐March 2020.

What should auditors keep in mind as it relates to subsequent events disclosures related to COVID‐19?

In complying with the requirements of AU‐C section 560,2 Subsequent Events and Subsequently Discovered Facts, the overall objectives of the auditor are to

obtain sufficient appropriate audit evidence about whether subsequent events are appropriately recognized and disclosed in the financial statements.

respond appropriately to facts that become known after the audit report date that, had they been known to the auditor as of the report date, may have caused the auditor to revise the report.

For audits of calendar year‐end 2019 financial statements, any COVID‐19 related subsequent events identified likely will be events that provide evidence of conditions that arose after the date of the financial statements (historically referred to as type II events). Although not requiring recognition in the financial statements, subsequent event disclosures may be required. If appropriate disclosure of

2 All AU‐C sections can be found in AICPA Professional Standards.

TQA 9070.06

Decline in Market Value of Assets Subsequent to the Balance Sheet Date

Inquiry—In light of overall market decline, should the decline in market value of an asset subsequent to the balance sheet date result in the adjustment of the financial statements?

Reply—FASB ASC 855-10-25-1 states that “[a]n entity shall recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.”

FASB ASC 855-10-25-3 states that “[a]n entity shall not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued.”

FASB ASC 855-10-55-2 provides a list of examples of nonrecognized subsequent events, including changes in the fair value of assets or liabilities (financial or nonfinancial) after the balance sheet date but before financial statements are issued

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https://www.aicpa.org/content/dam/aicpa/interestareas/centerforplainenglishaccounting/resources/2020/special-report-2-covid-19-disclosures-20200330.pdf

https://www.aicpa.org/content/dam/aicpa/interestareas/centerforplainenglishaccounting/resources/2020/cpea-covid-alert-20200318.pdf

https://www.aicpa.org/research/standards/auditattest/clarifiedsas.html



subsequent events is not made in the financial statements, a modified auditor’s opinion may be appropriate.

Many entities with year‐ends after December 2019 will have pandemic‐related events that may require an adjustment to the financial statements or additional disclosures (historically referred to as type I events). Auditors will have to work with clients to ensure any subsequent events have been accurately identified and reflected in the financial statements as required by FASB ASC 855. If management is either unable or unwilling to identify those events and properly reflect them in the financial statements, this could result in a modification to the auditors’ opinion.

Going Concern


FASB ASC 205‐40 requires management to evaluate an entity’s ability to continue as a going concern within one year after the date the financial statements are issued (or available to be issued, when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Disclosures in the notes to the financial statements are required if management concludes that substantial doubt exists or that its plans alleviate that substantial doubt.

The ability of an entity to continue as a going concern is affected by many factors, including the industry and geographic area in which the entity operates, the financial health of customers and suppliers of the entity, and the accessibility to financing that is available for the entity. The consequences of COVID‐19 may impact those factors and may cause a deterioration in an entity’s operating results and financial position. As such, entities and practitioners may need to consider recent pertinent information related to their assessments of going concern.

The look‐forward period is one year from the date the financial statements are issued (or available to be issued, when applicable). With circumstances changing hourly due to COVID‐19, and severe impacts in some industries (restaurants, entertainment, airlines, etc.), management’s evaluation of conditions or events that may have an effect on the entity’s ability to continue as a going concern under U.S. generally accepted accounting principles (U.S. GAAP) could be extremely difficult.

Refer to the AICPA CPEA Special Report "Consequences of COVID‐19: Illustrative Public Company Disclosures" and the AICPA CPEA Special Report “Consequences of COVID‐19” for an example of financial statement going concern disclosures as of mid‐March 2020.

What about auditing going concern assumptions and disclosures related to COVID‐19?

The ability of an entity to continue as a going concern is affected by many factors, including the industry and geographic area in which the entity operates, the financial health of customers and

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https://www.aicpa.org/content/dam/aicpa/interestareas/centerforplainenglishaccounting/resources/2020/special-report-2-covid-19-disclosures-20200330.pdf

https://www.aicpa.org/content/dam/aicpa/interestareas/centerforplainenglishaccounting/resources/2020/cpea-covid-alert-20200318.pdf


suppliers of the entity, and the accessibility to financing that is available for the entity. The consequences of COVID‐19 may impact those factors and may cause a deterioration in an entity’s operating results and financial position. As such, entities and auditors may need to consider recent pertinent information related to their assessments of going concern.

Management is required by U.S. GAAP to determine the appropriateness of preparing its financial statements on the basis of a going concern. The look‐forward period for auditors pursuant to AU‐C section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, is one year from the date the financial statements are issued (or available to be issued) unless otherwise specified by the financial reporting framework. With circumstances changing rapidly due to COVID‐19 and severe impacts in some industries (restaurants, entertainment, airlines, etc.), management’s evaluation of conditions or events that may have an effect on the entity’s ability to continue as a going concern under U.S. GAAP may likely be difficult.

In some cases, management’s ability to evaluate going concern issues could cause difficulty in complying with the relevant U.S. GAAP requirements (FASB ASC 205, Presentation of Financial Statements, and, more specifically, FASB ASC 205‐40). When management performs an evaluation of the entity’s ability to continue as a going concern, but auditors are unable to gain access to that information or believe the supporting documentation is inaccurate or incomplete, auditors need to consider a scope limitation or other modification of the auditor’s opinion.

If, after considering management’s evaluation of going concern, the auditor concludes that substantial doubt about the entity’s ability to continue as a going concern has been alleviated by management’s plans, then the auditor should evaluate whether the financial statements include adequate disclosure of management’s plans and, if adequate, an unmodified auditor’s report may be appropriate.

If auditors conclude that use of the going concern basis of accounting is appropriate, but substantial doubt about the entity’s ability to continue as a going concern remains, then the auditor’s report, modified to add an emphasis‐of‐matter (EOM) paragraph in accordance with paragraphs .24–.25 of AU‐C section 570, should be issued.

If the financial statements have been prepared on the going concern basis and auditors conclude that use of the going concern basis of accounting is inappropriate, then the auditor should express an adverse opinion.

What if management is struggling with some of the assumptions and forecasts related to going concern given the volatility of our current environment?

Auditors should keep in mind that management’s assumptions are just that and, in these times of uncertainty, making some of these evaluations or forecasts might be difficult so, in many cases, management’s best estimate would be acceptable and may not result in a scope limitation.

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Audit and Auditor Reporting Specific Matters

Inventory Observations

What if my client’s warehouses are closed down during COVID‐19 and they are unable to perform their year‐end inventory counts?

If clients are unable to perform physical inventory counts at year‐end due to unforeseen circumstances, they might decide to perform those physical counts on an alternative date. Auditors may be able to observe the rescheduled counts and perform additional audit procedures on intervening transactions. If the physical inventory counts are to take place at a later date than originally scheduled, auditors will have to perform additional procedures such as reviewing and testing inventory rollforwards. For businesses that have closed storefronts and warehouses, this may not be a difficult task because there may be very few receipts or shipments coming in if facilities have been closed between year‐end and the count date.

Another traditional alternative procedure can be performed if the client is using a cycle count procedure and a perpetual inventory system. A cycle count procedure relates to the client essentially having an internal control in place where, on a periodic basis, many times quarterly, they conduct their own test counts of just a portion of inventory. And, then, the client goes back to its perpetual system and prepares the counts, making any corrections as necessary to the general ledger.

Auditors may need to perform procedures to obtain assurance that client inventory locations have in fact been locked down for a period of time. This might include obtaining live feeds of security camera footage taken of the retail locations and warehouses during that time and reviewing shipping and receiving records during that time to ensure movement was minimal.

What could auditors do if they are unable to attend (in person) a client’s inventory counts due to travel restrictions caused by COVID‐19?

AU‐C section 501,3 Audit Evidence—Specific Considerations for Selected Items, notes that, if inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by attending physical inventory counting, unless impracticable, and perform audit procedures over the entity's final inventory records to determine whether they accurately reflect actual inventory count results. We believe the COVID‐19 pandemic may be considered a circumstance rendering in‐person attendance during physical inventory counting impracticable.

In some cases, clients may be able to perform the usual physical inventory counts, but auditors are unable to attend due to travel restrictions. In those cases, auditors may take advantage of technologies

3 See footnote 2.

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including camera systems with live video feeds, to observe inventory counts. Of course, auditors should be aware that procedures that can be performed virtually might be a bit more limited and may pose additional audit risks that will need to be addressed. When there are multiple inventory locations, auditors will need to address control of inventory counts to obtain evidence that inventory wasn’t moved from one location to another during the inventory counts. If the audit risks cannot be reduced to an acceptable level, this will pose a scope limitation.

Can auditors use cameras and other technologies to observe inventory if they are unable to attend in person?

The auditing standards do not prohibit use of technology when performing inventory observations. If auditors are satisfied with the inventory counting process, they may be able to utilize technologies to observe these counts. Of course, auditors may need to ensure there is some level of comfort that the videos are live feeds of client inventory locations, perhaps, for example, by confirming visually with key staff and using voice technology to have cameras moved to specified locations on command and direct certain boxes to be opened.

After considering the options above, what if the auditor still is unable to attend the inventory counts virtually or perform alternative procedures?

In cases where clients are unable to perform a physical inventory count at year‐end or auditors are unable to obtain sufficient appropriate audit evidence that those counts were conducted properly (either unable to attend physical counts in person or remotely, or unable to test rollforward of inventory from balance sheet date to inventory observation date), these issues likely will present scope limitations that will impact auditor reports. In cases where inventory balances are material but are not pervasive, this will result in qualified audit opinions.

Some alternatives auditors might discuss with clients include issuing qualified opinions now and, then, performing agreed‐upon procedures engagements on inventory after travel restrictions ease or perhaps if not already having been engaged to perform an audit, having clients discuss with financial statement users whether review engagements would be sufficient for the year‐end, supplemented with agreed‐upon procedures on inventory after year‐end when counts can be taken. Of course, auditors should follow the guidance in paragraphs .14–.15, and .A35–.A39 of AU‐C section 210, Terms of Engagement, when considering changing the terms of the engagement.

Fraud Inquiries

What about fraud risk during these uncertain times?

Auditors should be on higher alert for fraud risks given these uncertain times. For companies that have laid off key personnel and with work forces moving out of the typical office environment, there could be a breakdown in internal control. Auditors may need to adjust audit procedures as necessary to help appropriately address any potential fraud risks that could have a material effect on the financial statements.

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What if the auditor is unable to conduct fraud interviews in person with the client due to the impacts of COVID‐19?

AU‐C section 240, Consideration of Fraud in a Financial Statement Audit, lays out a number of requirements and procedures that may be more challenging in a remote audit. For example, auditors still will need to carry out an appropriate discussion among the engagement team in order to understand what fraud risk factors may be affecting the entity in this environment. Paragraph .A17 of AU‐C section 240 indicates that inquiries of management and others within the entity are generally most effective when they involve an in‐person discussion. However, due to the current circumstances related to the pandemic, these inquiries could be done via video conferencing technology. The key consideration is whether the manner in which the inquiries are made allow the auditor to “read the body language” of the person to whom the inquiries are directed. So, when fraud interviews cannot be performed in person, use of video conferencing would be preferable to audio‐only conferencing because auditors would be able to see body language.

Access to Books and Records

What if the auditor has trouble gaining access to the client’s books and records during the pandemic?

During the pandemic, accessing client books and records may present hurdles for some auditors, especially in cases where clients still maintain mostly paper records. Auditors may be able to obtain client‐prepared copies or scans of key records, but auditors need to consider the authenticity of those records and perhaps perform additional audit procedures to be satisfied that those records are complete, accurate, and authentic.

In cases where auditors are unable to access client books and records, auditors may have to inform clients that audits cannot be completed until books and records can be accessed.

In cases where clients are required to have audited financial statements before specific dates, perhaps due to bank covenant requirements, auditors may want to encourage clients to contact users of the financial statements, such as bank credit officers, as soon as possible to see if waivers or extensions can be obtained.

Internal Control

What should auditors be thinking about with regard to a client’s internal control with many audits taking place remotely due to travel and social distancing restrictions?

In an ever‐changing and somewhat unstable environment, auditors should inquire about any changes in the client system of internal control since the time that preliminary work was performed. In many cases, those controls may have changed dramatically, and procedures may have been changed to accommodate remote work forces and process flows. In such cases, auditors would need to evaluate how much reliance can be placed on those controls that were only in effect for a portion of the year.

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If client sites are closed and auditors are unable to perform audits on‐site, performing walkthroughs and certain tests of internal control will be challenging. In these cases, auditors may not be able to rely on controls and may have to increase substantive testing.

An understanding of internal control assists auditors in identifying types of potential misstatements and factors that affect the risks of material misstatement and in designing the nature, timing, and extent of further audit procedures. Even when auditors have no plans to rely on the operating effectiveness of controls, auditors still are required to obtain an understanding of internal control relevant to audits and to determine that those controls have been placed in operation. Obtaining an understanding of controls may be achieved remotely; however, inquiry alone is not sufficient to determine whether such controls have been placed in operation. As such, auditors need to consider what evidence can be obtained remotely to determine if effectively designed controls have been placed in operation. If auditors are unable to obtain sufficient appropriate audit evidence to perform and complete the risk assessment process, then auditors may have scope limitations.

Use of SOC 1® Reports by User Auditors [New]

What are the requirements for an auditor when an entity uses a service organization as part of its system of internal control?

Among the many consequences of COVID‐19 are the additional challenges auditors may face when auditing the financial statements of an entity that outsources functions to a third party that are integral to its business operations.

AU‐C section 402, Audit Considerations Related to an Entity Using a Service Organization,4 requires a user auditor, among other things, to obtain an understanding of the following:

The nature and significance of the services provided by the service organization and their effect on the user entity's internal control relevant to the audit.

The design and implementation of controls at the service organization, depending on the nature and significance of such services.

If the user auditor plans to rely on controls at the service organization, the operating effectiveness of controls at the service organization.

The understanding should be sufficient to enable the user auditor to assess the risks of material misstatement and design the nature, timing, and extent of further audit procedures in the audit of the entity’s financial statements.

4 See footnote 2.

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Many user auditors rely on a SOC 1 report on the controls at a service organization to obtain the required understanding. However, as a result of the recent pandemic, the issuance of SOC 1 reports may be delayed or such reports may not be available.

Can an understanding of the nature of services provided by a service organization be obtained remotely?

Obtaining an understanding of the nature of the services provided by the service organization and their effect on the user entity's internal control relevant to the audit may be obtained remotely. For example, the user auditor may be able to obtain and read one or more of the following:

User manuals

System overviews

Technical manuals

Contract or service level agreement between the user entity and the service organization

Reports by service organizations, internal auditors, or regulatory authorities on controls at the service organization

Although the user auditor is likely to be able to obtain information about the design of controls from reading many of the same aforementioned documents, merely reading many of those documents will not provide the user auditor with evidence about whether such controls were suitably designed and implemented at the service organization.

Is it necessary to obtain a SOC 1 report in all cases when an entity outsources to a service organization functions that are integral to its business operations?

If there is a high degree of interaction between the user entity and the service organization (for example, a payroll processor), the user entity may have implemented effective controls over the transactions processed by the service organization. In that case, the user auditor may not find it necessary to obtain an understanding of controls at the service organization, and a SOC 1 report may not be necessary. Instead, the user auditor may test controls at the entity to obtain evidence about their design and implementation.

In other situations, there may be a lower degree of interaction between the user entity and the service organization (for example, a broker dealer that buys and sells securities based on a trust account). Because the service organization may be both initiating the transactions and maintaining accountability for them, it may be necessary to obtain an understanding of the design and implementation of controls at the service organization.

Can user auditors obtain the required understanding of the design and implementation of controls at the service organization when a SOC 1 report is delayed or not available?

If a SOC 1 report is not available and the nature of the services provided by the service organization are significant to the audit, obtaining an understanding of the design and implementation of controls at the service organization may be more challenging in the midst of social distancing restrictions. If a SOC

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1 report is not available, the user auditor should discuss with senior management the expected date of receipt of the SOC 1 report and emphasize the need for it.

If it is unlikely that the report will be available in a timely manner, the user auditor may consider what other procedures might be performed to obtain evidence about the design and implementation of controls at the service organization. Because visiting, or having another auditor visit, the service organization to perform procedures is likely to be impracticable as long as travel restrictions and social distancing requirements are in place, the user auditor may consider obtaining and reading the prior‐period SOC 1 report and performing the following procedures for the gap period:

Contacting relevant individuals at the service organization, through the user entity, and making inquiries (these inquiries should be documented) about the following: — Significant changes within the system (including relevant system controls); including

procedures or controls that changed to accommodate employees working remotely and process flows

— System events that affected the service organization’s ability to achieve its service commitments to users

• Reading system documentation and any amendments to contracts or service level agreements from the service organization to the user entity that address significant system changes

• Reading communications from the service organization to the user entity about its COVID‐19 responses and the effects on the system

If, in the user auditor’s professional judgment, sufficient appropriate evidence to determine if effectively designed controls were placed in operation has not been obtained, the user auditor may have a scope limitation.

Can user auditors obtain sufficient appropriate audit evidence about the operating effectiveness of controls at the service organization when a SOC 1 type 2 report is delayed or not available?

If the user auditor has historically elected to test controls at the service organization and wishes to continue to do so, the user auditor will need to obtain a SOC 1 type 2 report. If a SOC 1 type 2 report is not available at the time of the audit, the user auditor should discuss with senior management the date by which the report is expected to be received. Depending on the expected delay, the user auditor may discuss with senior management whether it is feasible to delay the issuance of the auditor’s report on the entity’s financial statements until the SOC 1 type 2 report has been received and any matters arising from the use of the report have been addressed. In cases when the entity is required to have audited financial statements before a specific date, the user auditor may want to encourage senior management to contact users of the audited financial statements, such as bank credit officers, as soon as possible to see if waivers or extensions can be obtained.

If it is unlikely that the SOC 1 type 2 report will be received, the user auditor may be unable to rely on the operating effectiveness of controls at the service organization. In that case, the user auditor should consider revising the audit strategy to a substantive procedures approach where reliance on controls

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operating effectively is not anticipated. If an entirely substantive procedures approach will not provide sufficient appropriate audit evidence (that is, substantive procedures alone are not sufficient) and a SOC 1 type 2 report is not available, the user auditor may have a scope limitation.

Use of External Confirmations

How should auditors handle situations where responses to account confirmations might be limited due to COVID‐19?

As noted in AU‐C section 505, External Confirmations, depending on the circumstances of the audit, audit evidence in the form of external confirmations received directly by auditors from confirming parties may be more reliable than evidence generated internally by the entity. In cases where a client site has been shut down or key staff are no longer on‐site, obtaining external confirmations could be an alternative way to obtain audit evidence. However, there could be situations in which those audit confirmations are not completed and sent back to the auditors, perhaps due to the respondent’s office closures or mail issues. In such cases, auditors would have to design additional audit procedures to gain sufficient appropriate audit evidence related to the relevant assertions for the particular account balance or class of transaction for which confirmation was requested.

Typically, if auditors are able to design and perform additional tests of those relevant assertions, non‐receipt of confirmations in and of itself should not result in a scope limitation. However, if auditors are unable to obtain sufficient audit evidence through review of the client books and records and are relying on receipt of audit confirmations as a key source of audit evidence, the non‐receipt of those confirmations could result in a scope limitation (where balances are material to the financial statements).

Is it permissible for auditors to send electronic account confirmations in lieu of traditional paper ones?

Due to increasing business closures and movement to telecommuting models, auditors may consider sending electronic confirmations rather than paper confirmations. Some firms may have process flow software where this could be done quite easily and might result in a better response rate. Asking clients to contact their vendors and suppliers in advance may be prudent to understand the best way to contact these parties in the current environment. Additionally, auditors should be aware that although oral confirmations may be the fastest and most effective way to obtain evidence about account balances, they would be considered akin to an inquiry of a third party. In considering procedures, firms also should consider that, given sensitivity to cash flow in certain parts of the economy, more accounts receivable may remain outstanding when audit procedures are performed than in prior audits.

Planning Meetings

How should auditors perform audit planning in the current environment?

The first standard of fieldwork indicates that, "the auditor must adequately plan the work and must properly supervise any assistants.” Auditors should take note that remote working does not excuse

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having required audit planning meetings. Auditors should ensure they still are holding these discussions as needed and having substantive discussions on engagement risks with the engagement team prior to commencing audit fieldwork.

Management Representation Letters

Should auditors be adding additional representations related to COVID‐19 to the management representation letter?

During this pandemic, additional representations could be added to the management representation letter, depending upon the particular circumstances of an engagement. Those additional representations may relate to the going concern assumption, subsequent events, risks and uncertainties, fraud, and significant estimates, among others.

What if my client in unable to provide the signed original management representation letter with an original signature on their company letterhead?

Using electronic means to obtain signed management representation letters is acceptable if auditors can obtain appropriate evidence of management’s receipt and acknowledgment of the representations. In other words, confirmation that the signatory knowingly and willingly signed the representation letter. Whether auditors accept electronic signatures, scanned images of signatures, and so on, is a matter of firm risk management practices as well as applicable state laws or regulations addressing legal acceptability of electronic signatures.

On a recent AICPA webcast, participants asked whether it was acceptable for management representation letters to be on “plain paper” rather than on company letterhead. The standards do not require use of client letterhead. However, as a matter of best practice, it might be prudent for companies to note the company name and address at the top of the letter.

Depending on what is omitted from management’s representation letter, the failure to obtain all representations does not necessarily result in a scope limitation. If management does not provide one or more of the requested written representations, auditors should

discuss the matter with management;

re‐evaluate the integrity of management and evaluate the effect this may have on the reliability of representations (verbal or written) and audit evidence in general; and

take appropriate actions, including determining the possible effect on the opinion in the auditor's report in accordance with AU‐C section 705A, Modifications to the Opinion in the Independent Auditor’s Report.

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Emphasis‐of‐Matter Paragraphs and Types of Auditor’s Reports

Should auditors be including emphasis‐of‐matter paragraphs related to COVID‐19 in their audit reports?

Auditors may conclude that an event has such a material impact on the entity that it would be appropriate to include an emphasis‐of‐matter (EOM) paragraph in the auditor’s report directing the reader’s attention to the event and its effects. As paragraph .06 of AU‐C section 706A, Emphasis‐of‐Matter Paragraphs and Other‐Matter Paragraphs in the Independent Auditor’s Report, notes, EOM paragraphs are included in the auditor’s report if the auditor considers it necessary to draw users’ attention to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s professional judgment, is of such importance that it is fundamental to users’ understanding of the financial statements.

Paragraph .A2 of AU‐C section 706A indicates that a major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position is an example of circumstances when auditors may consider it necessary to include an EOM paragraph. Whether the COVID‐19 pandemic constitutes a major catastrophe for the client is a matter of the auditor’s professional judgment.

What if the auditor encounters situations where an unmodified auditor’s report is not appropriate? What type of auditor’s report should be issued?

In situations where auditors encountered misstatements of the financial statements or scope limitations, auditors may find the following table from paragraph .A1 of AU‐C section 705A helpful.

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Accountant’s Compilation Report

Modified Compilation Reports [New]

Should a separate paragraph be included in the accountant’s compilation report on financial statements that omit substantially all the disclosures required by U.S. GAAP disclosing uncertainties related to COVID‐19?

Accountants are permitted to issue a compilation report on financial statements that omit substantially all disclosures required by a financial reporting framework (accounting principles generally accepted in the United States of America, or U.S. GAAP, is a commonly used financial reporting framework) if the omission of the disclosures is not undertaken with the intention of misleading the users of such financial statements. The accountant’s report is required to include a statement that the financial statements are not designed for those who are not informed about the matters that would have been disclosed had the omitted disclosures been included in the financial statements.

The accountant may, using professional judgment, add a separate paragraph in the accountant’s compilation report addressing an unrecognized subsequent event related to the COVID‐19 pandemic to reduce the risk that a user may be misled by such the financial statements even if the subsequent event is not disclosed in the financial statements. Such a statement may read as follows:

The Company expects the economic uncertainties resulting from the COVID‐19 pandemic to negatively impact its operating results. However, the related financial impact and duration cannot be reasonably estimated at this time.

Accounting and Financial Reporting Specific Matters

Fair Value of Investments


If an entity reports its investments at fair value in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification® (ASC) 820, Fair Value Measurement, it would not be appropriate to disregard observable market prices at the measurement date unless those prices are from transactions that are not orderly.

FASB ASC 820 establishes a framework for measuring fair value when U.S. generally accepted accounting principles (U.S. GAAP) requires or permits a fair value measurement. Fair value is defined in FASB ASC 820 as "[t]he price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." FASB ASC 820‐10‐35‐41 indicates that "[a] quoted price in an active market provides the most reliable evidence of fair value and shall be used without adjustment to measure fair value whenever available, except as specified in paragraph 820‐10‐35‐41C." In other words, if a

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security trades in an active market at the measurement date, its fair value will equal the quoted price.

FASB ASC 820 defines active market as “[a] market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis” and does not provide bright lines or rules of thumb for what constitutes an active market. To assist entities with determining fair value in periods of market disruption, paragraphs 54C–54H of FASB ASC 820‐10‐35 provide guidance on measuring fair value when the volume or level of activity for an asset or a liability has significantly decreased. In situations when there has been a significant decrease in the volume or level of activity, it may be appropriate to consider other valuation techniques in estimating the fair value.

As indicated in FASB ASC 820‐10‐35‐54H, “[a] reporting entity’s intention to hold the asset or to settle or otherwise fulfill the liability is not relevant when measuring fair value because fair value is a market‐based measurement, not an entity‐specific measurement.”

FASB ASC 820‐10‐35‐54I lists circumstances that may indicate a transaction is not orderly, whereas FASB ASC 820‐10‐35‐54J provides guidance on how to consider such transitions.

Estimating fair value requires significant judgment in normal circumstances. However, in the current environment characterized by market volatility and an uncertain outlook, applying judgement in determining fair value will be even more challenging.

Asset Impairments


Among the many consequences of COVID‐19, impacts such as business and production disruptions, supply chain interruptions, negative impacts on customers, volatility in the equity and debt markets, reduced revenue and cash flows, and other economic consequences may occur. The entities whose operations are negatively affected by COVID‐19 may need to consider testing their assets for impairment.

Goodwill5

FASB ASC 350‐20 provides guidance on accounting and reporting for goodwill and requires that goodwill be tested for impairment on an annual basis and between annual tests in certain

5 When considering and/or performing a goodwill impairment test, it may be helpful to refer to the AICPA Accounting and

Valuation Guide Testing Goodwill for Impairment, which provides guidance and illustrations for preparers of financial statements, independent auditors, and valuation specialists regarding the accounting, valuation, and disclosures related to goodwill impairment testing.

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circumstances. FASB ASC 350‐20‐35‐3C provides the following examples of events and circumstances (triggering events) that may warrant an interim test:

a. Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets

b. Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market‐dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development

c. Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows

d. Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods

e. Other relevant entity‐specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation

f. Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more‐likely‐than‐not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit

g. If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers)

As indicated in FASB ASC 350‐20‐35‐3F, these examples are not all‐inclusive, and an entity should consider other relevant events and circumstances that affect the fair value or carrying amount of a reporting unit. Given the current economic environment, many entities are likely to conclude that triggering events are present, causing them to perform an interim goodwill impairment test.

Private companies and not‐for‐profit entities that have elected the accounting alternative under FASB ASC 350‐20 to amortize goodwill are still required to test it for impairment upon a triggering event at either the entity level or the reporting‐unit level. FASB ASC 350‐20 uses the same triggering events guidance for entities that have elected the accounting alternative as well as for those that have not. As a result, entities that have elected the accounting alternative are also likely to conclude that they have a triggering event, requiring them to test goodwill for impairment. The likelihood of goodwill being actually impaired will depend on many factors, including the recency of the acquisition giving rise to goodwill. In other words, goodwill that results from a recent acquisition and which, therefore, has not yet been amortized over a significant period, is more likely to be impaired than goodwill that results from a more distant acquisition.

Entities should also consider whether to test their other assets for impairment and to make sure they perform those tests in the appropriate order. FASB ASC 350‐20‐35‐31 requires that goodwill be tested

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for impairment only after the carrying amounts of the other assets of the reporting unit have been tested for impairment under other applicable accounting guidance. For more information, see the “Order of Impairment Testing” discussion later in this section.

Indefinite‐Lived Intangible Assets

Entities’ indefinite‐lived intangible assets (such as certain trademarks) may also need to be evaluated for impairment. Paragraphs 15‐20 of FASB ASC 350‐30‐35 provide guidance on impairment testing of indefinite‐lived intangible assets and require that they be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired (triggering events). FASB ASC 350‐30‐35‐18B provides examples of such events and circumstances, which are similar to those considered for goodwill.

As a result, entities needing to perform interim testing of goodwill for impairment are also likely to conclude that they should test their indefinite‐lived intangible assets.

Long‐lived Assets

Long‐lived assets to be held and used (including property, plant, and equipment, finite‐lived intangible assets, and right‐of‐use assets recognized under FASB ASC 842, Leases) are tested for impairment in accordance with the guidance in paragraphs 17‐35 of FASB ASC 360‐10‐35. FASB ASC 360‐10‐35‐21 requires that they be tested for recoverability (which involves comparing undiscounted cash flows for a long‐lived asset or asset group being evaluated with the carrying amount of that asset or asset group) whenever events or changes in circumstances indicate that their carrying amount may not be recoverable and provides the following examples of such events:

a. A significant decrease in the market price of a long‐lived asset (asset group) b. A significant adverse change in the extent or manner in which a long‐lived asset (asset group) is

being used or in its physical condition c. A significant adverse change in legal factors or in the business climate that could affect the

value of a long‐lived asset (asset group), including an adverse action or assessment by a regulator

d. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long‐lived asset (asset group)

e. A current‐period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long‐lived asset (asset group)

f. A current expectation that, more likely than not, a long‐lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent

FASB ASC 360‐10‐35‐17 states that an impairment loss should be recognized only if the carrying amount is not recoverable and exceeds fair value. An impairment loss should be measured as the amount by which the carrying amount exceeds fair value.

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Given the impact of COVID‐19, many entities may conclude that they should test their long‐lived assets to be held and used for recoverability. As provided in FASB ASC 360‐10‐35‐22, when such assets are tested for recoverability, it also may be necessary to review depreciation estimates and method or the amortization period.

Other Assets

In addition to the assets discussed in the preceding paragraphs, other assets may need to be tested for impairment. Impairment models under U.S. GAAP vary depending on the asset subject to the impairment test. Impairment models consideration of future events also vary significantly under current U.S. GAAP. This can even be the case for the same asset; for example, a financial asset using the “incurred loss” model for impairment versus a financial asset using the current expected credit losses model. Asset impairment considerations (and the related professional guidance for reference) may include the following:

Financing receivables (e.g., trade accounts receivables, loans)

— FASB ASC 310, Receivables — FASB ASC 326, Financial Instruments — Credit Losses (if adopted)

Inventories

— FASB ASC 330, Inventory Contract assets

— FASB ASC 310 Equity securities

— FASB ASC 320, Investments—Debt and Equity Securities, or FASB ASC 321, Investments—

Equity Securities, if Accounting Standards Update (ASU) No. 2016‐01, Financial

Instruments—Overall (Subtopic 825‐10): Recognition and Measurement of Financial

Assets and Financial Liabilities, has been adopted

Debt securities

— FASB ASC 320 or FASB ASC 326, if ASU No. 2016‐13, Financial Instruments—Credit Losses

(Topic 326): Measurement of Credit Losses on Financial Instruments, has been adopted

Other investments

— FASB ASC 325, Investments — Other

Deferred tax assets

— FASB ASC 740, Income Taxes

Order of Impairment Testing

It is important to perform impairment testing in the appropriate order. Consistent with FASB ASC 360‐10‐35‐27, the impairment testing should be performed in the following order:

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Adjust the carrying amounts of any assets (such as accounts receivable and inventory) and liabilities (such as accounts payable, long‐term debt, and asset retirement obligations) not covered by FASB ASC 360‐10 that are included in an asset group in accordance with other applicable GAAP.

Test for impairment and adjust carrying amounts of indefinite‐lived intangible asset(s) that are included in an asset group under FASB ASC 350‐30.

Test long‐lived assets (asset group) and amortizable intangible assets under FASB ASC 360‐10.

Test goodwill of a reporting unit (or, for private companies, an entity) that includes the aforementioned assets under FASB ASC 350‐20.

This sequence is necessary because it allows to make any required adjustments to the carrying amount of the reporting unit (or, for private companies, an entity) prior to the performance of the goodwill impairment test.

Unusual or Infrequent Events


Determining whether the COVID‐19 pandemic is unusual in nature or an infrequent occurrence requires significant judgement. FASB ASC 220‐20‐45‐1 states:

A material event or transaction that an entity considers to be of an unusual nature or of a type that indicates infrequency of occurrence or both shall be reported as a separate component of income from continuing operations. The nature and financial effects of each event or transaction shall be presented as a separate component of income from continuing operations or, alternatively, disclosed in notes to financial statements. Gains or losses of a similar nature that are not individually material shall be aggregated. Such items shall not be reported on the face of the income statement net of income taxes.

The FASB ASC Master Glossary offers the following definitions:

Infrequency of Occurrence

The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates (see FASB ASC 220‐20‐60‐1).

Unusual Nature

The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the

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entity, taking into account the environment in which the entity operates (see FASB ASC 220‐20‐60‐1).

Deferred Tax Assets


Recognition of unexpected losses and impairments as a result of the COVID‐19 pandemic may impact the entity’s tax accounting, including the realizability of the deferred tax assets (DTA).

FASB ASC 740‐10‐30‐2(b) requires that a valuation allowance be established for a DTA if it is more likely than not that the related tax benefit will not be realized. Realization of DTAs depends on the existence of sufficient taxable income of the appropriate character within the carryback and carryforward period available under the tax law. FASB ASC 740‐10‐30‐18 lists the following four sources of future taxable income:

a. Future reversals of existing taxable temporary differences

b. Future taxable income exclusive of reversing temporary differences and carryforwards

c. Taxable income in prior carryback year(s) if carryback is permitted under the tax law

d. Tax‐planning strategies

FASB ASC 740‐10‐30‐17 states the following:

All available evidence, both positive and negative, shall be considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. Information about an entity’s current financial position and its results of operations for the current and preceding years ordinarily is readily available. That historical information is supplemented by all currently available information about future years.

Entities should consider each source of income incrementally to determine the amount of the valuation allowance needed, if any. FASB ASC 740‐10‐30‐18 also states that “if one or more sources are sufficient to support a conclusion that a valuation allowance is not necessary, other sources need not be considered.”

FASB ASC 740‐10‐30‐21 notes that “forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years.”

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Q&A Section 3200

Long-Term Debt

.18 Borrower Accounting for a Forgivable Loan Received Under the Small Business

Administration Paycheck Protection Program

Inquiry — How should a nongovernmental entity1 account for a forgivable loan received under

the Small Business Administration Paycheck Protection Program (PPP)2?

Reply — Given the unique nature of the PPP, questions have arisen relating to how a borrower

under the program should account for the arrangement. Although the legal form of the PPP loan

is debt, some believe that the loan is, in substance, a government grant. Staff of the Office of the

Chief Accountant of the SEC have indicated they would not object to an SEC registrant

accounting for a PPP loan under FASB Accounting Standards Codification (ASC) 470, Debt, or

as a government grant by analogy to International Accounting Standard (IAS) 20, Accounting for

Government Grants and Disclosure of Government Assistance, provided certain conditions are

met.

Regardless of whether a nongovernmental entity expects to repay the PPP loan or believes it

represents, in substance, a grant that is expected to be forgiven, it may account for the loan as a

financial liability in accordance with FASB ASC 470 and accrue interest in accordance with the

interest method under FASB ASC 835-30. An entity would not impute additional interest at a

market rate (even though the stated interest rate may be below market) because transactions

where interest rates are prescribed by governmental agencies (for example, government

guaranteed obligations) are excluded from the scope of the FASB ASC 835-30 guidance on

imputing interest. For purposes of derecognition of the liability, FASB ASC 470-50-15-4 refers

to guidance in FASB ASC 405-20. Based on the guidance in FASB ASC 405-20-40-1, the

proceeds from the loan would remain recorded as a liability until either (1) the loan is, in part or

wholly, forgiven and the debtor has been “legally released” or (2) the debtor pays off the loan to

the creditor. Once the loan is, in part or wholly, forgiven and legal release is received, a

nongovernmental entity would reduce the liability by the amount forgiven and record a gain on

extinguishment.

If a nongovernmental entity that is not a not-for-profit entity (NFP) (that is, it is a business

entity) expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents,

1 References to nongovernmental entities include business entities and not-for-profit entities. 2 Please refer to the Small Business Administration website for information regarding the Paycheck Protection

Program.

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mailto:[email protected]

https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program

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in substance, a grant that is expected to be forgiven, it may analogize to IAS 20 to account for

the PPP loan. IAS 20 outlines a model for the accounting for different forms of government

assistance, including forgivable loans. Under this model, government assistance is not

recognized until there is reasonable assurance (similar to the “probable” threshold in U.S.

generally accepted accounting principles3) that (1) any conditions attached to the assistance will

be met and (2) the assistance will be received. Once there is reasonable assurance that the

conditions will be met, the earnings impact of government grants is recorded “on a systematic

basis over the periods in which the entity recognizes as expenses the related costs for which the

grants are intended to compensate.”4 Specifically, a business entity would record the cash inflow

from the PPP loan as a deferred income liability. Subsequent to initial recognition, a business

entity would reduce the liability, with the offset through earnings (presented as either [1] a credit

in the income statement, either separately or under a general heading such as “other income,” or

[2] a reduction of the related expenses), as it recognizes the related cost to which the loan relates,

for example, compensation expense.

If a nongovernmental entity that is not an NFP (that is, it is a business entity) expects to meet the

PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is

expected to be forgiven, the AICPA staff observes it can also analogize5 to the following

guidance: (1) FASB ASC 958-605 or (2) FASB ASC 450-30.

If an NFP chooses not to follow FASB ASC 470 and it expects to meet the PPP’s eligibility

criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be

forgiven, it should account for such PPP loans in accordance with FASB ASC 958-605 as a

conditional contribution.

The following table summarizes the key concepts of these models.

Accounting Topic Overview

FASB ASC 958-605 FASB ASC 958-605 addresses the accounting for contributions by

NFPs. Although the scope of FASB ASC 958-605 excludes contributions

made by governmental entities to business (for-profit) entities, the FASB

staff has acknowledged that entities scoped out of that guidance are not

precluded from applying it by analogy when appropriate.6

Under this model, the timing of recognition for a contribution received

depends on whether the contribution is conditional or not. If conditional,

the contribution is not recognized until the conditions are substantially

met or explicitly waived. Specifically, a nongovernmental entity would

3 The FASB ASC Master Glossary defines probable as “[t]he future event or events are likely to occur.” 4 Paragraph 12 of IAS 20. 5 FASB ASC 105-10-05-2 explains that, in the absence of explicit guidance, entities should first analogize to other

areas of authoritative generally accepted accounting principles before considering other nonauthoritative sources. 6 The issue of business entities analogizing to the guidance in FASB ASC 958-605 was discussed by FASB staff at

the Private Company Council meeting on April 17, 2020, as well as by the FASB Not-for-Profit Advisory

Committee during its meetings on September 13–14, 2018, and April 7, 2020.

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initially record the cash inflow from the PPP loan as a refundable

advance. The nongovernmental entity would then reduce the refundable

advance and recognize the contribution once the conditions of release

have been substantially met or explicitly waived.

FASB ASC 450-30 FASB ASC 450-30 outlines a model for gain contingency recognition.

Under this model, the earnings impact of a gain contingency is recognized

when all the contingencies related to receipt of the assistance have been

met and the gain is realized or realizable. As applied to forgivable loans

received under the PPP, a business entity would initially record the cash

inflow from the PPP loan as a liability. The proceeds from the loan would

remain recorded as a liability until the grant proceeds are realized or

realizable, at which time the earnings impact would be recognized.

Nongovernmental entities with material PPP loans should adequately disclose their accounting

policy for such loans and the related impact to the financial statements.

[Issue Date: June 2020.]

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Documents

2020 ACCOUNTING AND AUDITING UPDATE FOR THE LOCAL FIRM · the amendments in Update 2016-02 as described in the table below. The amendments in this Update related to transition do