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Clarity Long deck
Auditing Standards Update
Mike Glynn, CPA
AICPA Audit & Attest Standards
American Institute of CPAs
Objectives
Understand the key requirements of Clarity StandardsIdentify areas that may affect current practice
Clarity Long deck
American Institute of CPAs
Clarity Project Goals
Address concerns over length and complexity of standards
Make standards easier to read, understand and implement
Lead to enhancements in audit quality
American Institute of CPAs
Clarity
Convergence with ISAs
• Harmonize, not adopt
• Most audits performed internationally are of nonpublic entities –therefore, ASB and IAASB have a similar focus
• Avoid unnecessary differences with PCAOB
• ASB standards—more use of “should” than ISAs, but fewer than existing SASs
Avoid unnecessary conflicts with PCAOB standards.
Clarity Long deck
American Institute of CPAs
Clarity
Purpose of the Clarity Project was not to create additional requirements
Adjustments will have to be made to practices as a result of the clarified SASs
American Institute of CPAs
Clarity Format
Introduction
Objectives
Definitions
Requirements
Application Material
Appendices and Exhibits
Clarity Long deck
American Institute of CPAs
Considerations for Audits of Smaller, Less Complex Entities
Smaller, less complex refers to characteristics such as:
• Concentration of ownership and management in a small number of individuals
• One or more of the following:
- Straight forward/uncomplicated transactions
- Simple record keeping
- Few lines of business/few products
- Few internal controls
- Few personnel with a wide range of duties
American Institute of CPAs
Considerations for Audits of Smaller, Less Complex Entities
Guidance generally results in:
• Specifying alternate procedures appropriate for situations like:
- Scaling down audit programs and procedures
- Recognizing governance and management are the same people
- Addressing controls that are not documented or segregated
- Recognizing irrelevant requirements
Clarity Long deck
American Institute of CPAs
Considerations for Audits of Governmental Entities
Most clarified standards have guidance for audits of governmental entities• About uniqueness of governmental entities
• About uniqueness of state audit organizations
• Opinion units
• Materiality
• Laws and regulations, e.g., “withdrawal from engagements”
Accounting standards neutrality
American Institute of CPAs
Clarity Project Status
SASs 117-120 • Compliance auditing (SAS 117) and supplementary information
(SAS Nos. 118-120)
• Currently effective
SASs 122-125 • Effective for audits of financial statements for periods
ending on or after 12/15/12 (CY 2012 financial statement audits)
• Early adoption not permitted to avoid “piecemeal” adoption
Clarity Long deck
American Institute of CPAs
Clarity Project Status
Two SASs not yet clarified• Going Concern
- delayed to enable the ASB to align the proposed SAS with expected accounting standards
• Use of Internal Auditors
- delayed to enable the ASB to align with the IAASB’s revisions to clarified ISA 610
12
Clarity Project
Clarified SASs codified with new section numbers designated “AU-C”
AU section numbers changed to converge with ISA numbering
58 AU sections 47 new “AU-C” sections
• 3 withdrawn
- AU section 504, Association With Financial Statements
- AU section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles
- AU section 901, Public Warehouses – Controls and Auditing Procedures for Goods Held
Clarity Long deck
13
Clarity Project
• 37 redrafted to corresponding AU-C section
• 7 combined into 1 new AU-C section
- AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards
• 11 combined/split into 9 SASs
14
2012 Professional Standards
• The complete body of clarified SASs to be published in a separate volume of AICPA Professional Standards
- The volume will also include
- A preface, Principles Underlying the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards
- A glossary of terms defined in the standards
- Appendixes describing the differences between GAAS and the ISAs and mapping the current AU sections to AU-C sections.
Clarity Long deck
15
Changes to Auditing Standards
• New terms
- Applicable financial reporting framework
- Emphasis-of-matter and other-matter paragraphs replace explanatory paragraphs
- Group engagement partner and component auditor replace principal auditor and other auditor, respectively.
16
Changes to Auditing Standards
• Auditor’s Reports
- Use of paragraph headings
- Expansion of the description of management’s responsibilities
Clarity Long deck
17
Auditor’s Reports
Illustration: An Auditor’s Report on Consolidated 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 consolidated financial
statements (comparative).
• The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.
18
Auditor’s Reports
INDEPENDENT AUDITOR’S REPORT
[Appropriate Addressee]
We have audited the accompanying consolidated financial statements of ABC Company and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 20X1 and 20X0, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
Clarity Long deck
19
Auditor’s Reports
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
20
Auditor’s Reports
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Clarity Long deck
21
Auditor’s Reports
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Company and its subsidiaries as of December 31, 20X1 and 20X0, and the results of their operations and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
22
Auditor’s Reports
[Auditor’s signature]
[Auditor’s city and state]
[Date of the auditor’s report]
Clarity Long deck
American Institute of CPAs
23
Modifications to the Opinion (AU-C 705)
Basis for qualified, adverse, or disclaimer (placed before opinion paragraph)
Modified opinion (Qualified, Adverse, or Disclaimer
American Institute of CPAs
24
Emphasis of Matter and Other Matter Paragraphs (AU-C 706)
Emphasis of Matter• Matters appropriately
presented or disclosed
Other Matter• To understand audit matters
(Combining statements, SI, RSI, SEFA)
Clarity Long deck
American Institute of CPAs
Emphasis of Matter and Other Matter Paragraphs (AU-C 706)
Going concern
Contractual or regulatory reporting frameworks
Consistency
25
Audit reports of prior periods presented
Materially inconsistent “other information”
“In relation to” opinion
RSI
General use regulatory F/S
“In connection with” compliance reporting
Emphasis of Matter Other Matter
26
Changes to Auditing Standards
• Laws and Regulations
- Paragraph 14 of AU-C section 250 states
The auditor should perform the following audit procedures that may identify instances of noncompliance with other laws and regulations that may have a material effect on the financial statements (see paragraph .06b): (Ref: par. .A12–.A15)
a. Inquiring of management and, when appropriate, those charged with governance about whether the entity is in compliance with such laws and regulations
b. Inspecting correspondence, if any, with the relevant licensing or regulatory authorities (Ref: par. .A16)
Clarity Long deck
27
Changes to Auditing Standards
• Laws and Regulations
- The requirement to inspect correspondence is not required in the extant auditing standards.
28
Changes to Auditing Standards
• Opening balances
- The clarified SAS makes clear (paragraph 8 of AU-C section 510) that reviewing a predecessor auditor’s audit documentation cannot be the only procedure performed to obtain sufficient appropriate audit evidence regarding opening balances.
Clarity Long deck
American Institute of CPAs
Overall Objectives (AU 200)
Preface
Provides framework for an audit
Place holder for the former “10 generally accepted standards”
Principles
Structure for an audit
Components of each standard
Various definitions and terms
American Institute of CPAs
Terms of Engagement (AU 210)
Preconditions for an audit• Determine the financial reporting framework
is acceptable
- Was implicit in extant SASs
- Change is not expected to affect practice
Clarity Long deck
American Institute of CPAs
Terms of Engagement (AU 210)
Preconditions for an audit• In engagement letter, obtain management’s
acknowledgement of its responsibilities for
- Preparing financial statements
- Designing and implementing internal control
- Providing the auditor access to information and persons
American Institute of CPAs
Special Considerations—Special Purpose Frameworks (AU-C 800)
Replaces OCBOA with cash, tax, contractual and regulatory
Requires the auditor to understand the purpose and intended users for framework appropriateness
Audit still based on the rest of GAAS, but this section provides the reporting requirements and guidance
Clarity Long deck
American Institute of CPAs
Special Considerations—Special Purpose Frameworks ( AU-C 800)
Cash Basis Tax Basis Contractual Regulatory
Restricted General
Opinion Single Single Single Single Dual
Use EOM? Yes Yes Yes Yes No
DescribePurpose
No No Yes Yes Yes
Restrict use?
No No Yes Yes No
American Institute of CPAs
Impact of Selected Standards—Group Audits
OLD
Part of the audit performed by other auditors
OLD
“Principal Auditor”
“Other Auditor”
NEW
Group Audit
Component Auditor
34
Clarity Long deck
American Institute of CPAs
Special Considerations—Audit of Group Financial Statements (AU-C 600)
Key definitions
__ Group
__ Component
__ Component auditor
__ Component materiality
__ Significant component
Group financial statementsGroup managementGroup‐wide controlsGroup auditGroup auditorGroup audit opinion
35
American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
Preconditions to making reference to others’ work• Component f/s prepared on same GAAP
basis*
• Component auditor followed GAAS
• Component auditor report is not restricted as to use
*exception in application paragraphs for GASB and FASAB, which address this
36
Clarity Long deck
American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
Materiality – the GA should determine:• Materiality, incl. performance materiality, for group
financial statements• Whether specific circumstances exist for which
something less than materiality would influence users; if so, apply a different materiality to those transactions, balances, or disclosures
• Component materiality for components that will be audited – component materiality s/b lower than group materiality and component performance materiality s/b lower than group performance materiality
• Threshold above which misstatements are trivial37
American Institute of CPAs
Special Considerations—Audit of Group Financial Statements (AU-C 600)
Performing procedures
For components with significant RMM – an audit or other specific procedures to address those RMM
For components that are not significant, the GA performs analytical procedures
38
Clarity Long deck
American Institute of CPAs
Special Considerations—Audit of Group Financial Statements (AU-C 600)
The requirements for a group auditor who does not make reference to a component auditor’s report, and decides instead to take responsibility for the work of a component auditor has a SIGNIFICANT increase in requirements compared to:
• Current guidance on the matter
• When making reference under this new AU section
39
American Institute of CPAs
• 585‐Omitted Procedures
• 610 Internal Audit (coming)
• 705‐Modifications to Opinion
• 720‐Other Information
• 725‐Suppl Information
• 730‐Required Suppl Info
• 806‐Reports on Compliance
• 910‐Repts of Another Country
• 915‐Rept Appl of Acctg Princ
• 920‐Underwriters
• 925‐SEC Filings
• 930‐Interim Fin Info
• 935‐Compliance Audits
Summary of Changes
• 220‐Quality Control
• 230‐Audit Documentation
• 240‐Consider Fraud
• 260‐Comm with Governance
• 300‐Planning
• 315‐Understanding the Entity
• 450‐Evaluate Misstatements
• 500‐Audit Evidence
• 520‐Analytical Procedures
• 530‐Audit Sampling
• 540‐Auditing Estimates
• 570‐Going Concern (ED status)
• 580‐Written Representations
Essentially no/little change
40
Clarity Long deck
American Institute of CPAs
Formula for Implementation Success
41
Remember, clarified SASs are effective for calendar year 2012 audits
Familiarize yourself with Clarified Standards—including application material, appendixes, and exhibits
Go to www.aicpa.org/SASClarity for other resources
Read summary of changes between extant standards and new clarified standards
American Institute of CPAs
Formula for Implementation Success
42
Begin “project management”• Appoint a person or team to be in charge• Consider small task forces of staff at different
levels• Staff training• Revise firm guidance and audit programs to refer
to clarified standards
Clarity Long deck
American Institute of CPAs
Clarity Project Website Resources
Guide to Clarified and Converged Standards for Auditing and Quality Control
Clarity Project FAQs
Mapping of Existing AUsections to AU-C sections
Listing of Effective Dates of Each AU-C section
Summary of Differences Between Existing SASs and Clarified SASs
American Institute of CPAs
Clarity Project Website Resources
Substantive Differences Between theISAs and GAAS
Scalability of GAAS to theSize and Complexity of an Entity
Videos
Clarity Long deck
American Institute of CPAs® aicpa.org/FRC
Financial Reporting Center
Questions?