Clarifying the Clarity Standards: An Overview February 29, 2012 Moderator R. Kinney Poynter Executive Director NASACT [email protected] Speaker Randy

Clarifying the Clarity Standards: An Overview February 29, 2012

ModeratorR. Kinney Poynter

Executive DirectorNASACT

[email protected]

SpeakerRandy C. Roberts, CPA, CGFM

Professional Practice DirectorAZ Office of the Auditor General

[email protected]

Opening Remarks

Our Objectives for this Webinar• Identify the major revisions of the new clarity

standards• Understand where the new requirements differ

from the previous standards• Apply the new standards in future audits

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Clarity Project Status

• “Clarified standards” issued in October 2011• Most of them in one Statement on Auditing

Standards – SAS No. 122• Omnibus Statement to catch up – SAS No. 123

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

• Effective CY 2012/FY 2013 financial statement audits

• The standards not to be implemented piecemeal

Overall Objectives (AU 200)

Preface

Provides framework for an auditPlace holder for the former “10 generally accepted standards”

Principles

Structure for an audit

Components of each standardVarious definitions and terms

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Clarity Format

• Introduction• Objectives• Definitions• Requirements• Application Material• Appendices and

Exhibits

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Considerations for Audits of Governmental Entities• Guidance includes information about:

• Uniqueness of governmental entities• Uniqueness of state audit organizations• Opinion units• Materiality• Laws and regulations, e.g., “withdrawal from

engagements”• Accounting standards neutrality

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Terms of Engagement (AU 210)

• Preconditions for an audit• Determine the financial reporting framework is

acceptable• Obtain management’s acknowledgement of its

responsibility for• Preparing financial statements• Designing and implementing internal control• Providing the auditor access to information

and persons7

Terms of Engagement (AU 210)

Practice IssuesQ. Do you need an annual engagement letter?A. Only if terms change. If not, still need to remind them.Q. Does the reminder need to be in writing?A. No, can be reminded in writing or orally.

Factors to consider:- Management misunderstands scope or objective- Revised or special terms- Change in senior management- Change in reporting requirements- Change in nature of operations or services- Change in financial reporting framework

Audit Documentation (AU 230)

• Pretty much the same as the current standard• One potential change in practice new paragraph

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

9

Materiality in Planning and Performing an Audit (AU 320)

10

$ or %

Materiality Performance materiality

Planning and evaluation Audit procedures

Performing Procedures and Evaluating Audit Evidence (AU 330)• The auditor is required to use external

confirmations for accounts receivable, except when one or more is applicable:• Overall account balance is immaterial• External confirmations would be ineffective• The assessed level of RMM at the relevant

assertion level is low, and other planned substantive procedures address the assessed risk

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

• Investments in Securities and Derivatives• Inventory• Litigation, Claims and Assessments• Segment Information

• Only one significant change• Requires the auditor to send attorney letters if

there is a relevant risk of material misstatement or an indication that material litigation exists

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Opening Balances—Initial Audit Engagements (AU 510)Obtain sufficient

appropriate evidence about

whether beginning

balances contain material

misstatementsWhat procedures

will obtain sufficient


opening balances?

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whether beginning


misstatementsReviewing predecessor auditor helps

determine auditor scope, but is not sole

basis for sufficient appropriate

evidence

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whether beginning


misstatementsReviewing predecessor auditor helps

determine auditor scope, but is not sole

basis for sufficient appropriate

evidence

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1.Whether prior period closing balances brought forward correctly

2. Whether opening balances reflect appropriate application of accounting principles

3. Evaluating evidence about opening balances from current period audit procedures and one or both:a. Review predecessor auditor’s

workb. Perform specific procedures

about opening balances

Special Considerations—Audit of Group Financial Statements (AU 600)Key definitions__ Group__ Component__ Component auditor__ Component materiality__ Significant component

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E.G.,Group financial statementsGroup managementGroup-wide controlsGroup auditGroup auditorGroup audit opinion

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

Acceptance and continuance - group auditor; identify components; preconditions

Understanding - group; components; component auditors; make reference?

Materiality decisions and responding to risks of material misstatement

Other procedures - consolidation process; subsequent events; evaluating evidence

Communications - with component auditors; with group governance and management

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Special Considerations—Audit of Group Financial Statements (AU 600)Identifying components – why is it important?

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Significant components

Gain understanding of components

Assess RMM for components

Gain understanding of component

auditors

Make materiality decisions about

components

Perform procedures related

to componentsEvaluate evidence

obtainedEvaluate component auditorCommunicate with

component auditors and management


• Governance structure• Management structure• How centralized is financial

reporting• Centralized operations• Physical locations• Control environment• Nature of activity• Uniqueness to entity

• Physical location of assets• Financial information

prepared by others• Existence of multiple general

ledgers or records • Whether information is

booked in summary form• If risk assessments vary • Legal or regulatory

requirements/oversight19

Factors to Consider Other Indicators

Special Considerations—Audit of Group Financial Statements (AU 600)• Preconditions to making reference to others’

work• Component f/s prepared on same GAAP basis*• Component auditor (CA) followed GAAS• Component auditor report is not restricted as to

use

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

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• Materiality – the Group Auditor (GA) should determine:• Materiality, including performance materiality, for

group financial statements• Whether circumstances exist that something less

than materiality influences users; if so, apply different materiality to those transactions, balances, or disclosures

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

• Threshold above which misstatements are trivial

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Group versus Component Materiality

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$ or %

Materiality Performance materiality

Planning and evaluation Audit procedures

Component materiality Component performance materiality

Special Considerations—Audit of Group Financial Statements (AU 600)Performing procedures • Just like the Risk Assessment Standards and the

rest of the other SASs• Significant components – an audit of its financial

statements performed• For components with significant RMM – an audit

or other specific procedures to address those RMM• For components that are not significant, the GA

performs analytical procedures23

Special Considerations—Audit of Group Financial Statements (AU 600)Practice Issues:Group-wide controls & Consolidation Process• Test group-wide controls – but who – GA or CA?• Test consolidation process – but who – GA or CA?

Subsequent events (SE) issues:• How often does component audit work finish

before group audit team is done?• Who is responsible for SE work – GA or CA?

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Special Considerations—Audit of Group Financial Statements (AU 600)Final Thought:• The requirements for a group auditor who does

not make reference to a component auditor’s report, and decides instead to take responsibility for the component has a SIGNIFICANT increase in requirements compared to:• Current guidance on the matter• When making reference under this new AU

section25

Forming an Opinion and Reporting (AU 700)

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Opinion

Headings and Subheadings

Other auditor reporting responsibilities (Yellow Book Report reference)

Modifications to the Opinion (AU 705)

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

Modified opinion (Qualified, Adverse, or Disclaimer

Emphasis of Matter and Other Matter Paragraphs (AU 706)

• Going concern• Contractual or regulatory

reporting frameworks• Consistency

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• 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

-Litigation uncertainty

-Major catastrophe

-Significant related parties

-Subsequent events

-“Other” supplementary

information

Emphasis of Matter and Other Matter Paragraphs (AU 706)

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Emphasis of Matter• Matters appropriately

presented or disclosed

Other Matter• To understand audit

matters (Combining statements, SI, RSI, SEFA)

Special Considerations—Special Purpose Frameworks (AU 800)

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

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

• Restricted use language• Criteria suitable for

limited parties• Criteria available to

limited parties• Matters outside primary

objective of audit

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Important Elements of Requirements

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

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

internal controls• Communications with

governance• Supplementary

information “in relation to” (optional)

• Summary F/S• Single F/S or Elements

• Compliance with Aspects of Agreements

• Reports on application of GAAP

• Letters for Underwriters

• Compliance audits• Special purpose

frameworks• Group audits 32




limited parties• Matters outside

primary objective of audit

• Names specific parties in language

• Inability for others to use• Currently implicit/

overlooked• Under Group Audits

AU600, not allowed

• (For governments) Huge disconnect

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Requirements Elements Impact on Practice




limited parties• Matters outside

primary objective of audit

• Now uses language about “intended purpose”

• Exception for 3rd criteria if also following GAGAS• Don’t name specific

parties• Removes disconnect• Removes Group Audits

conflict34

Requirements Elements What’s Different


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“Restricted” Use “Restricted” Purpose

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

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


Currently Under Clarity Standards

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

+ =

General use report

Restricted use report


+ =

General use report


General use report with a restricted use section

Summary of Changes – SASs 1 – 120 versus Clarified SASsReally good summary on AICPA web site for more complete comparison• www.aicpa.org/interestareas/frc/

auditattest/downloadabledocuments/clarity/clarity_sas_summary_of_differences.pdf

Two essential Clarified AU sections• AU 200 Overall Objectives• AU 600 Group Audits

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• 510-Opening Balances• 550-Related Parties• 560-Subsequent Events• 620-Auditor’s Specialist• 700-Forming an Opinion• 706-Emphasis of Matter &

Other Matter• 708-Consistency• 800-Special Purpose

Framework• 805-Single F/S• 810-Summary F/S• 905-Restricted Use

Summary of Changes – SASs 1 – 120 versus Clarified SASs

• 210-Terms of Engagement• 250-Laws and Regulations• 265-Communicating Int Ctrls• 320-Materiality Plan/Perform

Audits• 330-Performing Audit

Procedures in Response• 402-Auditing Considerations

for Entity Use of Service Organizations

• 501-Audit Evidence Selected Items

• 505-External Confirmations

Little-some change

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• 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


• 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

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

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

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Formula for Implementation Success

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

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

• Begin “project management”• Appoint a person or team to be in charge• Consider small task forces of staff at different levels• Training, training, training• Review your types of auditees to determine who will be

affected/first• Explain to auditee management how the engagement may

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

Thank You for Joining Us!

ModeratorR. Kinney Poynter

Executive DirectorNASACT

[email protected]

SpeakerRandy C. Roberts, CPA, CGFM

Professional Practice DirectorAZ Office of the Auditor General

[email protected]

Questions and Answers

Documents

Clarifying the Clarity Standards: An Overview February 29, 2012 Moderator R. Kinney Poynter Executive Director NASACT [email protected] Speaker Randy