Clarified SAS, Initial Audit Engagements, Including Reaudits—Opening Balances

1. The SAS

a) Supersedes SAS No. 84, Communications Between Predecessor and Successor Auditors (AICPA, Professional Standards, vol. 1, AU sec. 315).

b) Applies the ASB clarity drafting conventions and converges with International Standards on Auditing.

2. Convergence

a) Drafted using International Standard on Auditing (ISA) No. 510, Initial Audit Engagements—Opening Balances, as a base.

b) Differences between the proposed SAS and ISA No. 510, for which the ASB believes no compelling reason for the difference exists, have been eliminated.

c) The ASB has made various changes to the language of the ISA to use terms or phrases that are more commonly used in the United States, and to tailor examples and guidance to be more appropriate to the U.S. environment.

3. Effective Date
The SAS will effective for audits of financial statements for periods ending on or after December 15, 2012.

4. Changes from Existing Standards

a) Incorporates guidance from ISA No. 510, Initial Audit Engagements—Opening Balances, which requires the auditor to obtain sufficient appropriate audit evidence about whether

(1) Opening balances contain misstatements that materially affect the current period's financial statements;

(2) Accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, and whether changes in the accounting policies have been properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

b) Incorporates relevant guidance from SAS No. 84, as amended

c) Clarifies that initial audit engagements include reaudits, and eliminates from AU section 315 requirements and guidance directed to reaudits that are repetitive with other generally accepted auditing standards.

Significant Changes in Redrafted SAS on Risk Assessment

SAS, Planning an Audit (AU section 311) (Redrafted)

(1) The ASB proposes to delete Paragraphs .05–.10 of AU section 311, Planning and Supervision, which address the auditor’s responsibilities about the early appointment of the independent auditor and establishing the terms of the engagement. These requirements are expected to be included in the proposed SAS, Terms of the Engagements, in connection with the convergence with ISA 210 (Redrafted), Agreeing the Terms of Audit Engagements.

(2) The ASB proposed to delete Paragraphs .28–.32 of AU section 311 which covers supervision in an audit. It is expected that these requirements and guidance will be included in proposed SAS, Quality Control for Audit Engagements, in connection with convergence with ISA 220 (Redrafted), Quality Control for an Audit of Financial Statements.

SAS, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (AU section 314) (Redrafted)

(1) Most of the paragraphs written in the form of presumptive and mandatory requirements, particularly in the content dealing with internal control are proposed to be moved to application guidance because the ISA was drafted in a more principles based manner.

(2) Paragraph .19 of AU section 314 contains a requirement of the auditor to perform the audit with professional skepticism. This requirement is proposed to be deleted from AU section 314 because it is addressed by the proposed SAS, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards.

(3) Paragraph .45 of AU section 314 contains a requirement that the auditor consider whether the entity has disclosed a particular matter appropriately. This requirement is proposed to be deleted because it is expected that this requirement will be addressed when AU section 508, Reports on Audited Financial Statements is redrafted.

We have modified the ASB's Roadmap to Redrafted SASs to include the numbers of existing SASs linked to redrafted and clarified SASs. For a free email copy, please send a request to larry@cpafirmsupport.com.

Redrafted SASs, Audit Evidence and Materiality

Significant Changes From Existing Standards

a) SAS, Audit Evidence (AU section 326) (Redrafted)

(1) Consistent with ISA 500, Considering the Relevance and Reliability of Audit Evidence, the ASB is proposing to transfer the requirements and guidance related to the auditor’s use of assertions from AU section 326 to AU section 314, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement.

b) SAS, Materiality in Planning and Performing an Audit (AU section 312) (Redrafted)

(1) To make the standard clearer and consistent with ISA 320 (Revised), Materiality in Planning and Performing an Audit, and ISA 450, Evaluation of Misstatements Identified during the Audit, the ASB separates AU section 312 into two separate standards.

(a) SAS, Materiality in Planning and Performing an Audit (Redrafted), would address the use of materiality in planning and performing the audit.

(b) A separate standard, Evaluation of Misstatements Identified During the Audit, would address the evaluation of misstatements identified during the audit.

(2) The definition of audit risk and its components are now defined in the SAS, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards.

(3) The ASB proposes to eliminate the mandatory requirement of the auditor to consider audit risk in an audit because the ASB believes that the consideration of audit risk is fundamental in the audit process, and an explicit requirement is not necessary.

(4) Paragraphs .62–.67 of AU section 312 address the auditor’s responsibilities to evaluate the overall effect of audit findings on the auditor’s report. The ASB proposes to delete these paragraphs from this section because it is expected that these requirements and guidance will be included in AU section 508, Reports on Audited Financial Statements (AICPA, Professional Standards, vol. 1), when AU section 508 is redrafted as part of the ASB’s Clarification and Convergence project.

E. Statements on Auditing Standards, Risk Assessment

A. Statements on Auditing Standards, Risk Assessment

1. This section covers the following SASs:

a) SAS, Audit Evidence (Redrafted)

b) SAS, Materiality in Planning and Performing an Audit (Redrafted)

c) SAS, Evaluation of Misstatements Identified During the Audit (Redrafted)

d) SAS, Planning an Audit (Redrafted)

e) SAS, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (Redrafted)

f) SAS, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (Redrafted)

2. Supersedes the following:

a) SAS No. 106, Audit Evidence (AICPA, Professional Standards, vol. 1, AU sec. 326)

b) SAS No. 107, Audit Risk and Materiality in Conducting an Audit (AICPA, Professional Standards, vol. 1, AU sec. 312)

c) SAS No. 108, Planning and Supervision (AICPA, Professional Standards, vol. 1, AU sec. 311)

d) SAS No. 109, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (AICPA, Professional Standards, vol. 1, AU sec. 314)

e) SAS No. 110, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (AICPA, Professional Standards, vol. 1, AU sec. 318)

3. Represents the redrafting of SAS Nos. 106–110 to apply the ASB’s clarity drafting conventions and to converge with ISAs.

4. Convergence – The SASs were drafted using the following ISAs as a base:

a) ISA 300 (Redrafted), Planning an Audit of Financial Statements;

b) ISA 315 (Redrafted), Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment;

c) ISA 320 (Revised), Materiality in Planning and Performing an Audit;

d) ISA 330 (Redrafted), The Auditor’s Responses to Assessed Risks;

e) ISA 450, Evaluation of Misstatements Identified during the Audit; and

f) ISA 500 (Redrafted), Considering the Relevance and Reliability of Audit Evidence

5. Effective Date – Effective for audits of financial statements for periods ending on or after December 15, 2012.

6. Background of ASB Risk Assessment Standards

a) Eight SASs (Nos. 104 – 111) known as the Risk Assessment Standards were issued by the ASB in March 2006. They were issued

(1) To provide extensive guidance concerning the auditor’s assessment of the risks of material misstatement in a financial statement audit, and the design and performance of audit procedures whose nature, timing, and extent are responsive to the assessed risks.

(2) Establish standards and provided guidance on planning and supervision, the nature of audit evidence, and evaluating whether the audit evidence obtained affords a reasonable basis for an opinion regarding the financial statements under audit.

b) They

(1) Emphasized the link between understanding the entity (its control, financial, operational and business environment) assessing risks, and designing further audit procedures.

(2) Introduced the concept of risk assessment procedures, which are considered necessary to provide a basis for assessing the risk of material misstatement.

(3) Risk assessment procedures are tests of controls and substantive procedures. With further audit procedures, they provide the audit evidence to support the auditor’s opinion on the financial statements.

c) The auditor should perform risk assessment procedures to gather information and gain an understanding of the entity and its environment, including inquiries, analytical procedures, and inspection and observation.

d) The auditor should document during the planning and performance phases:

(1) Assessed risks and the basis for those assessments and may no longer default to maximum control risk without documenting the basis for that assessment.

(2) How the risk of material misstatement at the financial statement level affects individual financial statement assertions, so that auditors may tailor the nature, timing, and extent of their audit procedures to be responsive to their risk assessment and findings.

The next few blogs will cover the significant changes to each of these new SASs. If you'd like a copy of a modified ASB roadmap that links existing auditing standards with the new redrafted SASs, please send your request to larry@cpafirmsupport.com.