Statements on Auditing Standards, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks

Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement

1. This Exposure Draft of proposed Statements on Auditing Standards (SAS), contained two proposed SASs. Those SASs were issued as:

a) Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, and

b) Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement.

c) These SASs will supersede SAS No. 1, Codification of Auditing Standards and Procedures, section 544, Lack of Conformity with Generally Accepted Accounting Principles, as amended and SAS No. 62, Special Reports, as amended, except paragraphs 19–21(AICPA, Professional Standards, vol. 1, AU sec. 544 and 623, except paragraphs .19–.21).

d) Redrafts of AU sections 544 and 623 to apply the ASB’s clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

2. Convergence

a) The SASs were drafted using ISA 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, and ISA 805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement, as a base.

b) There are no differences between these SASs and ISAs 800 and 805 other than those for which the ASB believes a compelling reason for the difference exists.

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

3. Effective Date

The SASs will be effective for audits of financial statements for periods ending on or after December 15, 2012.

4. Changes From Existing Standards

a) SAS Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks is converged with ISA 800. It

(1) Addresses special considerations in the application of the AU sections to an audit of financial statements prepared in accordance with a special purpose framework, which now includes cash, tax, regulatory, or contractual basis of accounting.

(a) The cash, tax, and regulatory bases of accounting were commonly referred to as other comprehensive bases of accounting (OCBOA).

(b) The term OCBOA was replaced with the term special purpose framework. The new term no longer includes the broader concept of a definite set of criteria having substantial support that is applied to all material items appearing in financial statements.

(2) Requires the auditor to obtain an understanding of:

(a) the purpose for which the financial statements are prepared,

(b) the intended users, and

(c) the steps taken by management to determine that the special purpose framework is acceptable in the circumstances.

(3) Requires the auditor to obtain the agreement of management that it acknowledges and understands its responsibility to include all informative disclosures that are appropriate for the special purpose framework being used.

(4) Requires the explanation of management’s responsibility for the financial statements in the auditor’s report, and if management has a choice of financial reporting frameworks in the preparation of the financial statements, to make reference to management’s responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances.

(5) Requires the auditor, if the financial statements are prepared in accordance with a contractual basis of accounting, to obtain an understanding of any significant interpretations of the contract that management made in the preparation of those financial statements and to evaluate whether the financial statements adequately describe such interpretations.

(6) Requires the auditor’s report, if the financial statements are prepared in accordance with a regulatory or contractual basis of accounting, to describe the purpose for which the financial statements are prepared or refer to a note in the special purpose financial statements that contains that information.

(7) Requires the auditor’s report to include specific elements if the auditor is required by law or regulation to use a specific layout, form, or wording of the auditor’s report.

b) SAS Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement is converged with ISA 805. It

(1) Addresses special considerations in the application of the AU sections to an audit of a single financial statement or of a specific element, account, or item of a financial statement.

(2) Clarifies that a single financial statement and a specific element of a financial statement includes the related notes.

(3) Related notes ordinarily comprise a summary of significant accounting policies and other explanatory information relevant to the financial statement or to the element.

(4) Requires the auditor, if the auditor is not also engaged to audit the entity’s complete set of financial statements,

(a) To determine whether the audit of a single financial statement or of a specific element of those financial statements in accordance with generally accepted auditing standards is practicable and

(b) To determine whether the auditor will be able to perform procedures on interrelated items.

(c) In the case of an audit of a specific element that is, or is based upon, the entity’s stockholders’ equity or net income or the equivalent, the proposed SAS requires the auditor to perform procedures necessary to obtain sufficient appropriate audit evidence about financial position, or financial position and results of operations, respectively.

(5) Requires the auditor to determine the acceptability of the financial reporting framework, including whether application of the financial reporting framework will result in a presentation that provides adequate disclosures to enable the intended users to understand the information conveyed in the financial statement or the element, and the effect of material transactions and events on the information conveyed in the financial statement or the element.

(6) Requires the auditor, if, in conjunction with an engagement to audit the entity’s complete set of financial statements, the auditor undertakes an engagement to audit a single financial statement or a specific element of a financial statement, to issue a separate auditor’s report and express a separate opinion for each engagement.

(7) Requires the auditor, if an audited single financial statement and an audited specific element of a financial statement are published together with the entity’s audited complete set of financial statements, to inform management that it may not publish the auditor’s report containing the opinion on the single financial statement or on the specific element of a financial statement together with the entity’s complete set of financial statements unless the auditor is satisfied with the differentiation or separation from the complete set of financial statements.

(8) Requires the auditor, if the opinion in the auditor’s report on an entity’s complete set of financial statements is modified, or that report includes an emphasis of matter or an other matter paragraph,

(a) To determine the effect that this may have on the auditor’s report on a single financial statement or on a specific element of those financial statements.

(b) In the case of an audit of a specific element of a financial statement, if the modified opinion on the entity’s complete set of financial statements is relevant to the audit of the specific element or an interrelated item of the specific element, the proposed SAS requires the auditor to:

(i) Express an adverse opinion on the specific element when the modification on the complete set of financial statements arises from a material misstatement.

(ii) Disclaim an opinion on the specific element when the modification on the complete set of financial statements arises from an inability to obtain sufficient appropriate audit evidence.

(c) Allows the auditor, if the auditor concludes that it is necessary to express an adverse opinion or disclaim an opinion on the entity’s complete set of financial statements as a whole but, in the context of a separate audit of a specific element that is included in those financial statements, the auditor nevertheless considers it appropriate to express an unmodified opinion on that element, to do so only if

(i) That opinion is expressed in an auditor’s report that is neither published together with nor otherwise accompanies the auditor’s report containing the adverse opinion or disclaimer of opinion; and

(ii) The specific element does not constitute a major portion of the entity’s complete set of financial statements or the specific element is not, or is not based upon, the entity’s stockholders’ equity or net income or the equivalent.

A new SAS is proposed to address the requirements in paragraphs .19–.21 of AU section 623 that relate to compliance with aspects of contractual agreements or regulatory requirements in connection with an audit of financial statements.

Statement on Auditing Standards, Engagements to Report on Summary Financial Statements

1. This SAS:

a) Superseded SAS No. 42, Reporting on Condensed Financial Statements and Selected Financial Data (AICPA, Professional Standards, vol. 1, AU sec. 552).

b) Redrafted AU section 552 to apply the ASB’s clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

2. Convergence

a) Drafted using ISA 810, Engagements to Report on Summary Financial Statements, as a base.

b) Differences between this SAS and ISA 810 for which the ASB believes no compelling reason exists for the difference have been eliminated.

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

3. Effective Date

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

4. Changes From Existing Standards

In converging with ISA 810, the proposed SAS:

a) addresses the auditor’s responsibilities for specified procedures and reporting formats when reporting on summary financial statements derived from financial statements audited by that same auditor.

b) Procedures required:

(1) requires the auditor to determine whether the criteria applied by management in the preparation of the summary financial statements are acceptable.

(2) requires the auditor to obtain management’s agreement that it acknowledges and understands its responsibilities for the summary financial statements, including its responsibility to make the audited financial statements readily available to the intended users of the summary financial statements. The audited financial statements need not accompany the summary financial statements.

(3) requires the auditor to request management to provide, in the form of a representation letter addressed to the auditor, written representations relating to the summary financial statements.

(4) stipulates specific procedures to be performed as the basis for the auditor’s opinion on the summary financial statements.

c) Reporting requirements. In addition to standard reporting elements the new standard:

(1) eliminates reporting on selected financial data

(2) stipulates specific elements of the auditor’s report, including management’s responsibility and a description of the auditor’s procedures.

(3) requires the auditor to deny an opinion on the summary financial statements when the auditor issued an adverse opinion or disclaimer of opinion on the audited financial statements. This type of report will require the auditor to:

(a) state that the auditor’s opinion on the audited financial statements contains an adverse opinion or disclaimer of opinion

(b) describe the basis for that adverse or disclaimer of opinion.

(c) state that, as a result of the adverse opinion or disclaimer of opinion, it is inappropriate to express, and the auditor does not express an opinion on the summary financial statements. The auditor is not required to include the paragraph describing the procedures. However the auditor should indicate that the report is prepared in accordance with the standards established by the American Institute of Certified Public Accountants.

d) clarifies the auditor’s responsibilities related to subsequent events and subsequently discovered facts when the date of the auditor’s report on the summary financial statements is later than the date of the auditor’s report on the audited financial statements.

e) includes requirements relating to comparatives, unaudited information presented with summary financial statements, and other information included in a document containing the summary financial statements and related auditor’s report.

Statement on Auditing Standards, Quality Control for an Engagement Conducted in Accordance With Generally Accepted Auditing Standards

1. This SAS

a) Supersedes SAS No. 25, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards (AICPA, Professional Standards, vol. 1, AU sec. 161).

b) Redrafts SAS No. 25 to apply the Auditing Standards Board’s (ASB) clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

2. Convergence

a) Drafted using ISA No. 220 Quality Control for an Audit of Financial Statements, as a base.

b) There are no differences between this SAS and ISA No. 220 other than those for which the ASB believes compelling reasons exists.

c) The ASB has made various changes to the language of the ISA to use terms or phrases that are more common in the United States, and to tailor examples and guidance to the U.S. environment. The ASB believes that such changes will not create differences between the application of ISA No. 220 and the application of the proposed SAS.

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

4. Changes from Existing Standards

a) Supersedes SAS No. 25, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards (AICPA, Professional Standards, vol. 1, AU sec. 161).

b) The explanatory memorandum to the ASB's exposure draft of the redrafted Risk Assessment standards stated that paragraphs .28–.32 of extant AU section 311, Planning and Supervision (AICPA, Professional Standards, vol. 1), which address supervision in an audit, were omitted from the SAS, Planning an Audit "because it is expected that these requirements and guidance will be included in the proposed SAS, Quality Control for Audit Engagements when this proposed SAS is prepared in connection with convergence with ISA 220 (Redrafted), Quality Control for an Audit of Financial Statements, as part of the ASB's Clarification and Convergence project.”

c) The SAS contains requirements and application material that address specific responsibilities of the auditor regarding quality control procedures for an audit of financial statements.

d) Quality control systems, policies, and procedures are the responsibility of the audit firm.

e) The SAS specifies quality control procedures at the engagement level that assist the auditor in achieving the objectives of the quality control standards.

f) Since these procedures are required to be established by SQCS No. 8, A Firm’s System of Quality Control (Redrafted) (AICPA, Professional Standards, vol. 2, QC sec. 10), the SAS should not result in a change to existing practice.

g) The SAS would strengthen existing standards by making it easier for auditors to understand and apply those quality control procedures that apply to an audit of financial statements.

Statement on Auditing Standards, Related Parties (Redrafted)

1. Supersedes the “Related Parties” section of SAS No. 45, Omnibus Statement on Auditing Standards—1983 (AICPA, Professional Standards, vol. 1, AU sec. 334). It represents the redrafting of the “Related Parties” section of SAS No. 45 to apply the Auditing Standards Board’s (ASB’s) clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

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

3. Changes From Existing Standards

a) Extant AU section 334 is premised on the related party requirements in Financial Accounting Standards Board (FASB) Statement No. 57, Related Party Disclosures. Therefore it is focused on auditing the amounts and disclosures pursuant to GAAP the United States and is centered on the provisions of FASB Statement No. 57.

b) This SAS is framework neutral so it includes all approved financial reporting frameworks, including special purpose frameworks described in the SAS Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks.

c) The applicability of the objectives, requirements, and definitions in the SAS are irrespective of whether the framework establishes such requirements.

4. Scope

a) Addresses the auditor’s responsibilities relating to related party relationships and transactions in an audit of financial statements.

b) Expands on how the SASs Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (Redrafted), Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (Redrafted), and Consideration of Fraud in a Financial Statement Audit (Redrafted) are to be applied in relation to risks of material misstatement.

c) The SAS Forming an Opinion and Reporting on Financial Statements requires the auditor to evaluate whether the financial statements achieve fair presentation.

d) The SAS Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks requires that the auditor (1) evaluate whether the financial statements include informative disclosures similar to those required by generally accepted accounting principles (GAAP), and (2) evaluate whether additional disclosures beyond those specifically required by the framework and related to matters that are not specifically identified on the face of the financial statements or other disclosures may be necessary for the financial statements to achieve fair presentation. Thus, this SAS applies to all audits of financial statements.

5. The SAS contains sections on:

a) Nature of Related Party Relationships and Transactions—Many related party transactions are in the normal course of business and they may carry no higher risk of material misstatement of the financial statements than similar transactions with unrelated parties. However, the nature of related party relationships and transactions may give rise to higher risks of material misstatement of the financial statements than transactions with unrelated parties.

b) Responsibilities of the Auditor:

(1) Because related parties are not independent of each other, financial reporting frameworks establish specific accounting and disclosure requirements for related party relationships, transactions, and balances to enable users of the financial statements to understand their nature and actual or potential effects on the financial statements. Therefore, the auditor has a responsibility to perform audit procedures to identify, assess, and respond to the risks of material misstatement arising from the entity’s failure to appropriately account for or disclose related party relationships, transactions, or balances.

(2) An understanding of the entity’s related party relationships and transactions is relevant to the auditor’s evaluation of whether one or more fraud risk factors are present, as required by the SAS Consideration of Fraud in a Financial Statement Audit (Redrafted), because fraud may be more easily committed or disguised through related parties.

c) An audit has inherent limitations, so an unavoidable risk exists that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with US GAAS. In the context of related parties, the potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater because management may be unaware of the existence of all related party relationships and transactions. Related party relationships may present a greater opportunity for collusion, concealment, or manipulation by management.

d) Planning and performing the audit with professional skepticism–The SAS Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards, requires the auditor to plan and perform the audit with professional skepticism. It is in context, given the potential for undisclosed related party relationships and transactions.

6. Requirements

a) Risk Assessment Procedures and Related Activities

b) Identification and Assessment of the Risks of Material Misstatement Associated With Related Party Relationships and Transactions

c) Responses to the Risks of Material Misstatement Associated With Related Party

d) Relationships and Transactions Evaluation of the Accounting for, and Disclosure of, Identified Related Party Relationships and Transactions

e) Communication With Those Charged With Governance

f) Documentation