SAS Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

(1) Addresses circumstances when the auditor considers it necessary or is required to include additional communications in the auditor’s report that are not modifications to the auditor’s opinion.

(2) Uses the terms emphasis of matter and other matter paragraphs in the auditor’s report. The SAS describes an emphasis of matter as a paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements.

(3) Describes an other matter paragraph as a paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.

(4) Change from current practice

(a) The number and nature of paragraphs included in the auditor’s report that address matters appropriately presented or disclosed in the financial statements (emphasis of matters) and matters other than those presented or disclosed in the financial statements (other matters) is not expected to change from current practice.

2. Changes from Existing Standards

a) Forming an Opinion and Reporting on Financial Statements

(1) Most significant changes to extant standards:

(a) A requirement to describe management’s responsibility for the preparation and fair presentation of the financial statements in more detail than what was required in extant AU section 508.

(b) The description includes an explanation that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework, and that this responsibility includes 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.

(c) The ASB believes that this addition to the auditor’s report will communicate more clearly the responsibilities of management for the preparation of the financial statements.

(d) The SAS requires the use of headings throughout the auditor’s report to clearly distinguish each section of the report.

b) Modifications to the Opinion in the Independent Auditor’s Report

No significant changes exist from extant standards.

c) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

(1) Most significant changes to extant standards if the proposed standard was issued.

(a) Paragraph .11 of extant AU section 508 indicates that certain circumstances, although not affecting the auditor's unqualified opinion, may require that the auditor add an explanatory paragraph (or other explanatory language) to the standard report. The auditor may add an explanatory paragraph to emphasize a matter regarding the financial statements. As described in paragraph .19 of AU section 508, emphasis paragraphs are never required; they may be added solely at the auditor's discretion.

(b) Uses the terms emphasis of matter and other matter paragraphs.

(i) The SAS describes an emphasis of matter as a paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements. The SAS describes an other matter paragraph as a paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.

(ii) Under the SAS, an emphasis of matter paragraph would refer to any paragraph added to the auditor’s report that relates to a matter that is appropriately presented or disclosed in the financial statements. Some of these paragraphs would be required by certain SASs, whereas others would be added at the discretion of the auditor, consistent with current practice.

(iii) All such paragraphs would be considered emphasis of matter paragraphs because they are intended to draw users’ attention to a particular matter.

(iv) The concept of an “explanatory paragraph” would no longer be included in U.S. generally accepted auditing standards (GAAS). Instead, additional communications in the auditor’s report would be labeled as either “emphasis of matter” or “other matter” paragraphs.

(c) The SAS, consistent with ISA 706, requires an emphasis of matter or other matter paragraph to always follow the opinion paragraph and be included in a separate section of the auditor’s report under the section heading “Emphasis of Matter” or “Other Matter.”

SAS Modifications to the Opinion in the Independent Auditor’s Report

SAS Modifications to the Opinion in the Independent Auditor’s Report

(1) Addresses the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with proposed SAS Forming an Opinion and Reporting on Financial Statements, the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary.

(2) The SAS defines a modified report to include a qualified or adverse opinion or a disclaimer of opinion.

(3) Addresses the issuance of a qualified, adverse, or disclaimer of opinion using the auditor’s judgment about the materiality of the matters giving rise to the modification and the pervasiveness of their effects or possible effects on the financial statements.

(4) The ASB believes that the terms material and pervasive, although not explicitly stated in extant AU section 508, are consistent with the concepts embedded in the extant standards and, therefore, will not change, but will, rather, support current practice.

(5) The ASB also believes that the framework, as discussed in the text and in the application material to the proposed SAS, will help auditors better apply the concepts in determining whether a modification to the opinion in the auditor’s report is appropriate.

(6) Consistency of Accounting Principles

(a) Extant standards (AU sec. 508 par. 16–.18 and AU section 420 par. .01–.05) require the auditor to include an explanatory paragraph in the auditor’s report if there has been a change in accounting principles or in the method of their application that has a material effect on the comparability of the company's financial statements. PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements, (AICPA, PCAOB Standards and Related Rules, Rules of the Board, “Standards”), contains the same requirement.

(b) The ISAs do not include a requirement for the auditor to include an emphasis of matter paragraph in the auditor’s report if there has been a change in accounting principles, provided that the nature and magnitude of the change is disclosed in the financial statements under audit.

(c) ISA 705 discusses consistency of application of accounting policies in the context of evaluating whether a material misstatement of the financial statements exists that would give rise to the need for a modified opinion. The proposed SAS Modifications to the Opinion in the Independent Auditor’s Report also contains this requirement.

(d) The ASB has determined that the auditing standards in the United States should retain the extant requirement and include an emphasis of matter paragraph in the auditor’s report if there has been a change in accounting principles or in the method of their application that has a material effect on the comparability of the entity’s financial statements. The redrafted, SAS (AU section 420), Consistency of Application of Generally Accepted Accounting Principles (AICPA, Professional Standards, vol. 1), requires the inclusion of an “emphasis of matter” paragraph in the 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

Statement on Auditing Standards, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors)

1. Supersedes SAS No. 1 section 543, Part of Audit Performed by Other Independent Auditors (AICPA, Professional Standards, vol. 1, AU sec. 543).

2. Drafted to apply the Auditing Standards Board’s (ASB’s) clarity drafting conventions and to converge with ISA 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors).

3. Will be effective for audits of financial statements for periods beginning on or after December 15, 2012.

4. The SAS was drafted using ISA 600 as a base.

(1) ISA 600 addresses group audits. It defines a group audit as an audit of group financial statements. Group financial statements are financial statements with more than one component. Component is defined as an entity or business activity for which management prepares financial information that should be included in the group financial statements.

(2) Under both ISA 600 and the proposed SAS, the auditor responsible for signing the auditor’s report on the group financial statements (referred to as the group engagement partner) is responsible for:

(a) the direction, supervision, and performance of the group audit engagement in compliance with professional standards and regulatory and legal requirements and

(b) determining whether the auditor’s report that is issued is appropriate in the circumstances.

b) Diverges from ISA 600 in that ISA 600 does not permit the auditor’s report on the group financial statements to make reference to another independent auditor (referred to as a component auditor), unless required by law or regulation to include such reference.

5. The SAS, consistent with extant AU section 543, permits the auditor’s report to make reference to a component auditor.

6. Contains requirements and application material that are not in ISA 600, which results in substantive differences in the wording of the objectives, requirements, and application material between ISA 600 and the proposed SAS.

7. The ASB’s convergence policy requires compelling reasons for differences between its standards and those of the IAASB. The ASB believes:

a) That the ability to make reference to the report of another auditor is appropriate in the United States.

b) No compelling practice issues suggest a need to change an approach that has always been permitted by generally accepted auditing standards (GAAS) in the United States.

c) The size, complexity, and diversity of some audits, in particular the federal government in which withdrawal or disclaimer of opinion are not viable options, make eliminating the option to make reference to a component auditor problematic.

d) That there will be considerable practical problems with access issues, particularly with equity investments, under the ISA approach.

e) That there is no difference in the effectiveness of the audit following either approach when the audits are conducted in accordance with GAAS.

8. When no reference is made to a component auditor in the auditor’s report on the group financial statements, no substantive differences in the requirements exist between ISA 600 and the proposed SAS.

9. This SAS contains Exhibit G “Comparison of Requirements of Statement on Auditing Standards, Special Considerations, Audits of Group Financial Statements (Including the Work of Component Auditors)” that shows the differences in requirements between the SAS and ISA 600.

10. The SAS is broader than AU section 543. It lists the procedures necessary for the group engagement team to perform in order to be involved with component auditors to the extent necessary for an effective audit. It explains the degree of involvement required when reference is made to component auditors in the auditors’ report.

11. Requirements —The requirements of the SAS address the following:

a) Acceptance and continuance considerations

b) The group engagement team’s process to assess risk

c) The determination of materiality to be used to audit the group financial statements

d) The determination of materiality to be used to audit components

e) The selection of components and account balances for audit testing

f) Communications between the group engagement team and component auditors

g) Assessing the adequacy and appropriateness of audit evidence by the group engagement team in forming an opinion on the financial statements

12. In situations when the group engagement partner does not make reference to a component auditor in the audit report on the group financial statements, all of the requirements of the proposed SAS apply, when relevant in the context of the specific group audit engagement.

Statement on Auditing Standards, Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures (Redrafted)

1. Supersedes SAS No. 57, Auditing Accounting Estimates and Auditing Fair Value Measurements and Disclosures and SAS No. 101, Auditing Fair Value Measurements and Disclosures (AICPA, Professional Standards, vol. 1, AU sec. 342 and 328).

2. Issued September 4, 2009 with a comment period that ended November 30, 2009.

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

4. Changes From Existing Standards

a) Does not change or expand SAS No. 57 or SAS No. 101 in any significant respect.

b) The SAS is restructured to reflect a more principles-based approach to standard setting.

c) As done in other revised SASs, certain requirements that are duplicative of broader requirements (in this case SAS No. 57 and SAS 101) have been moved to application and other explanatory material, consistent with ISA 540.

d) Consistent with the approach taken by the IAASB in the development of ISA 540 (Revised and Redrafted), Auditing Accounting Estimates, Including Fair Value Estimates and Related Disclosures, the proposed SAS combines AU section 342, Auditing Accounting Estimates with AU section 328, Auditing Fair Value Measurements and Disclosures (AICPA, Professional Standards, vol. 1).

5. Other considerations

a) The ASB considered the disposition of AU section 332, Auditing Derivatives Estimates (AICPA, Professional Standards, vol. 1) and concluded that many of the requirements of AU section 332 are redundant with or very similar to other requirements in the risk assessment standards.

b) Believe these are better addressed as interpretative guidance in the Audit Guide Auditing Derivative Instruments, Hedging Activities, and Investments in Securities.

c) A few requirements that were not covered elsewhere in the standards were included along with related application guidance in the SAS Audit Evidence Specific Considerations for Selected Items when AU section 331, Inventories and AU section 337, Inquiry of a Client’s Lawyer Concerning Litigation, Claims and Assessments (AICPA, Professional Standards, vol. 1), were redrafted for clarity and convergence using ISA 501 (Redrafted), Other Evidence as a base.

6. Supplements to the Exposure Draft

The Audit and Attest Standards Staff prepares supplementary materials for many of the proposed SASs. However, supplementary material for proposed SASs was not a part of the Exposure draft or the SAS and includes:

a) A matrix document, which compares ISA 540, the proposed SAS, and extant AU sections 342 and 328. The schedule contains the following:

(1) ISA 540

(2) The proposed SAS, marked to show differences in language between the ISA and the proposed SAS (new and deleted material are shown in colored track changes.)

(3) The requirements and guidance in extant AU section 342, mapped against the proposed SAS, to demonstrate how the material in AU section 342 has been reflected in the proposed SAS

(4) The requirements and guidance in extant AU section 328, mapped against the proposed SAS, to demonstrate how the material in AU section 328 has been reflected in the proposed SAS

b) Mapping documents, which map the requirements and guidance contained within SAS No. 57 and SAS No. 101 to the proposed SAS to demonstrate how the material in SAS No. 57 and SAS No. 101 has been reflected in the proposed SAS.

c) The supplementary materials can be found on the AICPA website, www.aicpa.org under the Professional Resources – Accounting and Auditing tab.

Redrafted Statement on Auditing Standards, External Confirmations

1. This SAS

a) Supersedes SAS No. 67, The Confirmation Process (AICPA, Professional Standards, vol. 1, AU sec. 330).

b) Redrafts SAS No. 67 to apply the Auditing Standards Board’s (ASB’s) clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

2. Convergence

a) Drafted using International Standard on Auditing (ISA) No. 560, Subsequent Events, as a base.

b) Differences between the proposed SAS and ISA No. 560, 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 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. 560 and the application of the proposed SAS.

3. Effective Date

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

4. Changes from Existing Standards

a) Is not expected to change practice in any significant respect;

b) To reflect a more principles-based approach to standard setting, certain requirements that are duplicative of broader requirements in SAS No. 67 have been moved to application and other explanatory material, consistent with ISA No. 505. In the ASB’s view, this has not changed the overall effectiveness of the proposed SAS.

c) Most significant changes to existing standards are as follows:

(1) Responsibilities of the auditor when management refuses to allow the auditor to send a confirmation request. These responsibilities include inquiries as to reasons for the refusal, evaluating alternative procedures and impact on the risk assessment. When and if the auditor concludes that management’s refusal is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures the auditor should include communicate with those charged with governance These procedures are not currently required by AU section 330.

(2) Added application material to the proposed SAS regarding the use of oral responses to confirmation requests as audit evidence.

(a) It clarifies that the receipt of an oral response to a confirmation request does not meet the definition of an external confirmation.

(b) Provides guidance on how the response may be considered part of alternative procedures performed in order to obtain sufficient appropriate audit evidence.

(c) The definition of confirmation has been changed.

(i) The ASB has expanded the ISA definition of an external confirmation to include direct access by the auditor to information held by a third party.

(ii) Third-party involvement is increasingly common, and the ASB believes that the inclusion of this concept clarifies the definition.

(iii) The ASB believes this clarification is an improvement to the ISA definition because it specifically addresses a situation that is becoming increasingly common, and this change to the ISA definition is not inconsistent with the intent of the IAASB’s definition.

Statement on Auditing Standards, Audit Sampling (Redrafted)

1. This SAS

a) Supersedes SAS No. 39, Audit Sampling (AICPA, Professional Standards, vol. 1, AU sec. 350).

b) Redrafts SAS No. 39 to apply the Auditing Standards Board’s (ASB’s) clarity drafting conventions and to converge with International Standard on Auditing (ISA) No. 530 (Redrafted), Audit Sampling,

2. Convergence

a) Drafted using ISA No. 530 (Redrafted) as a base.

b) Differences between the proposed SAS and ISA No. 530 (Redrafted) 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. The ASB believes that such changes will not create differences between the application of ISA No. 530 (Redrafted) and the application of the proposed SAS.

3. Effective Date

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

4. Changes from Existing Standards

a) The SAS does not change or expand SAS No. 39 in any significant respect.

b) To reflect a more principles-based approach to standard setting, certain requirements that are duplicative of broader requirements in SAS No. 39 have been moved to application and other explanatory material, consistent with ISA No. 530 (Redrafted). In the ASB’s view, this has not changed the overall effectiveness of the proposed SAS.

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.

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.

Statement on Auditing Standards, Consideration of Fraud in a Financial Statement Audit (Redrafted)

1. The SAS

a) Supersedes SAS No. 99, Consideration of Fraud in a Financial Statement Audit (AICPA, Professional Standards, vol. 1, AU sec. 316).

b) Redrafting of SAS No. 99 to apply the ASB’s clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

c) Convergence – Drafted using ISA 240 (Redrafted), The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, as a base.

d) Differences between SAS No. 99 and ISA 240 (Redrafted) for which the ASB believes no compelling reason to be different exists have been eliminated.

e) The ASB made various changes to the language of the ISA during the drafting process to use terms or phrases that are more commonly used 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 240 and the application of the SAS.

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

3. Changes from Existing Standards

a) Does not change or expand SAS No. 99 in any significant respect.

b) To reflect a more principles-based approach to standard setting, certain requirements that are duplicative of broader requirements in SAS No. 99 have been moved to application and other explanatory material, consistent with ISA 240 (Redrafted). The ASB’s view is that this has not changed the overall effectiveness of the proposed SAS.

4. Additions to the SAS

a) The Clarity Project of the ASB has added some sections to the redrafted SAS’s. In this case Objectives are added. Objectives refer to the objectives of the auditor. In this proposed SAS Objectives are to:

(1) identify and assess the risks of material misstatement of the financial statements due to fraud;

(2) obtain sufficient appropriate audit evidence about the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses;

(3) respond appropriately to identified or suspected fraud.

Statement on Auditing Standards, Audit Considerations Relating to an Entity Using a Service Organization (Redrafted)

1. Introduction. This SAS

a) Supersedes SAS No. 70, Service Organizations (AICPA, Professional Standards, vol. 1, AU sec. 324), which contains guidance for auditors auditing the financial statements of entities that use a service organization (user auditors) and for auditors reporting on controls at a service organization (service auditors).

b) Contains guidance for user auditors. Guidance for service auditors will be contained in a new Statement on Standards for Attestation Engagements (SSAE), Reporting on Controls at a Service Organization, which is being exposed for comment concurrently with this SAS.

2. Affects Existing Standards

a) A user organization is known as a user entity.

b) In a type 2 report, the service auditor’s report would contain an opinion on the fairness of the description of the service organization’s system and on the suitability of the design of the controls for a period rather than as of a specified date, as it currently does.

c) A user auditor is permitted to make reference to the work of a service auditor in his or her report to explain a modification of the user auditor’s opinion. In those circumstances, the user auditor’s report would be required to indicate that such reference does not diminish the user auditor’s responsibility for that opinion. (As in extant AU section 324, the user auditor would be prohibited from making reference to the work of a service auditor in a user auditor’s report containing an unmodified opinion. The user auditor cannot divide responsibility for the audit of user’s financial statements by referring to the service auditor’s report.)

d) A user auditor is required to inquire of management of the user entity about whether the service organization has reported to the user entity any fraud, noncompliance with laws and regulations, or uncorrected misstatements. If so, the user auditor would be required to evaluate how such matters affect the nature, timing, and extent of the user auditor’s further audit procedures.

e) The SAS is applicable to situations in which an entity uses a shared service organization that provides services to a group of related entities.

3. Convergence

a) Drafted using the December 2007 exposure draft of International Standard on Auditing (ISA) 402 (Revised and Redrafted), Audit Considerations Relating to an Entity Using a Third Party Service Organization, as a base.

b) Differences between the SAS and the ISA 402 exposure draft, for which the ASB believes there is no compelling reason to be different, have been eliminated.

c) The ASB has made various changes to the language in the proposed ISA, including replacing terms or phrases used in the proposed ISA with those more commonly used in the United States, and tailoring examples and guidance so that they are more appropriate for the U.S. environment.

4. Effective Date

a) The SAS is effective for audits of financial statements for periods ending on or after December 15, 2012.