The Principles and Objectives for Redrafted SASs

Here is a summary of the first redrafted and clarified SAS issued by the Auditing Standards Board which will become effective for periods ending after December 15, 2012:

Preface to Codification of Statements on Auditing Standards, Principles Underlying an Audit Conducted in Accordance With Generally Accepted Auditing Standards and Statement on Auditing Standards, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards

This released document contains two elements:

· Preface to Codification of Statements on Auditing Standards, Principles Underlying an Audit Conducted in Accordance With Generally Accepted Auditing Standards, and

· Statement on Auditing Standards, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards.

Changes from Existing Standards

Will supersede SAS No. 95, as amended, which contains the general, field work, and reporting standards (the 10 standards).

Consideration by the ASB of the 10 standards

· SASs are codified within the framework of the 10 standards, viewed as the historical basis for generally accepted auditing standards (GAAS). The clarity drafting conventions adopted by the ASB include establishing an objective or objectives for each SAS.

· The SAS establishes the overall objectives of the auditor, which are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thus, enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report on the financial statements, or otherwise as required by the SASs, in accordance with the auditor’s findings.

· Each SAS contains an objective, or objectives that provide a link between the requirements and the overall objectives of the auditor. The SASs taken together provide the standards for the auditor’s work in fulfilling the overall objectives of the auditor.

· If an auditor fulfills the overall objective of the audit and meets applicable ethical requirements, such as the AICPA Code of Professional Conduct, the ASB believes that the auditor will have fulfilled the requirements currently stated in the 10 standards. Accordingly, the proposed SAS does not contain 10 unconditional requirements that are the direct equivalent of the 10 standards.

Replacement of the 10 standards with principles

· To preserve the functions of the 10 standards, the ASB has developed the Principles Governing the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards (referred to as the principles).

· The principles identified in the preface:

§ have been drafted in the present tense.

§ are not requirements and

§ do not carry any authority.

§ are the fundamental principles that govern an audit and are supported by the objectives and requirements of the individual SASs.

Structure of the Principles

· The purpose of an audit (purpose). To provide financial statement users with an opinion by the auditor on whether the statements are presented fairly, in all material respects, in a manner that conforms to an applicable financial reporting framework

· Personal responsibilities of the auditor (responsibilities). These include competence and capabilities, compliance with appropriate ethical standards and approaching the work with appropriate professional skepticism and judgment.

· Auditor actions in performing the audit (performance). Perform the work necessary to be reasonably, but not absolutely, sure that the financial statements are free from material misstatement due to fraud or error.

· Reporting (reporting). Based on the results of the performance of the audit, express an opinion or state that an opinion cannot be expressed on the financial statements.

Applicable Financial Reporting Frameworks

The SAS introduces the following terms:

Financial reporting framework. A set of accounting principles that are used to determine measurement, recognition, presentation, and disclosure of all material items for preparing financial statements in accordance with principles generally accepted in the U.S.(GAAP), International Financial Reporting Standards (IFRSs), issued by the International Accounting Standards Board (IASB), or a special purpose framework prepared on a comprehensive basis of accounting other than GAAP (OCBOA– now referred as Special Purpose Framework).

Applicable financial reporting framework— The financial reporting framework adopted by management in the preparation and presentation of the financial statements.

Fair-presentation framework— Refers to a financial reporting framework that requires compliance with the requirements of the framework and acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances. Current reporting requirements do not permit. departures from GAAP.

Regulatory and contractual-based framework—Refers to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgments in (c) above This type of framework is referred to in the ISAs as a compliance framework; the term was changed for purposes of GAAS to regulatory or contractual-based framework to avoid confusion with the term compliance audit.

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ASB Clarity and Convergence Projects Produce 30+ New SASs

The AICPA Auditing Standards Board (ASB) is involved in a project that is designed to make U.S. generally accepted auditing standards (GAAS) easier to read, understand, and apply. Since the creation of the Public Company Accounting Oversight Board (PCAOB) in 2004 the ASB has gone through a reorganization and has considered how best to meet its mission. In addition it has been cognizant of the increasingly widespread acceptance of International Standards on Auditing (ISAs).

The Board subsequently developed a plan to converge U.S. GAAS with the ISAs while, at the same time, avoiding unnecessary conflict with PCAOB standards. In order to converge SASs with ISAs the Board aligned its agenda with that of the IAASB and began to develop its standards based on the ISAs. This allows the ASB to consider projects simultaneously with the IAASB.

Clarity Project

The foundation of the Clarity Project is the establishment of an objective for each auditing standard to better reflect a principles-based approach to standard-setting. In March 2007 the ASB issued a discussion paper, Improving the Clarity of ASB Standards. As a result of the feedback the Board received on this discussion paper, the ASB established “clarity drafting conventions” that will be applied to all standards issued by the ASB after January, 2008.

The clarity drafting conventions are:

a) Establishing objectives for each of the standards
b) Including a definitions section, where relevant, in each standard
c) Separating requirements from application and other explanatory material
d) Numbering application and other explanatory material paragraphs using an A prefix and presenting them in a separate section (following the requirements section)
e) Using formatting techniques, such as bulleted lists, to enhance readability
f) Special considerations relevant to audits of smaller, less complex entities
g) Special considerations relevant to audits of governmental audits

The ASB currently is in the process of:

a) Redrafting all of the auditing sections in Codification of Statements on Auditing Standards,
b) Applying the clarity drafting conventions, and
c) Converging the material with the international auditing standards.

This process includes exposing clarity redrafts, considering comments, making changes, and finalizing the standards. The ASB has directed that all clarified and redrafted standards will be effective on the same date, (Standards that address current issues will have earlier effective dates.), for audits of financial statements for periods ending on or after December 15, 2012.

Currently, there are more than 20 finalized standards plus other proposed standards. While changes in the standards are for most subjects not consequential, auditors will need an understanding of the new standards when auditing entities for the year ending December 31, 2012. In future blogs, we plan to discuss and dissect each of the new finalized standards that are posted on the ASB's Clarity Project page of the AICPA website.

SAS No. 121 Issued by ASB

The Auditing Standards Board (ASB) has issued SAS No. 121, Revised Applicability of Statement on Auditing Standards No. 100, Interim Financial Information. Issued in February 2011 this SAS is effective for interim reviews of interim financial information for periods beginning after December 15, 2011. Early application is permitted.

Looking back to February 2009, you’ll recall that the ASB issued SAS No. 116, Interim Financial Information, which amended SAS No. 100, Interim Financial Information,(AU section 722 of AICPA Professional Standards) to address the independent accountant’s professional responsibilities when the accountant undertakes an engagement to review interim financial information of a nonissuer. SAS No. 121 further amends SAS No. 100 to make AU section 722 applicable when the accountant audited the entity’s latest annual financial statements, and the appointment of another accountant to audit the current year financial statements is not effective prior to the beginning of the period covered by the review.

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Proposed SAS Alert As To The Intended Use Of The Auditor’s Written Communication

This Proposed SAS was issued December 21, 2010. The comment period ends April 29, 2011. The Proposed SAS supersede SAS No. 87, Restricting the Use of an Auditor’s Report [AICPA, Professional Standards, vol. 1, AU sec. 532]. It would be effective for written communications related to audits of financial statements for periods ending on or after December 15, 2012, and, for all other engagements conducted in accordance with generally accepted auditing standards (GAAS), for written communications issued on or after December 15, 2012.

The proposed SAS

• Has been clarified to indicate that it applies to auditor’s reports and other written communications issued in connection with an engagement conducted in accordance GAAS.
• Eliminates the use of the term restricted use and instead addresses the intended use of such communications.
• Establishes an umbrella requirement to include an alert as to the intended use of the auditor’s written communication when the subject matter of that communication is based on (a) measurement or disclosure criteria that are determined by the auditor to be suitable only for a limited number of users who can be presumed to have an adequate understanding of the criteria, (b) measurement or disclosure criteria that are available only to the specified parties, or (c) matters identified by the auditor during the course of the engagement that are not the primary objective of the engagement (commonly referred to as a by-product report).
• Modifies the guidance pertaining to single combined reports covering both (a) communications that are required to include an alert as to intended use and (b) communications that are for general use, which do not ordinarily include such an alert.
• Indicates that the alert as to intended use pertains only to the communications required to include such an alert. Accordingly, the intended use of the communications that are for general use is not affected by this alert.

A copy of the exposure draft is available from the AICPA website, www.aicpa.org.

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ASB Issues SAS on Reports on Application of Requirements of an Applicable Financial Reporting Framework

The Auditing Standards Board has issued Statement on Auditing Standards, Reports on Application of Requirements of an Applicable Financial Reporting Framework. This SAS supersedes SAS No. 50, Reports on the Application of Accounting Principles (AICPA, Professional Standards, vol. 1, AU sec. 625). It is effective for engagements that end on or after December 15, 2012.

This SAS covers the reporting accountant’s responsibilities when asked to issue a written report on either the application of the requirements of an applicable financial reporting framework to a specific transaction or the type of report that may be issued on a specific entity’s financial statements. It also applies to oral advice provided by the reporting accountant that the reporting accountant concludes is intended to be used by a principal to the transaction as an important factor considered in reaching a decision on the application of the requirements of an applicable financial reporting framework to a specific transaction or on the type of report that may be issued on a specific entity’s financial statements.

Because there are differing interpretations that may exist concerning whether and, if so, how existing accounting policies in an applicable financial reporting framework apply to new transactions or how new accounting policies in an applicable financial reporting framework apply to existing transactions, management and others may consult with accountants on the application of the requirements of an applicable financial reporting framework to those transactions or to increase their knowledge of specific financial reporting issues.

You should be aware that this SAS does not apply to:

• a continuing accountant with respect to the specific entity whose financial statements the continuing accountant has been engaged to report on,
• engagements either to assist in litigation involving accounting or auditing matters or to provide expert testimony in connection with such litigation,
• professional advice provided to another accountant in public practice,
• to communications such as position papers prepared by an accountant for the purpose of presenting views on an issue involving the application of the requirements of an applicable financial reporting framework, provided that these communications are not intended to provide guidance on the application of these requirements to a specific transaction.

You may download clarified auditing standards from the AICPA website at www.aicpa.org/InterestAreas/AccountingAndAuditing/Resources.

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Our newest publication is the Quarterly Accounting and Auditing Reference Guide, Issue 3. Focusing on accounting, auditing and reporting issues with wide practice applications, this reference aid will benefit non-governmental accountants in public accounting and private industry. Available now at www.cpafirmsupport.com/home/OurServices/tabid/65/Default.aspx

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ASB Issues Clarified SAS on Analytical Procedures

The Auditing Standards Board has issued another clarified auditing statement, Analytical Procedures (Redrafted). This SAS supersedes SAS No. 56, Analytical Procedures (AICPA, Professional Standards, vol. 1, AU sec. 329) and is effective for audits of financial statements for periods ending on or after December 15, 2012.

This SAS covers the auditor’s use of analytical procedures as substantive procedures (substantive analytical procedures) and his or her responsibility to perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion on the financial statements. This clarified SAS refers to two other clarified SASs, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (Redrafted) and Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (Redrafted). These two SASs contain information on the use of analytical procedures as risk assessment procedures and the nature, timing, and extent of audit procedures in response to assessed risks.

You’ll recall that clarified SASs contain “objectives.” These objectives have to do with the objectives of the auditor. In this clarified SAS those objectives are:

• to obtain relevant and reliable audit evidence when using substantive analytical procedures and
• to design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion about whether the financial statements are consistent with the auditor’s understanding of the entity.

You may download clarified auditing standards from the AICPA website www.aicpa.org/InterestAreas/AccountingAndAuditing/Resources.

New Publication
Our newest publication is the Quarterly Accounting and Auditing Reference Guide, Issue 3. Focusing on accounting, auditing and reporting issues with wide practice applications, this reference aid will benefit non-governmental accountants in public accounting and private industry. Available now at www.cpafirmsupport.com/home/OurServices/tabid/65/Default.aspx

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Original Auditing Standards: Where are they?

Most of the news on auditing standards lately has been on Clarified Auditing Standards. As you know the Auditing Standards Board (ASB) has been working on redrafting, revising, and converging audit, attest, and quality control standards with international standards. But the clarified auditing statements are not effective until December 15, 2012. So meanwhile where do you find the current standards?

Since the AICPA revamped their website it is more difficult to find the standards. So for your information here’s the link:

http://www.aicpa.org/Research/Standards/AuditAttest/Pages/SAS.aspx.

On this page you’ll find a list of the SASs from No. 1 to 120, with links to their respective Auditing Sections (AU) in the professional standards. The list is current as of June 1, 2010.