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.

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.