AICPA Update

1. AICPA Update 2019 Update on Standards for Audits, Reviews, Compilations, and Preparation Engagements Rich Cunningham, Auditor of State Mike Howard, Julian & Grube

2. Session will cover: • Primarily SAS 134, 135, 137 • Coming up soon [October 2019 ASB Meeting]: Attestation standards, materiality • Exposure drafts: Auditing Estimates; Audit Evidence; Auditor Reporting-AU-C 800/805 • Other standard-setting project - Risk Assessments

3. Recently issued auditing standards Auditor Reporting – AU-C 700 Series (SAS 134) Omnibus SAS – 2019 (SAS 135) The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports - AU-C section 720 (SAS 137 ) [Note: SAS 136 is relevant to ERISA plan audits]

4. Auditor reporting and disclosures – SAS 134 • Goals: • Enhancing the communicative value and relevance of the auditor’s report • Auditing Standards Board activity is relevant to all US professional audits • Convergence with IAASB’s auditor reporting standards • The International Auditing and Assurance Standards Board is an independent standard-setting body that serves the public interest by setting high-quality international standards for auditing, assurance, and other related areas, and by facilitating their adoption and implementation. In doing so, the IAASB enhances the quality and consistency of practice throughout the world and strengthens public confidence in the global auditing and assurance profession.

5. Auditor Reporting – AU-C 700 Series • SAS No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements • New section • AU-C 701, Communicating Key Audit Matters in the Independent Auditor’s Report • Supersedes • AU-C 700, Forming an Opinion and Reporting on Financial Statements • AU-C 705, Modifications to the Opinion in the Independent Auditor’s Report • AU-C 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report

6. Auditor Reporting – AU-C 700 Series cont’d • SAS No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements • Issued May 2019 • Effective for audits of financial statements for periods ending on or after December 15, 2020. Early adoption not permitted. • Ohio counties, cities, etc.: 12/31/2020 • Ohio schools: 6/30/2021

7. Section 700, Forming an Opinion and Reporting on Financial Statements • Changes form and content for all auditor’s reports under GAAS • Consistent with the IAASB’s revised auditor’s report • Consistent with the PCAOB’s revised auditor reporting model as to positioning of the Opinion and Basis for Opinion sections. • Significance to us: these revised auditing standards apply to more than audits of governmental entities

8. Significant Changes to the Auditor’s Report • Opinion section first • “Basis for Opinion” section second and includes a statement that • the auditor is required to be independent of the entity and to meet the auditor’s other ethical responsibilities, in accordance with the relevant ethical requirements relating to the audit

9. Significant Changes to the Auditor’s Report • “Basis for Opinion” section second and includes a new section: • Key Audit Matters [“KAM”] section (New AU-C section 701) • Not Mandatory: only include if engaged to include (agreed in terms of engagement that report will include KAMs - If included, requirements apply) • “What keeps the auditor up at night” • Selected from matters communicated with “TCWG” • “Those charged with governance”

10. Significant Changes to the Auditor’s Report • The term thosecharged with governance is defined in paragraph .06 of AU-C section 260, as “the person(s) or organization(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting and disclosure process.”  • In a government environment, examples: • thosecharged with governance or management, or both (depending on the facts and circumstances), include governing boards, city councils, audit committees, mayors, governors, legislators, university or college presidents, certain other officials elected to a constitutional office, and chancellors.

11. Significant Changes to the Auditor’s Report cont’d • Expanded descriptions of the responsibilities of: • management relating to going concern evaluation, when required by the applicable financial reporting framework • GASB might have a project coming about “going concern” • the auditor, including relating to • professional judgment and professional skepticism • going concern • communications with those charged with governance

12. Auditor Reporting – SAS No. 134 • Going Concern (AU-C 570) • AU-C 700 requires reporting in accordance with AU-C 570 when applicable; AU-C 570 amended • If substantial doubt exists, include a separate section headed “Substantial Doubt About the Entity’s Ability to Continue as a Going Concern” • Replaces required EOM [“Emphasis of a Matter”] but wording is similar

13. Section 705, Modifications to the Opinion in the Independent Auditor’s Report • Changes to conform to new section 700 • Modifications: qualified, disclaimer, adverse • No change regarding: • when a modification is required • determining the type of modification to the auditor’s report

14. Section 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report • Principal changes clarify the relationship between EOM paragraphs and KAMs in the auditor’s report • When section 701 applies, can’t substitute an EOM paragraph for a description of individual KAMs in “Key Audit Matters” section • EOM requires an appropriate heading • If report includes KAM section, EOM heading is required to include the term “Emphasis of Matter”

15. Amendments Addressing Auditing Disclosures • Amendments to various other sections to focus auditor attention on disclosures throughout the audit process • Strengthened requirements in AU-C section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, AU-C section 330, Performing Audit Procedures in Response to Assessed Risks, and AU-C section 700. • Enhanced application material in these and several other AU-C sections to assist auditors in addressing the practical challenges arising from the evolving nature of disclosures. • Effective for audits of financial statements for periods ending on or after December 15, 2020.

16. Interlude: Consideration of “Going Concern” • Governments rarely, if ever, go out of business • Recent governments with noted financial difficulties: City of Detroit, Puerto Rico • AICPA SLG indicates: • 15.29 There may be circumstances in which a governmental entity has disclosed certain condition(s) or event(s) in the financial statements (such as fund balance or net position deficits, violations of debt covenants, or default on bonds) that are indicators of substantial doubt of the government's ability to continue as a goingconcern, but collectively the indicator(s) do not meet the criteria for a goingconcern under GASB Statement No. 56, as amended. However, these indicator(s) could significantly curtail the government's ability to continue providing public services at the current level.

17. Various Amendments • Some of the more significant amendments relate to: • AU-C 570 (Going Concern) • Specifies heading and wording for new section replacing EOM paragraph when substantial doubt remains • AU-C 260 (Communication with Those Charged with Governance) • auditor required to communicate with TCWG about the significant risks identified by the auditor

18. Other Related Projects • Amendments have been or will be proposed to align the following sections with SAS 134: • AU-C section 800 (Special purpose frameworks) • “OCBOA” i.e. cash-basis, “modified” cash basis, “regulatory” basis • AU-C section 805 (Single financial statements & specific elements, accounts or items) • AU-C section 810 (Summary financial statements) • AU-C section 930 (Interim financial information) • AU-C section 935 (Compliance audits) • AU-C section 940 (Integrated audits)

19. What should you be doing now? • It’s not too early to start thinking about how this standard will affect what you [i.e. the auditors] do • Review and update firm methodologies and guidance – this takes time! • Consider the impact of amendments to various AU-C sections, including AU-C 210, Terms of Engagement. For example, update engagement letters to reflect new report wording and heightened focus on disclosures • Consider the training needs for engagement teams • Start educating identified users (e.g. your client, their lenders) about new form and content of the auditor’s report.

20. Illustrative Auditor’s Report --SAS has commercial version; SLG [and probably AoS] will come up with a governmental version--

21. Illustrative Report Independent Auditor’s Report [Appropriate Addressee] Report on the Audit of the Financial Statements Opinion We have audited the financial statements of ABC Company, which comprise the balance sheets as of December 31, 20X1 and 20X0, and the related statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1 and 20X0, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

22. Illustrative Report Basis for Opinion We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of ABC Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

23. Illustrative Report Key Audit Matters [Not Mandatory – Included if agreed to in terms of engagement] Key audit matters are those matters that were communicated with those charged with governance and, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. [Description of each key audit matter in accordance with AU-C 701.]

24. Illustrative Report Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for 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. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about ABC Company’s ability to continue as a going concern for [insert the time period set by the applicable financial reporting framework].

25. Illustrative Report Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users made on the basis of these financial statements. In performing an audit in accordance with GAAS, we: • Exercise professional judgment and maintain professional skepticism throughout the audit.

26. Illustrative Report • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of ABC Company’s internal control. Accordingly, no such opinion is expressed. • Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. • Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about ABC Company’s ability to continue as a going concern for a reasonable period of time.

27. Illustrative Report We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit. Report on Other Legal and Regulatory Requirements [The form and content of this section of the auditor’s report would vary depending on the nature of the auditor’s other reporting responsibilities.] [Signature of the auditor’s firm] [City and state where the auditor’s report is issued] [Date of the auditor’s report]

28. Materiality • The illustrative report uses the current definition of materiality • AICPA ASB has proposed a revised definition [discussed later]

29. SAS 135, Omnibus Statement on Auditing Standards – 2019 • “Omnibus”: • Merriam Webster defines “omnibus” as: “1: a usually automotive public vehicle designed to carry a large number of passengers: “took a seat on the omnibus;” 2: a book containing reprints of a number of works (as of a single author or on a single subject): ‘The omnibus contained all of the author's short stories.’ ” • Hm… Oxford Dictionaries is more helpful: - “ADJECTIVE - comprising several items: ‘Congress passed an omnibus anticrime package ‘ "

30. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendments to various AU-C sections • Amendments intended to enhance audit quality by heightening the auditor’s focus on • related parties and relationships and transactions with related parties • Significant unusual transactions • ASB considered PCAOB Pronouncements • Effective for audits of financial statements for periods ending on or after December 15, 2020. • 12/31/2020 • 6/30/2021

31. SAS 135, Omnibus Statement on Auditing Standards – 2019 1 • (Amendments to Statement on Auditing Standards (SAS)No. 122, Statements on Auditing Standards: Clarification and Recodification, as amended, • section 210, Terms of Engagement; • section 240, Consideration of Fraud in a Financial Statement Audit; • section 260, The Auditor’s Communication With Those Charged With Governance; • section 265, Communicating Internal Control Deficiencies Identified in an Audit; • section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement; • section 330, Performing Audit Procedures in Responses to Assessed Risks and Evaluating the Audit Evidence Obtained;

32. SAS 135, Omnibus Statement on Auditing Standards – 2019 2 • section 510, Opening Balances—Initial Audit Engagements, Including Reaudit Engagements; • section 550, Related Parties; • section 560, Subsequent Events and Subsequently Discovered Facts; Section 580, Written Representations; • section 600, “Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors),” and • section 930, Interim Financial Information [AICPA, Professional Standards]; • • SAS No. 130, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements [AICPA, Professional Standards, AU-C sec. 940]) • 36 pages worth of these changes – selected excerpts follow

33. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, Section 260 • .12 The auditor should communicate with those charged with governance: … • b.Significant unusual transactions, if any. … • f. Matters that are difficult or contentious for which the auditor consulted outside the engagement team and that are, in the auditor’s professional judgment, significant and relevant to those charged with governance regarding their responsibility to oversee the financial reporting process.

34. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, Section 260 • .13 The auditor should communicate with those charged with governance: … • c. that uncorrected misstatements or matters underlying those uncorrected misstatements could potentially cause future-period financial statements to be materially misstated, even if the auditor has concluded that the uncorrected misstatements are immaterial to the financial statements under audit.

35. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, Section 260 • Forms of Communication • 17. If, as part of its communication to those charged with governance, management communicated some or all of the matters the auditor is required to communicate, and as a result, the auditor did not communicate these matters at the same level of detail as management, the auditor should communicate any omitted or inadequately described matters to those charged with governance. The auditor does not need to communicate them at the same level of detail as management, as long as the auditor a) participated in management’s discussion with those charged with governance, and b) affirmatively confirmed to those charged with governance that management has adequately communicated these matters.

36. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, Section 260 - Documentation • 21. … If, as part of its communication to those charged with governance, management communicated some or all of the matters the auditor is required to communicate, and as a result, the auditor did not communicate these matters at the same level of detail as management, the auditor should include a copy or summary of management’s communications provided to those charged with governance in the audit documentation.

37. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, Section 260 • Significant Unusual Transactions (Ref. par. .12b) .A30 The communication of significant unusual transactions may include: • the auditor’s views on the policies and practices management used to account for significant unusual transactions; and • the auditor's understanding of the business purpose for significant unusual transactions.

38. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, AU-C Section 550 [Related Parties][selected changes] • .14 The auditor should inquire of management and others within the entity regarding the following: • a. The identity of the entity’s related parties, including changes from the prior period (Ref: par. .A9–.A1415) • b. The nature of the relationships (including ownership structure) between the entity and these related parties • c. The business purpose of entering into a transaction with a related party versus an unrelated party • d. Whether the entity entered into, modified, or terminated any transactions with these related parties during the period and, if so, the type and business purpose of the transactions

39. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, AU-C Section 550 [Related Parties][selected changes] • .15 The auditor should inquire of management and others within the entity and perform other risk assessment procedures considered appropriate to obtain an understanding of the controls, if any, that management has established to … • c. authorize and approve significant unusual transactions, and arrangements outside the normal course of business. • Inquiries should include asking about any related party transactions • a. that have not been authorized and approved in accordance with the entity’s established policies or procedures regarding the authorization and approval of transactions with related parties. • b. for which exceptions to the entity's established policies or procedures were granted and the reasons for granting those exceptions

40. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, AU-C Section 550 [selected changes] • . 2122. The auditor should evaluate whether the entity has properly identified its related party relationships and transactions. Evaluating whether an entity has properly identified its related party relationships and transactions involves more than assessing the process used by the entity. The evaluation should include procedures to test the accuracy and completeness of the related party relationships and transactions identified by the entity, taking into account the information gathered during the audit.

41. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, AU-C Section 210 • .A32 The communication with the predecessor auditor may be either written or oral. Matters subject to the auditor’s inquiry of the predecessor auditor may include the following: … • The predecessor auditor's understanding of the nature of the entity’s relationships and transactions with related parties and significant unusual transactions

42. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, AU-C Section 240 [Fraud] • New definition added: • Significant unusual transactions. Significant transactions that are outside the normal course of business for the entity or that otherwise appear to be unusual due to their timing, size, or nature.

43. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, AU-C Section 240 [Fraud] • Auditor to evaluate whether significant unusual transactions might be fraud; procedures required:) • Reading the underlying documentation and evaluating whether the terms and other information about the transaction are consistent with explanations from inquiries and other audit evidence about the business purpose (or the lack thereof) of the transaction • Determining whether the transaction has been authorized and approved in accordance with the entity’s established policies and procedures • Evaluating whether significant unusual transactions that the auditor has identified have been properly accounted for and disclosed in the financial statements

44. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, AU-C Section 240 [Fraud] • Unusual transaction fraud indicators 1: • Transactions involve previously unidentified related parties or relationships or transactions with related parties previously undisclosed to the auditor. • Transactions involve other parties that do not have the substance or the financial strength to support the transaction without assistance from the entity under audit or any related party of the entity. • Transactions lack commercial or economic substance or are part of a larger series of connected, linked, or otherwise interdependent arrangements that lack commercial or economic substance individually or in the aggregate (for example, a transaction is entered into shortly prior to period end and is unwound shortly after period end).

45. SAS 135, Omnibus Statement on Auditing Standards – 2019 • Amendment to SAS No. 122, AU-C Section 240 [Fraud] • Unusual transaction fraud indicators 2: • Transactions occur with a party that falls outside the definition of a related party (as defined by the applicable financial reporting framework), with either • party able to negotiate terms that may not be available for other, more clearly independent parties on an arm's-length basis. • Transactions exist to enable the entity to achieve certain financial targets.

46. SAS 137 The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports • What typically is included in governmental general purpose annual financial reports? [Note to our private-sector friends: need to look at your private-entity, including private NFPs, annual reports] • Basic Financial Statements: [i.e., Statements of Net Position, Activities Statements, Cash Flows Statements, [sometimes] Budgetary Statements, Notes to the Financial Statements, MD&A, Other RSI, e.g., pension and OPEB information, “modified approach” infrastructure info] • Additional CAFR Materials: • Introductory Section [table of contents, letter of transmittal, list of officials, etc.], combining fund statements, Statistical section, [sometimes] budgetary schedules • Additional audit and single audit materials [reports on compliance and controls, federal awards schedule] • Question: which of these are “other information”?

47. SAS 137 The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports • There is RSI; SI; and OI • Basic financial statements, RSI, and SI are not OI • These are not OI: • Basic Financial Statements: [Statements of Net Position, Activities Statements, Cash Flows Statements, [sometimes] Budgetary Statements, Notes to the Financial Statements, MD&A, Other RSI] • budgetary schedules [RSI], combining fund statements [SI], federal awards schedule [SI] • These are OI: • Introductory Section, Statistical section, anything else added to the annual general-purpose financial reports

48. SAS 137 The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports • Supersedes AU-C section 720, Other Information in Documents Containing Audited Financial Statements • Issued July, 2019 • Effective date: audits of financial statements for periods ending on or after December 15, 2020 [Early implementation is not permitted] • 12/31/2020 • 6/30/2021

49. SAS 137 The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports • Clarifies the auditor is required to apply procedures only to other information included in annual reports (or similar documents). • Revises work effort to require the accountant to remain alert for information that is misleading, including because it omits or obscures information necessary for a proper understanding of a matter disclosed in the other information • Requires a separate section be included in the auditor’s report addressing OI

50. SAS 137 The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports • SI [Usually] and RSI: Auditor is engaged to and reports on the information “in relation to” the audited financial statements taken as a whole • OI [Usually]: Auditor is not engaged to (and declines) to report on the information, unless it’s materially inconsistent with the rest of the financial statements [“report” means “opinion”]