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Audit and Attest Standards Update

Audit and Attest Standards Update. Ensuring Integrity: 4 th Annual Audit Conference Harold L. Monk, Jr. CPA, CFE Davis, Monk & Company. Session Objectives. Discuss the recent activities of the ASB Clarity project

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Audit and Attest Standards Update

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  1. Audit and Attest Standards Update Ensuring Integrity: 4th Annual Audit Conference Harold L. Monk, Jr. CPA, CFE Davis, Monk & Company

  2. Session Objectives Discuss the recent activities of the ASB Clarity project SAS No. 115, Communicating Internal Control Related Matters Identified in an Audit SAS No. 116, Interim Financial Information SQCS No. 7, A Firm’s System of Quality Control 2

  3. Session Objectives Newly approved SASs: Compliance Audits Required Supplementary Information Other Information in Documents Containing Audited Financial Statements Supplemental Information in Relation to the Financial Statements as a Whole

  4. Recent Auditing Standards Board Activities Clarity Project

  5. Clarity • Background • Discussion paper issued March 2007 • ASB considered comments received and approved direction forward August 2007 • Goals: • Address concerns over length and complexity of standards • Make standards easier to read, understand and implement • Will lead to enhancements in audit quality

  6. Clarity Drafting Conventions • Introduction • Objective • Definitions • Terms used in the SAS are defined • Establish separate glossary of terms • Requirements and Application Material

  7. Objective • Create objectives for each standard • Provide a framework for the application of professional judgment • Outcome based goal • Difficult to achieve the overall objective of the audit if individual objectives are not achieved

  8. Requirements and Application Material • Application and other explanatory material presented in a separate section that follows the requirements • Application and other explanatory material paragraphs numbered using an A prefix • Cross-referencing between requirements and related application material

  9. Clarity and Convergence • Convergence with ISAs • Removal of unnecessary differences • Supplemental materials with EDs • Mapping of the requirements and guidance contained within extant AU section to the proposed SAS; and • Schedule of proposed changes in requirements and explanatory material as a result of redrafting. • Schedule of detailed changes in language between the proposed SAS and the ISA. • Exhibit of substantive differences with ISA

  10. Audit and Attest UpdateClarity Project • Once finalized, they’ll be made available to practitioners. • However, the standards will not become effective piecemeal. • With limited exceptions, all “clarified standards” will become effective at the same time • Most likely 2011

  11. Implementation Issues Of Risk Assessment Standards

  12. Q&A—Use of Walkthroughs • Question—How often do walkthroughs need to occur? • Answer—Auditors will most likely perform walkthroughs annually to document their understanding of internal control and to establish the continued reliance of audit evidence obtained in prior periods. TIS 8200.12

  13. Q&A—Journal Entries • Question—Paragraph 52 of SAS No. 110 refers to “adjustments made during the course of preparing the financial statements” to address entries prepared by the client during the process of drafting the financial statements (rather than all entries posted in the accounting system at year end). Is this correct? • Answer—Yes, this requirement relates to entries posted during the financial statement closing process. SAS 99 establishes requirements to test journal entries during the audit period. TIS8200.16

  14. Recently Issued Standards Statement on Auditing Standards No. 115, Communicating Internal Control Related Matters Identified in an Audit 14

  15. SAS 115 Effective for periods ending after 12/15/09 Early adoption is allowed Supersedes SAS 112 of the same title

  16. SAS 115 Why revised? – To eliminate differences resulting from the issuance of SSAE No. 15, An Examination of an Entity’s Internal Control Over Financial Reporting That is Integrated With an Audit of Financial Statements SSAE 15 conform definitions of control deficiency, material weakness and significant deficiency to AS 5 Provide for more professional judgment Not intended to reduce quality of communication

  17. Control Deficiency A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis.

  18. Material Weakness A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected on a timely basis. Reasonable possibility = the likelihood of the event is either "reasonably possible" or "probable," as those terms are used in SFAS No. 5, Accounting for Contingencies

  19. The Significant Deficiency A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

  20. Deficiencies As with SAS 112, nothing is an automatic material weakness or significant deficiency Preparation of financial statements Professional judgment must be applied

  21. Deficiencies Revises the list of deficiencies in internal control that are indicators of a material weaknesses to consist of: Identification of fraud, whether or not material, on the part of senior management Restatement of previously issued financial statements to reflect the correction of a material misstatement due to fraud or error

  22. Deficiencies Identification by the auditor of a material misstatement of the financial statements under audit in circumstances that indicate that the misstatement would not have been detected by the entity’s internal control; and Ineffective oversight of the entity’s financial reporting and internal control by those charged with governance

  23. Deficiencies SAS 115 does not include the list of deficiencies that ordinarily would be considered at least significant deficiencies

  24. Communication Needs to be in writing SAS 115 contains a revised illustrative written communication to management and those charged with governance of material weaknesses and significant deficiencies Prior year comments can be communicated by reference to the prior year letter Best made by report release date but needs to be made by 60 days from release date

  25. Recently Issued Standards Statement on Auditing Standards No. 116, Interim Financial Information 25

  26. SAS 116 Effective for reviews of interim financial information for interim periods beginning after December 15, 2009. Early application is permitted Supercedes SAS 100

  27. SAS 116 Amends SAS 100/AU 722 to accommodate reviews of interim financial information of nonissuers. Would apply when the interim financial information is intended to provide a periodic update of year end reporting

  28. SAS 116 Applies when: The entity’s latest annual financial statements have been audited by the accountant or a predecessor; The accountant has been engaged to audit the entity’s current year financial statements, or the accountant audited the entity’s latest annual financial statements and expects to be engaged to audit the current year financial statements

  29. SAS 116 The client prepares its interim financial information in accordance with the same financial reporting framework as that used to prepare the annual financial statements If any of the following are not met, the review should be performed in accordance with SSARSs.

  30. SAS 116 If the interim financial information is condensed all of the following are met: The condensed interim financial statements purport to conform with an appropriate financial reporting framework The condensed interim financial information includes a note that the financial information does not represent complete financial statements and should be read in conjunction with the entity’s latest annual audited financial statements

  31. SAS 116 The condensed interim financial information accompanies the entity’s latest audited financial statements or such audited annual financial statements are made readily available by the entity. Readily available = a third party can obtain the financial statements without any further action by the entity. F/S on the web may be readily available “Available upon request” are not readily available

  32. SAS 117 - Compliance Audits • Revises AU 801 by: • Changing the title • Clarifying its Applicability • Establishing a requirement for the auditor to adapt and apply GAAS to a compliance audit • Identifies AU sections applicable to compliance audits • Defines terms related to a compliance audit

  33. SAS 117 - Compliance Audits • Revisions to AU 801 (continued) • Identifies auditor requirements unique to compliance audits • Design and perform further audit procedures, including tests of details, to obtain sufficient appropriate audit evidence about the entity’s compliance with each of the applicable compliance requirements in response to assessed risks of material noncompliance.

  34. SAS 117 - Compliance Audits • Requirements (continued) • Identify audit requirements specified in the government audit requirement that is supplementary to GAAS and GAS and perform appropriate procedures • If audit guidance provided by government agency has not been updated or conflicts with current GAAS or GAS, comply with the most current applicable GAAS and GAS instead of the outdated or conflicting guidance

  35. Audit and Attest Standards Update Other Current ASB Projects

  36. Audit and Attest Standards UpdateOther Current ASB Projects • Revisions to SAS 70 • Move Service Organization examination to AT Standards • Revisions to auditing estimates and fair value • Withdrew SAS 69 to remove GAAP hierarchy for FASB, GASB and FASAB incorporation • Revise AU 534 “Financial Statements Prepared for Use in Other Countries” because IFRS is now recognized as equivalent U.S. GAAP

  37. Audit and Attest Standards Update-Other Current ASB Projects • Newly approved standard – Proposed Preface to the Codification of Statements on Auditing Standards and • Proposed Statement on Auditing Standards – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards

  38. Proposed Preface • Supersede SAS 95, Generally Accepted Auditing Standards • Currently contains the general, field work, and reporting standards • If an auditor fulfills the overall objective of the auditor and meets applicable ethical requirements, the ASB believes they will have fulfilled the requirements of the 10 standards. Accordingly the new SAS does not contain the equivalent of the 10 standards. • They are restated in guiding fundamental principles.

  39. Proposed Preface • Proposed Preface • An audit is conducted on the premise that management and those charged with governance have responsibility • For the preparation and presentation of the financial statements which includes the design, implementation and maintenance of internal control • To provide the auditor with all information required or requested and unrestricted access to those within the entity

  40. Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards • Establishes the auditors overall responsibilities when conducting an audit • Sets out the overall objectives • Explains the nature and scope of an audit • Explains the scope, authority and structure of GAAS • Includes requirements establishing the general responsibilities of the auditor in all audits

  41. Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards • Purpose of an audit is to enhance the degree of confidence that intended users can place in the financial statements • Achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework • FASB, GASB, FASAB, OCBOA, IFRS (General Purpose / Fair Presentation) or Special Purpose Framework

  42. Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards • Opinion based on obtaining reasonable assurance financial statements are free from material misstatement • Opinion deals with financial statements as a whole so auditor is not responsible for the detection of misstatements not considered material.

  43. Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards • Auditor should comply with relevant ethical requirements including independence and due care • Auditor should plan and perform the audit with professional skepticism • Comply with all relevant AU sections • Auditor should have an understanding of the entire text of an AU section • Auditor may make suggestions about or draft in whole or in part the financial statements

  44. AU 558 –Supplementary Information • Broken into three separate standards: • Required Supplementary Information • Other Information in Documents Containing Audited Financial Statements • Supplemental Information in Relation to the Financial Statements as a Whole

  45. RSI • Required Supplementary Information is defined as information that a designated accounting standard setter requires to accompany an entity’s basic financial statemetns • Objective is to communicate through a written report if the auditor has identified any material modifications that should be made to the RSI for it to conform with standard

  46. RSI • Required procedures: • Inquire of management about methods of preparing • Compare information for consistency with management responses to inquiries, audited financial statements, other knowledge obtained during the audit • Obtain written representations

  47. RSI • Provides Reporting Guidance • When all RSI is included • When a portion of RSI has been omitted • When none of the RSI is included • Auditors’ opinion on the basic financial statements is not affected by any of the above

  48. Other Information (OI) in Documents Containing Audited Financial Statements • Eliminates distinction between OI included in an auditor submitted document and in a client-prepared document • Auditor must read the OI to identify material inconsistencies, if any • Arrange to obtain the OI before release of the report • Provides guidance if inconsistencies are identifed

  49. Proposed SAS - OI Eliminates the distinction between OI that is included in an auditor submitted document that contains the client’s basic financial statements and the auditor’s report thereon and OI that is in a client prepared document Auditor should read the OI to identify material inconsistencies with the financial statements

  50. Proposed SAS - OI Auditor should make appropriate arrangements with management or those charged with governance to obtain the OI prior to the report release date Auditor should communicate with those charged with governance The auditor’s responsibility with respect to OI Any procedures performed relating to the OI Results When revision of the OI is necessary but management refuses to make the revision

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