Transcript FGFOA Audit Update - City University of New York

Audit and Attest Standards
Update
Ensuring Integrity: 4th
Annual Audit Conference
Harold L. Monk, Jr. CPA, CFE
Davis, Monk & Company
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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
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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
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Recent Auditing Standards
Board Activities
Clarity Project
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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
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Clarity Drafting Conventions
• Introduction
• Objective
• Definitions
– Terms used in the SAS are defined
– Establish separate glossary of terms
• Requirements and Application Material
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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
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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
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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
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Audit and Attest Update
Clarity 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
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Implementation Issues
Of Risk Assessment
Standards
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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
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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
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Recently Issued Standards
Statement on Auditing Standards No. 115,
Communicating Internal Control Related
Matters Identified in an Audit
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SAS 115
• Effective for periods ending after 12/15/09
– Early adoption is allowed
• Supersedes SAS 112 of the same title
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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
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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.
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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
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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.
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Deficiencies
• As with SAS 112, nothing is an automatic
material weakness or significant deficiency
– Preparation of financial statements
– Professional judgment must be applied
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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
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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
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Deficiencies
• SAS 115 does not include the list of
deficiencies that ordinarily would be
considered at least significant deficiencies
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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
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Recently Issued Standards
Statement on Auditing Standards No. 116,
Interim Financial Information
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SAS 116
• Effective for reviews of interim financial
information for interim periods beginning
after December 15, 2009. Early
application is permitted
• Supercedes SAS 100
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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
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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
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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.
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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
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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
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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
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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.
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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
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Audit and Attest Standards Update
Other Current ASB Projects
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Audit and Attest Standards Update
Other 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
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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
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Audit and Attest Standards UpdateOther 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
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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.
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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
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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
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•
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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
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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
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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.
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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
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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
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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
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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
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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
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Other Information (OI) in
Documents Containing Audited
Financial Statements
• Eliminates distinction between OI included in an
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•
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auditor submitted document and in a clientprepared 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
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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
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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
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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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Proposed SAS - OI
• If material inconsistencies are identified,
the auditor should determine whether the
financial statements or the OI needs to be
revised
– If prior to the report release date and
management refuses to make the revision:
• Modify the report on the AFS
• Communicate with those charged with governance
• Where permitted, withhold the report or withdraw
from the engagement
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Proposed SAS - OI
– If subsequent to the report release date
• Follow the requirements in AU 561
• If management refuses to make the revision, the
auditor should communicate with those charged
with governance
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Proposed SAS - IRT
• Establish as a condition for opining on the fair
presentation of other information in relation to
the financial statements as a whole that:
– The other information was derived from and relates
directly to the underlying accounting records used to
prepare the financial statements
– The other information relates to the same period as
the financial statements
– The financial statements were audited and the auditor
served as the principal auditor
– Neither an adverse opinion or a disclaimer of opinion
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was issued on the financial statements
Proposed SAS - IRT
• In addition to the audit procedures, the
auditor should
– Inquire of management about the purpose of
the other information and the criteria under
which it was prepared
– Obtain an understanding about the methods
for preparing the other information
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Proposed SAS - IRT
– Compare and reconcile the other information
to the underlying accounting records and
other records used in preparing the financial
statements or to the financial statements
themselves
– Inquire of management whether there were
any significant assumptions or interpretations
underlying the measurement or presentation
of the other information
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Proposed SAS - IRT
– Evaluate the appropriateness and the
completeness of the other information
considering procedures and other knowledge
obtained during the audit
– Obtain written representations from
management
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Proposed SAS - IRT
• Include an explanatory paragraph in the
auditor’s report that includes
– A statement that the audit was performed for
the purpose of forming an opinion on the
financial statements as a whole
– A statement that the other information is
presented for the purpose of additional
analysis and is not a required part of the
financial statements
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Proposed SAS - IRT
– A statement that the other information was
derived from and relates directly to the
underlying accounting and other records used
to prepare the financial statements
– A statement that the other information has
been subjected to the auditing procedures
applied in the audit of the financial
statements and certain additional procedures
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Proposed SAS - IRT
– A statement that the purpose of the additional
procedures is to provide the auditor with a
basis for expressing an opinion on whether
the other information is not misstated by an
amount that would be material to the financial
statements
– If an unqualified opinion on the financial
statements is being issued, a statement that,
in the auditor’s opinion, the other information
is fairly stated in all material respects in
relation to the financial statements as a whole
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Proposed SAS (Exposure Draft) –
Quality Control for an Audit of
Financial Statements
• Supersedes SAS No. 25, The Relationship
of Generally Accepted Auditing Standards
to Quality Control Standards
• Contains requirements and application
material that address specific
responsibilities of the auditor regarding
quality control procedures
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Proposed SAS (Exposure Draft) –
Quality Control for an Audit of
Financial Statements
Engagement partner should:
• form a conclusion on compliance with
independence requirements
• Be satisfied that appropriate procedures
regarding acceptance & continuance have
been followed
• Be satisfied engagement team has appropriate
competence and capabilities
• Proper reviews are performed
• Sufficient evidence has been obtained
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Documentation Required by QC
SAS
• Conclusions on compliance with
independence requirements
• Conclusions regarding acceptance &
continuance of clients
• Nature & scope of and conclusions
resulting from consultations
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Documentation Required by QC
SAS
Engagement Quality Control Reviewer
should document:
• Procedures required by firm’s QC policies
have been performed
• Date QCR was completed
• Reviewer is not aware of any unresolved
matters concerning significant judgments
and conclusions
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New SQCS Exposure Draft
• Some requirements that are duplicative of
•
broader requirements have been moved to
application material
Requirement previously included in SAS 108,
Planning and Supervision has been included in
revised SQCS to make it applicable to all
engagements
– Procedures established for dealing with differences of
opinion should enablel a member of the engagement
team to document that member’s disagreement with
conclusions reached after appropriate consultation
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Questions?
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