Transcript 06 - 2pm - Auditing Standards Update - Jeff Slate

Auditing Standards Update
Dallas CPA Society
7th Annual Education Conference
May 26, 2011
Today’s agenda
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Dodd-Frank Act and SOX 404(b)
PCAOB Update
AICPA Update
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Dodd-Frank Act and SOX 404(b)
Dodd-Frank Act and SOX 404(b)
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Dodd-Frank Act permanently exempts non-accelerated
filers from SOX 404(b) auditor attestation requirement
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Companies with less than $75 million of worldwide public
float (at end of 2nd fiscal quarter)
Companies with no public float (only registered debt and
preferred securities)
Former accelerated filers after public float drops below $50
million
Under current SEC regulations, non-accelerated filers
must continue to report on management’s assessment of
internal control (SOX 404(a))
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PCAOB Update
New PCAOB Board members
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PCAOB
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James R. Doty, Chairman
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Jay D. Hanson, Member
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Partner at McGladrey & Pullen LLP
Lewis H. Ferguson
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Partner at Baker Botts LLP
Partner at Gibson, Dunn & Crutcher LLP
Founding members Bill Gradison and Charles D. Niemeier have retired
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PCAOB risk assessment standards Background
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The PCAOB issued eight auditing standards in August
2010 (collectively, the risk assessment standards)
The risk assessment standards:
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Update the PCAOB’s interim standards
Address observations from the PCAOB’s inspection findings
Consider the standard-setting activities of the ASB and IAASB
Effective for audits of issuers for fiscal years beginning on
or after 15 December 2010 (i.e., 2011 audits of calendar
year-end entities)
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PCAOB risk assessment standards – Areas
of emphasis
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Consideration of risks of material misstatement due to
fraud and error
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Obtain a thorough understanding of the entity to inform risk
assessments
Consider information obtained throughout the audit process to
assess if there are additional risks of material misstatement due to
fraud
Consideration of financial statement disclosures
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Develop expectations about the necessary disclosures
Consider risks of material misstatement due to inaccurate,
incomplete or omitted disclosures
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PCAOB risk assessment standards – What’s
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Understand the business
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Nature of the entity
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Significant accounting policies
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Sources of the entity’s earnings, including relative profitability of key products
and services
Key supplier and customer relationships
Consider financial reporting competencies of personnel involved in selecting
and applying significant new or complex accounting principles
Consider accounts or disclosures for which judgment is used in the application
of significant accounting policies
Develop expectations about the necessary disclosures
Considerations from other engagements
Review of information
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Public information about the entity
Transcripts of earnings calls
Compensation arrangements with senior management
Trading activity in the entity’s securities and holdings in the company’s
securities
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PCAOB risk assessment standards – What’s
new (cont.)
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Significant risks
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Develop an overall and a specific response
Include tests of details in the specific response
Team planning event
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Include team members with significant engagement
responsibilities in the TPE
Discussion should include:
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The entity’s selection and application of significant accounting policies
Disclosures that are necessary for fair presentation of the financial
statements
How fraud may be perpetrated or concealed by omitting disclosures or
by presenting incomplete or inaccurate disclosures
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PCAOB risk assessment standards – What’s
new (cont.)
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Tests of controls
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Summary of audit differences (SAD)
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Rotating tests of controls is not applicable for any issuer audits
Lower risk controls guidance can be applied on all issuer audits
Omitted or inaccurate disclosures are considered misstatements
Perform additional procedures around offsetting entries identified by
management
Expanded qualitative considerations when evaluating the SAD
Multilocation engagements
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The Primary Team:
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Assesses whether the components significant based on size and significant based
on risk provide sufficient evidence about the group financial statements and add
additional components into our audit scope as necessary
Concludes that the components not included in the group audit scope do not,
individually or in the aggregate, have a reasonable possibility of containing a
material misstatement to the group financial statements
Considers the factors in the multilocation supplement when performing this
evaluation
Document our consideration of components to be included in scope
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AICPA Standard setting update
Clarity Project Overview
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Goals
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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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Convergence with International Standards
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International Standards on Auditing (ISAs) issued by
IAASB
Clarity drafts use ISAs as base while avoiding
unnecessary differences with PCAOB standards
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Harmonize, not adopt
Most audits performed internationally are of nonpublic
entities – therefore, ASB and IAASB have a similar focus
IAASB, ASB, GAO, PCAOB
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Clarity Drafting Conventions
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Introduction
Objective
Definitions
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Terms used in the SAS are defined
Establish separate glossary of terms
Requirements
Application Material
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Objective of each SAS
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Create objectives for each standard
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Establish obligation relating to the objective
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 & Application Material
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Requirements
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Application and other explanatory material
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Expressed with must or should
Presented in a separate section that follows the requirements
Indicated with may
Paragraphs numbered using an A prefix
Cross-referencing between requirements and related
application material
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Status of Clarity Project
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Once all clarified standards have been finalized, most will
be issued in one SAS (SAS No. 12X) that will be codified
in “AU section” format
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Planned effective date for financial statements for periods ending
on or after December 15, 2012 (2012 year-end audits)
To address practice issues, certain clarified SASs (SASs
No. 117 – 120) have been assigned numbers and already
been issued
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SAS No. 117, Compliance Auditing
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SAS responds to federal study indicating need for
improvements in quality of audits under OMB Circular
A133, Audits of States, Local Governments, and NonProfit Organizations
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Supersedes SAS 74, Compliance Auditing Considerations
in Audits of Governmental Entities and Recipients of
Governmental Financial Assistance
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Issued in December 2009, effective for periods ending
after June 15, 2010
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SAS No. 117, Compliance Auditing
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Applicable when performing a compliance audit in
accordance with all of the following:
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GAAS
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The standards for financial audits under Government Auditing
Standards (AKA: Yellow Book or GAGAS)
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A governmental audit requirement requiring the auditor to express
an opinion on compliance
Appendix identifies the AU sections that are not applicable
to a compliance audit
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SAS No. 118, Other Information in Documents
Containing Audited Financial Statements
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Effective for audits of financial statements for periods
beginning on or after December 15, 2010
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Early application is permitted
Supersedes AU section 550 and (along with SAS No.
119) AU section 551
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SAS No. 118, Other Information in Documents
Containing Audited Financial Statements
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Other Information (OI) = information that is included in a
document containing audited financial statements and the
auditor’s report thereon, excluding required
supplementary information
Eliminates the distinction between OI that is in an auditor
submitted vs. client prepared document
Make arrangements with management or those charged
with governance to obtain the OI prior to the report
release date
Read the OI that the auditor is aware of in order to identify
material inconsistencies with the AFS
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SAS No. 119, Supplementary Information in
Relation to the Financial Statements as a Whole
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Effective for audits of financial statements for periods
beginning on or after December 15, 2010
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Early application is permitted
Supersedes (along with SAS No. 118) AU section 551
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SAS No. 119, Supplementary Information in
Relation to the Financial Statements as a Whole
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In order to opine on whether SI is fairly stated in relation
to the financial statements as a whole, the auditor
determines that all of the following conditions are met:
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The SI was derived from, and relates directly to, the underlying
accounting and other records used to prepare the f/s
The SI relates to the same period as the f/s
The f/s were audited, and the auditor served as the principal
auditor in that engagement
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SAS No. 119, Supplementary Information in
Relation to the Financial Statements as a Whole
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In addition to procedures performed during the f/s audit, in order to
provide an IRT opinion, the auditor performs the following procedures
(using the same materiality level as used during the f/s audit):
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Inquire of management about the purpose of the SI and the criteria used
by management to prepare the supplementary information (Regulator
criteria, contractual, other)
Determine whether the form and content of the SI complies with the
applicable criteria
Obtain an understanding about the methods of preparing the SI and
determine whether the methods of preparing the SI have changed from
those used in the prior period and, if the methods have changed, the
reasons for such changes.
Compare and reconcile the SI to the underlying accounting and other
records used in preparing the f/s or the f/s themselves
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SAS No. 119, Supplementary Information in
Relation to the Financial Statements as a Whole
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Inquire of management about any significant assumptions or
interpretations underlying the measurement or presentation of the
SI
Evaluate the appropriateness and completeness of the SI,
considering the results of the procedures performed and other
knowledge obtained during the audit of the f/s
Obtain written representations from management
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SAS No. 120, Required Supplementary
Information
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Effective for audits of financial statements for periods
beginning on or after December 15, 2010
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Early application is permitted
Supersedes AU section 558
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SAS No. 120, Required Supplementary
Information
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RSI
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Information that a designated accounting standard setter requires
to accompany an entity’s basic f/s
RSI is not part of the basic f/s
A designated accounting standard setter considers the information
to be an essential part of the financial reporting for placing the
basic f/s in an appropriate operational, economic, or historical
context
Authoritative guidelines for the methods of measurement and
presentation of the information have been established
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SAS No. 120, Required Supplementary
Information
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Required procedures:
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Inquire of management about the methods of preparing the
information, including
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Compare the information for consistency with
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Whether it has been measured and presented in accordance with
prescribed guidelines,
Whether methods of measurement or presentation have changed from
those used in the prior period and the reasons for any such changes,
and
Whether there were any significant assumptions or interpretations
underlying the measurement or presentation of the information.
Management’s responses to the inquires,
The basic f/s, and
Other knowledge obtained during the audit of the basic f/s.
Obtain written reps from management
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SAS No. 120, Required Supplementary
Information
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Include an explanatory paragraph in the auditor’s report
on the f/s referring to the RSI. Different language is
required based on whether:
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The RSI is included and the auditor has applied all of the required
procedures
The RSI is omitted
Some RSI is missing and some is presented in accordance with
the prescribed guidelines
The auditor has identified material departures from the prescribed
guidelines
The auditor is unable to complete the required procedures
The auditor has unresolved doubts about whether the RSI is
presented in accordance with prescribed guidelines
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SAS 70 superseded
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Two new standards combined to supersede SAS 70
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Several factors drove the need for the new standards
Changes to service organizations’ reporting processes and
reports
Changes to service auditor responsibilities
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ISAE 3402, Assurance Reports on Controls at a Service Organization
SSAE No. 16, Reporting on Controls at a Service Organization
Moving from an audit standard to an assurance/attestation standard
Using the work of internal audit
Little effect on the user auditor as a result of this change
Effective for reports covering periods ending on or after 15
June 2011
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Service Organizations
What’s new?
SSAE 16
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Requires a service auditor to obtain an assertion from
management of the service organization
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States that evidence obtained in prior engagements about
the satisfactory operation of controls does not provide a
basis for a reduction in testing
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Service Organizations
What’s new?
SSAE No. 16
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Requires the service auditor’s description of tests of
controls to identify work performed by internal audit and
the service auditor’s procedures with respect to that work
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For type 2 reports, changes the period covered by the
service organization’s description of the system
Type 2 Report
SAS No. 70
SSAE No. 16
As of a period
For a period
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Service Organizations
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SSAE 16 is effective for periods ending on or after
June 15, 2011.
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SAS for user auditors is provisionally effective for periods
ending on or after December 15, 2012 (same as other
clarified SASs)
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Questions
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