Update on Standards for Audits, Reviews, and Compilations...
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Transcript of Update on Standards for Audits, Reviews, and Compilations...
4/23/2013
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Update on Standards for Audits, Reviews, and Compilations
Mike Glynn, CPA
Senior Technical Manager
AICPA Audit and Attest Standards Team
American Institute of CPAs
DISCLAIMER
Views expressed by AICPA employees are expressed for purposes of deliberation, providing member services and other purposes exclusive of practicing public accounting. Views expressed by AICPA staff do not necessarily represent the official views of the AICPA unless otherwise noted. Official AICPA positions are determined through certain specific committee procedures, due process and deliberation.
4/23/2013
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American Institute of CPAs
Session Objectives
Discuss the AICPA’s proposed accounting framework for small- and medium-sized entitiesDiscuss the AICPA’s Practice Aid “Accounting and Financial Reporting Guidelines for Cash-and Tax-Basis Financial Statements”Discuss the ARSC’s and the ASB’s Clarity projects and differences from pre-clarity standards
Slide 3
AICPA's Financial Reporting Framework for Small and
Medium-sized Entities (FRF-SME)
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American Institute of CPAs
FRF-SME
Intended for privately held small and medium-sized entities.
Blend of accrual-tax method and traditional methods of accounting.
Developed by a working group of CPAs and AICPA staff
Was exposed for public comment during the fall of 2012.
Expected to be issued in early June 2013.
American Institute of CPAs
FRF-SME
Will be a less complicated and less costly system of accounting for SMEs that do not require GAAP basis statements.
More beneficial than other OCBOAs as it will have undergone public comment and professional scrutiny.
Will not be required to be used, but can be used as soon as it is released.
Will be assessed 3-4 years after issuance for modifications but will not undergo frequent changes
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American Institute of CPAs
FRF-SME
Will use historical cost as a measurement basis – and depart from increased use of fair value measurements
Disclosure requirements will be greatly reduced
If users need additional information, they can obtain it from management
Focuses on the performance of the SME, its assets, liabilities, and cash flows
American Institute of CPAs
FRF-SME
“Similar informative disclosures”?• While financial statements will be required to include
“similar informative disclosures”, disclosure requirements in framework are intended to meet the requirement
Implementation guidance will be made available by the AICPA
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AICPA Practice Aid: Accounting and Financial Reporting Guidelines For
Cash- and Tax-Basis Financial Statements
American Institute of CPAs
PA: Cash- and Tax-Basis Financial Statements
Many smaller entities have determined that financial statements prepared by applying the cash- or tax-basis of accounting more appropriately suit their needs.
Little authoritative guidance is available with respect to the preparation of financial statements when applying the cash- or tax-basis of accounting.
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American Institute of CPAs
PA: Cash- and Tax-Basis Financial Statements
Practice Aid is intended to provide preparers with the guidelines and best practices that promote consistency and that resolve the often difficult questions regarding the preparation of cash- and tax-basis financial statements.
While nonauthoritative, this practice aid is the best source for such guidance.
All content has been reviewed by subject-matter experts.
American Institute of CPAs
PA: Cash- and Tax-Basis Financial Statements
Available at www.cpa2biz.com
• Product code APACTB12P
Also available, Applying OCBOA in State and Local Government Financial Statements
• Product code APAOCBO12P
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ASB and ARSC Clarity Projects
American Institute of CPAs
Clarity Project Goals
Address concerns over length and complexity of standards
Make standards easier to read, understand and implement
Lead to enhancements in engagement quality
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American Institute of CPAs
Clarity
Auditing Standards Convergence with ISAs
• Harmonize, not adopt
• Most audits performed internationally are of nonpublic entities –therefore, ASB and IAASB have a similar focus
• ASB standards—more use of “should” than ISAs, but fewer than existing SASs
Avoid unnecessary conflicts with PCAOB standards.
American Institute of CPAs
Clarity
SSARSs will not be converged with international standards
• Compilation engagements are not compatible
• ARSC determined to converge review standard with AU-C section 930, Interim Financial Information
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American Institute of CPAs
Clarity
Purpose of the Clarity Project is not to create additional requirements
Adjustments will have to be made to practices as a result of the clarified standards
American Institute of CPAs
Clarity Format
Introduction
Objectives
Definitions
Requirements
Application Material
Appendices and Exhibits
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American Institute of CPAs
Considerations for Audits of Smaller, Less Complex Entities
Smaller, less complex refers to characteristics such as:
• Concentration of ownership and management in a small number of individuals
• One or more of the following:
- Straight forward/uncomplicated transactions
- Simple record keeping
- Few lines of business/few products
- Few internal controls
- Few personnel with a wide range of duties
American Institute of CPAs
Considerations for Audits of Smaller, Less Complex Entities
Guidance generally results in:
• Specifying alternate procedures appropriate for situations like:
- Scaling down audit programs and procedures
- Recognizing governance and management are the same people
- Addressing controls that are not documented or segregated
- Recognizing irrelevant requirements
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American Institute of CPAs
Considerations for Audits of Governmental Entities
Most clarified standards have guidance for audits of governmental entities• About uniqueness of governmental entities
• About uniqueness of state audit organizations
• Opinion units
• Materiality
• Laws and regulations, e.g., “withdrawal from engagements”
Accounting standards neutrality
SSARSs Clarity Project and Proposed Changes to 101-3
and SSARSs
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American Institute of CPAs
Compilations and Nonattest Services
PEEC amended 101-3 to withdraw a requirement that impairs independence if a CPA designs or maintains internal controls for an attest client
With this barrier and confusion removed, PEEC further amended 101-3 to clarify that preparation of financial statements, in whole or in part, is a non attest service
• Effective for engagements covering periods beginning on or after December 15, 2014
American Institute of CPAs
Attest versus Non Attest Services
Today’s compilation standard applies when the CPA is engaged to perform a compilation or where the practitioner submits financial statements to their client.
Submission means prepare and present
Because PEEC has defined preparation as a non attest service, compilation, review and auditing standards all need to be revised to state that preparation or drafting is not part of the attest service, but rather a non attest service.
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American Institute of CPAs
Where are the issues?
Many members incorrectly believe that attest engagement is the same as an assurance engagement, so many members don’t understand why a compilation is an attest service today• Attest engagement. An attest engagement is an engagement
that requires independence as defined in AICPA Professional Standards.
Many members (and clients) believe that compile and prepare are the same thing. So they don’t understand the nuance between attest and non attest
American Institute of CPAs
Proposed nonattest compilation standard
Remove independence from compilation standard• By definition compilation becomes a non attest service
Create a non attest compilation/preparation standard that puts requirements around what a CPA needs to do when preparing financial statements
Financial statements would include a legend that a CPA has not performed an assurance service
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American Institute of CPAs
Proposed nonattest compilation standard
Reporting in certain specific circumstances• Accountant is engaged to or decided to report on the f/s
• F/s contain known departures from the applicable FRF that are not disclosed in the notes to the f/s
• Entity does not include an appropriate legend on the f/s
• Accountant has material financial interest in the client or contingent or referral fees
Report would look significantly different from review or audit report
American Institute of CPAs
Proposed nonattest compilation standard
Aligns non attest with many state laws
Aligns the terms compile and prepare
Retains the term compilation and by making it a non attest service removes confusion around attest and assurance
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SSARSs Clarity Project: Proposed Review
SSARSs
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Proposed Changes to the Review Literature
The SSARSs review literature will be converged with the requirements of AU-C section 930, Interim Financial Information• Will result in consistency between limited assurance
engagements.
Scope• The Standard may be applied to historical financial information
other than historical financial statements, such as:
- Specified elements, accounts, or items of a f/s
- Supplementary information
- Required supplementary information
- Financial information included in a tax return
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Proposed Changes to the Review Literature
Requirement to exercise professional judgment• Is implicit in extant SSARSs
Requirement to obtain a signed engagement letter• Signed by the accountant/accountant’s firm AND
management/those charged with governance
Reporting on financial statements• Requires the use of headings in the accountant’s review report
• Required to name the city and state of the issuing office
- May be included on letterhead
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Proposed Changes to the Review Literature
Reporting on f/s prepared in accordance with a SPF• Requirement to consider whether f/s are suitably titled and
describe how the SPF differs from GAAP
• Requirement to consider whether f/s include informative disclosures similar to GAAP, where appropriate
• Include an EOM paragraph that states that the f/s are prepared in accordance with an SPF; refers to the note that describes the framework; and states that the SPF is not GAAP
• Include an OM paragraph that restricts the use of f/s prepared in accordance with a contractual basis of accounting or a regulatory basis of accounting (unless intended for general use)
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Proposed Changes to the Review Literature
Required EOM/OM paragraphs• Financial statements prepared in accordance with an SPF
• Reporting when management revises f/s for a subsequently discovered fact and the accountant’s report on the revised f/s differs from that initially issued.
• When the accountant considers it necessary to draw users’ attention to a matter
Accountant is required to communicate with management when it expects to include an EOM or OM paragraph in the report
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Proposed Changes to the Review Literature
Required Supplementary Information• Required to include an OM paragraph in the report to refer to
RSI
Effective date:• For reviews of financial statements for fiscal years (and interim
periods within those years) beginning after December 15, 2014.
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Clarified Auditing Standards
American Institute of CPAs
Clarity Project Status
One SAS not yet clarified• Use of Internal Auditors
- delayed to enable the ASB to align with the IAASB’s revisions to clarified ISA 610
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Clarity Project
Clarified SASs codified with new section numbers designated “AU-C”
• AU section numbers changed to converge with ISA numbering
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Changes to Auditing Standards
• New terms
- Applicable financial reporting framework
- Emphasis-of-matter and other-matter paragraphs replace explanatory paragraphs
- Group engagement partner and component auditor replace principal auditor and other auditor, respectively.
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American Institute of CPAs
Most Significant Areas of Implementation Issues
Terms of EngagementInitial Audits
Auditor’s Reports
GROUP AUDITS
American Institute of CPAs
Terms of Engagement
Preconditions for an audit• Determine the financial reporting framework
is acceptable
- Was implicit in extant SASs
- Change is not expected to affect practice
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American Institute of CPAs
Terms of Engagement
Preconditions for an audit• In engagement letter, obtain management’s
acknowledgement of its responsibilities for
- Preparing financial statements
- Designing and implementing internal control
- Providing the auditor access to information and persons
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Terms of Engagement
Leaves open the engagement that the written understanding should cover• Can combine the monthly compilation engagements and annual
audit in one engagement letter
• Can address nonattest services
• Engagement letters can cover multiple years
- Is discouraged since the understanding may lose clarity as time passes
- Recommendation is that the understanding be documented at least annually
GAO requires an annual engagement letter
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American Institute of CPAs
Other Acceptance Considerations
Terms of Engagement
• If management imposes a scope limitation that would result in qualified opinion or disclaimer, precluded from accepting engagement
- Inability to observe inventory due to timing of acceptance of engagement is circumstantial, NOT management imposed
Initial Audits• Looking at predecessor workpapers is useful but can’t be the
only procedure to verify opening balances
American Institute of CPAs
Auditor’s Reports
Headings are REQUIRED for every paragraph
Title of report = first paragraph heading
If letterhead includes city and state, not necessary to put at bottom of report• For multi-office firms, to not repeat city and state, letterhead
should be clear as to which office is issuing the report
Reports covering 2012 and 2011 may use new wording for both periods
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American Institute of CPAs
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Modifications to the Opinion (AU-C 705)
Basis for qualified, adverse, or disclaimer (placed before opinion paragraph)
Modified opinion (Qualified, Adverse, or Disclaimer
American Institute of CPAs
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Emphasis of Matter and Other Matter Paragraphs (AU-C 706)
Emphasis of Matter• Matters appropriately
presented or disclosed
Other Matter• To understand audit matters
(Combining statements, SI, RSI, SEFA)
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American Institute of CPAs
Emphasis of Matter and Other Matter Paragraphs (AU-C 706)
Going concern
Contractual or regulatory reporting frameworks
Consistency
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Audit reports of prior periods presented
Materially inconsistent “other information”
“In relation to” opinion
RSI
General use regulatory F/S
“In connection with” compliance reporting
Emphasis of Matter Other Matter
American Institute of CPAs
Special Considerations—Special Purpose Frameworks (AU-C 800)
Replaces OCBOA with cash, tax, contractual, regulatory, and other bases (will include AICPA’s FRF-SME)
Requires the auditor to understand the purpose and intended users for framework appropriateness
Audit still based on the rest of GAAS, but this section provides the reporting requirements and guidance
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American Institute of CPAs
Special Considerations—Special Purpose Frameworks ( AU-C 800)
Cash Basis Tax Basis Contractual Regulatory
Restricted General
Opinion Single Single Single Single Dual
Use EOM? Yes Yes Yes Yes No
DescribePurpose
No No Yes Yes Yes
Restrict use?
No No Yes Yes No
American Institute of CPAs
Alert That Restricts the Use of the Auditor’s Written Communication (AU-C 905)
Auditor should include an alert which restricts the use of the auditor’s communication when the subject matter is based on:• Measurement or disclosure requirement criteria that are
determined by the auditor to be suitable only for a limited number of users who can be presumed to have an adequate understanding of the criteria,
• Measurement or disclosure criteria that are available only to the specified parties, or
• Matters identified by the auditor during the course of the audit engagement when the identification of such matters is not the primary objective of the audit engagement (commonly referred to as a by-product report)
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American Institute of CPAs
Alert That Restricts the Use of the Auditor’s Written Communication (AU-C 905)
Exception for the by-product report when the audit is also performed in accordance with GAGAS• Don’t name specific parties
• Removes group audit conflict
• Language runs to “intended purpose”
American Institute of CPAs
Alert That Restricts the Use of the Auditor’s Written Communication (AU-C 905)
Restricted Use illustration:
This [report, letter, presentation, or communication] is intended solely for the information and use of [list or refer to the specified parties] and is not intended to be and should not be used by anyone other than these specified parties.
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American Institute of CPAs
Alert That Restricts the Use of the Auditor’s Written Communication (AU-C 905)
Restricted Purpose illustration:The purpose of this [report, letter, presentation, or communication] is solely to [describe the purpose of the auditor’s written communication, such as to describe the scope of our testing of internal control over financial reporting and compliance, and the result of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control over financial reporting or on compliance]. This [report, letter, presentation, or communication] is an integral part of an audit performed in accordance with Government Auditing Standards in considering [describe the results that are being assessed, such as the entity’s internal control over financial reporting and compliance]. Accordingly, this [report, letter, presentation, or communication] is not suitable for any other purpose.
American Institute of CPAs
Alert That Restricts the Use of the Auditor’s Written Communication (AU-C 905)
New:
An auditor’s written communication that includes an alert that restricts its use may be included in a document that also contains an auditor’s written communication that is for general use. In such circumstances, the use of the general use communications is not affected.
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American Institute of CPAs
Group Audits
Biggest source of implementation questions
Issues include• Identifying components
• Equity investments
• Setting materiality
• EBP audits – investments accounted for at fair value are NOT defined as components!
American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
AU-C section 600 applies when• 2 separate firms are involved
• 2 or more offices of the same firm are involved
• 2 or more partners within the same office are involved
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
Group – All the components whose financial information is included in the group financial statements
Group management – Management responsible for the preparation of the group financial statements
Group-wide controls – Controls designed, implemented, and maintained by group management over group financial reporting
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
Component – an entity or business activity for which the group prepares financial information required by the reporting framework
Component materiality – Materiality for a component as determined by group engagement team for purposes of the group audit
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
Significant component – One identified by the group engagement team that is of individual financial significance to the group OR due to its circumstances is likely to include significant RMM to the group financial statements
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
Considerations for governments• Existence of components evaluated within
individual opinion units
- Each opinion usually its own group
- Exception when there are other auditors or legally separate entities would automatically be considered a component
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
Considerations for governments• For governments with multiple opinion units,
components will commonly exist within:
- Aggregate discretely presented component units
- Individual component units whether audited by same audit firm or other auditors
- Aggregate remaining fund information:
- Pension or OPEB trust funds
- Investment trust funds
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
Considerations for governments• Departments within a major fund that are
separately managed may also be components
• Most governments with multiple opinion units will be a group audit
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
Risk based approach• Group engagement team should obtain sufficient understanding
of the group, its components, and their environment to:
- Identify and assess risks of material misstatement at the group level
- Identify significant accounts and disclosures and related assertions at the group level
- Confirm identification of significant components
- Determine the timing and type of work to be performed at significant and non-significant components
- Determine which work will be performed by the group and component auditor
- Determine the nature, timing, and extent of work to be performed at the group level
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
Obtain an understanding of the component auditor• Whether CA will comply with ethical requirements, especially
independence
• About the CA’s professional competence
• The extent, if any, the GA will be able to be involved in the CA’s work
• Whether the GA will be able to obtain information affecting the consolidation process
• Whether a CA operates in a regulatory environment that oversees auditors
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
When a CA does not meet the independence requirements relevant to the group audit or the GA has serious concerns about the CA, the GA should obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to the audit of that component auditor in the auditor’s report on the group financial statements or otherwise using the work of that CA.
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements ( AU-C 600)
Materiality – the GA should determine:• Materiality, incl. performance materiality, for group
financial statements• Whether specific circumstances exist for which
something less than materiality would influence users; if so, apply a different materiality to those transactions, balances, or disclosures
• Component materiality for components that will be audited – component materiality s/b lower than group materiality and component performance materiality s/b lower than group performance materiality
• Threshold below which misstatements are trivial
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements (AU-C 600)
Performing procedures
For components with significant RMM – an audit or other specific procedures to address those RMM
For components that are not significant, the GA performs analytical procedures
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements (AU-C 600)
The requirements for a group auditor who does not make reference to a component auditor’s report, and decides instead to take responsibility for the work of a component auditor has a SIGNIFICANT increase in requirements compared to:
• Current guidance on the matter
• When making reference under this new AU section
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements (AU-C 600)
The procedures required for group audits in a financial statement audit apply to federal compliance procedures.
The most likely places group audits applies:• Relying on other auditors who audit major programs
• Auditing major programs when the administration of a major program has “components”
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American Institute of CPAs
Special Considerations—Audit of Group Financial Statements (AU-C 600)
Understanding the Responsibilities of Auditors for Audits of Group Financial Statements - AICPA Audit Risk Alert• Contains a decision making flowchart
• Examples for not-for-profit organizations and a local government
Product# ARAGRP12P
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American Institute of CPAs
Technical Practice Aids for Group Audits
41 Technical Questions and Answers
Nonauthoritative guidance to address various questions
Available• in TIS Section 8800, Audits of Group Financial Statements and
Work of Others (AICPA, Technical Practice Aids)
• on AICPA Website at http://www.aicpa.org/interestareas/frc/pages/recentlyissuedtechnicalquestionsandanswers.aspx
American Institute of CPAs
Attestation Standards
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American Institute of CPAs
Clarifying the Attestation Standards
Use of clarity format (same as for auditing standards)
Existing attestation standards include four general standards that provide a framework for developing an attestation engagement:• AT section 20, Defining Professional Requirements in
Statements on Standards for Attestation Engagements
• AT section 50, SSAE Hierarchy
• AT section 101, Attest Engagements (which addresses examination and review engagements)
• AT section 201, Agreed-Upon Procedures Engagements
American Institute of CPAs
Clarifying the Attestation Standards
New structure for the general attestation standards:
• Initial section that contains concepts common to all attestation engagements
• Three separate sections for examinations, reviews, and agreed-upon procedures
• These four sections would supersede AT sections 20, 50, 101 and 201
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American Institute of CPAs
Clarifying the Attestation Standards
Subject-matter-specific attestation standards:
• Separate sections for each of the six subject-matter-specific AT sections, which address:
- prospective financial information
- pro forma financial information
- internal control over financial reporting
- compliance with laws and regulations
- management’s discussion and analysis
- controls at service organizations
• Build on, not repeat, the requirements and guidance in the applicable general attestation standards
American Institute of CPAs
Clarifying the Attestation Standards
Convergence with standards of the IAASB• Foundation for the common concepts, examination, and review
sections of the proposed attestation standards:
- IAASB exposure draft, ISAE 3000, “Assurance Engagements Other than Audits or Reviews of Historical Financial Information” (April 2011)
- ISAE 3000 is IAASB’s framework standard for assurance engagements (equivalent of attestation engagements)
- ISAE 3410, Assurance Engagements on Greenhouse Gas Emissions
- AICPA’s attestation standards
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American Institute of CPAs
Clarifying the Attestation Standards
Exposure drafts
• Proposed common concepts, examination, and review sections
- Expected issuance for comment by end of June (estimate)
• Proposed subject-matter-specific sections
- One or more exposure drafts
- Expected issuance for comment in late 2013 or early 2014 (estimate)
• Will be posted at http://www.aicpa.org/Research/ExposureDrafts/AccountingandAuditing/Pages/ExposureDrafts_ASB.aspx
American Institute of CPAs
Clarifying the Attestation Standards
Final clarified SSAE containing all attestation standards
• One SSAE (SSAE No. 18) even though two or more exposure drafts
- Expected issuance in second half of 2014 (estimate)
- Proposed effective date:
- effective for attestation engagements for which the subject matter or assertion is as of or for a period ending on or after December 15, 2014
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American Institute of CPAs
Clarity Project Website Resources
Guide to Clarified and Converged Standards for Auditing and Quality Control
Clarity Project FAQs
Mapping of Existing AUsections to AU-C sections
Listing of Effective Dates of Each AU-C section
Summary of Differences Between Existing SASs and Clarified SASs
American Institute of CPAs
Clarity Project Website Resources
Substantive Differences Between theISAs and GAAS
Scalability of GAAS to theSize and Complexity of an Entity
Videos
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Helpful Information and Resources
American Institute of CPAs
Helpful Information and Resources
Authoritative standards for non-issuers (SASs, SSARSs, SSAEs, SQCSs) as of June 1 are available at http://www.aicpa.org/Professional+Resources/Accounting+and+Auditing/Audit+and+Attest+Standards/Authoritative+Standards+and+Related+Guidance+for+Non-Issuers/default.htm
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American Institute of CPAs
Helpful Information and Resources
AICPA Accounting and Auditing Technical Hotline
• (877) 242-7212• [email protected]
• http://www.aicpa.org/Professional+Resources/Accounting+and+Auditing/Accounting+and+Auditing+Technical+Help/
Questions?