Audit, Review, Compilation, and Preparation of Financial Statements DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior technical committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright 2011 by American Institute of Certified Public Accountants, Inc. New York, NY 10036-8775 All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please email copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110. Speaker Biography Michael P. (Mike) Glynn is a Senior Technical Manager in the AICPA Audit and Attest Standards Team. In this capacity, Mike serves as the staff liaison to the Accounting and Review Services Committee (ARSC). In addition, Mike supports the activities of Auditing Standards Board (ASB) and its subcommittees by assisting members in drafting and deliberating authoritative professional standards and interpretations. Prior to joining the Audit and Attest Standards Team, Mike was a technical manager in the AICPA SEC Practice Section (SECPS). In that capacity, Mike supported the Quality Control Inquiry Committee (QCIC) by participating in deliberations of QCIC cases and participating in meetings with the Securities and Exchange Commission regarding the SEC s oversight of the self-regulatory process. Prior to joining the SECPS, Mike was a technical manager in the AICPA Professional Ethics Division. Prior to joining the AICPA in April 1998, Mike worked at Ernst & Young LLP in New York. Mike also serves as a member of the New York State Society of CPAs Accounting and Review Services Committee. Mike is a graduate of Pace University with a BBA in public accounting. 2
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. Session Objectives Discuss standards for audits, reviews, compilations, and financial statement preparation. Discuss the changes to practice expected as a result of the ARSC s project to clarify the literature for compilations and reviews including significant revisions to the requirements for financial statement preparers. Discuss recently issued auditing standards including SAS 126, The Auditor s Consideration of an Entity s Ability to Continue as a Going Concern; SAS 127, Omnibus Statement on Auditing Standards 2013; and SAS 128, Using the Work of Internal Auditors. Discuss implementation issues related to the clarified standards on initial audits and group audits. Slide 4
SSARSs Clarity Project: Overview Clarity Project Goals Same as ASB s 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 Same format and drafting guidelines No inclusion of special considerations for smaller, less complex entities or governmental entities
SSARSs Clarity Project: Significant Changes to Standards for Financial Statement Preparers Submission of Financial Statements AR section 80 applies when an accountant is engaged to report on compiled financial statements or submits financial statements to the client or to third parties. Submission is defined as prepare and present Determining Whether Financial Statements Have Been Prepared by the Accountant Cloud computing and other applications have made it difficult to determine who (or what) has prepared the financial statements: - The accountant? - Management? - The computer application?
Submission of Financial Statements ARSC proposes to revise the applicability so that the standard applies when an accountant is engaged to perform a compilation service. Clarifying the Comp. & Review Standards New Exposure Draft, Proposed SSARSs Preparation of Financial Statements; Compilation Engagements; Association With Financial Statements - Issued October 23, 2013 - Available on AICPA website at http://www.aicpa.org/research/exposuredrafts/compilation Review/Pages/EDofSSARS.aspx - Comment period ends May 2, 2014 - Proposed effective date for calendar 2015 engagements with early implementation permitted
New Proposed SSARSs Preparation of Financial Statements Would apply when an accountant is engaged to prepare financial statements Compilation Engagements Would apply when an accountant is engaged to perform a compilation engagement Association With Financial Statements Applies when an accountant permits the use of his or her name in a report, document, or written communication containing financial statements that the accountant did not issue an audit, review or compilation report on. Accountant may or may not have prepared the financial statements. Proposed New Preparation Standard Would apply when the accountant is engaged to prepare f/s but not engaged to perform an audit, review, or compilation on those f/s Would not require a report even when f/s are expected to be used or presented to third parties Would require an engagement letter
Proposed New Preparation Standard Would require a legend on each page of the f/s stating that no assurance is being provided If management refuses or cannot include the legend, the accountant could issue a disclaimer report, a compilation report, or resign. Would not require the accountant to consider whether he or she is independent Can be applied to f/s with or without disclosures Significant Changes to Compilation Standard Report would always be required. Report is shortened to differentiate from audit and review (assurance) reporting Management use only financial statements would be covered by the preparation standard Would require an engagement letter. Would retain the independence requirements from the current compilation standard. Can be applied to financial statements with or without disclosures.
Comparison of Proposed SSARS Compilation Preparation When does the standard apply? Engaged to compile Engaged to prepare Is an engagement letter required? Yes Yes Is the accountant required to determine Yes No if he or she is independent of the client? If the accountant is not independent, is Yes N/A that fact required to be disclosed? Does the engagement require a report? Yes No 1 May the financial statements go to users Yes Yes outside of management? May the financial statements omit notes? Yes Yes 1 legend required that no assurance provided. Compilation and Preparation SSARSs Would result in a bright line between accounting services and reporting services. Accountant would not have to be concerned about whether the financial statements would be used internally or by third parties.
Other New Proposed SSARS FRAMEWORK FOR PERFORMING AND REPORTING ON COMPILATION AND REVIEW ENGAGEMENTS (To supersede paragraphs.01.04 and.09.51 of AR section 60, Framework for Performing and Reporting on Compilation and Review Engagements [AICPA, Professional Standards]) No substantive changes from existing standard SSARSs Clarity Project: Proposed Review SSARSs
Proposed Review SSARS Proposed SSARS: Review of Financial Statements Proposed SSARS: Review of Financial Statements Special Considerations Issued November 2012 Comment period ended April 2013 14 comment letters received 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 20
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 21 SSARSs Clarity Project - Timeline May 2014 Comment period ends with respect to all of the following proposed clarified SSARSs: Association With Financial Statements Preparation of Financial Statements Compilation Engagements Framework for Performing and Reporting on Compilation and Review Engagements ARSC to consider comments received on the 4 proposed clarified SSARS ARSC to consider voting to finalize the proposed clarified SSARS, Review Engagements 22
SSARSs Clarity Project - Timeline August 2014 ARSC to consider voting to finalize the following proposed clarified SSARSs: Framework for Performing and Reporting on Compilation and Review Engagements Association With Financial Statements Preparation of Financial Statements Compilation Engagements ARSC to issue the above standards as one SSARSs along with the finalized Review SSARS 23 Clarifying the Comp. & Review Standards Final clarified SSARS containing all compilation and review standards One SSARS (SSARS 21) even though two or more exposure drafts - Expected issuance in second half 2014 (estimate) - Proposed effective date: - effective for calendar 2015 engagements early implementation is expected to be permitted
Recent and Upcoming Auditing Standards SAS No. 126 - Overview The Auditor s Consideration of an Entity s Ability to Continue as a Going Concern (Redrafted) Issued June 2012 Effective for audits of financial statements for periods ending on or after December 15, 2012 Clarity redraft of AU section 341 of the same title Not converged with ISA 570, Going Concern Convergence postponed pending expected FASB guidance
SAS No. 126 Differences From AU 341 Changes, Not Expected to Affect Practice New requirement to obtain written representation from management if conditions or events have been identified that indicate there could be substantial doubt about the entity s ability to continue as a going concern. - Not previously required, but included in illustrative going concern representation in appendix B of AU section 333, Management Representations. Interpretation No. 1, Eliminating a Going-Concern Explanatory Paragraph From a Reissued Report, of AU section 341, incorporated into AU-C section 570 (paragraph.21). SAS No. 127 - Overview Omnibus Statement on Auditing Standards - 2013 Issued January 2013 Effective for periods ending on or after December 15, 2012 Amends: - AU-C section 600, Special Considerations - Audits of Group Financial Statements (Including the Work of Component Auditors) - AU-C section 800, Special Considerations - Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks
SAS 127 Amendments to AU-C 600 Amended preconditions to making reference to others work, relating to Basis of component f/s preparation when financial reporting frameworks differ* Auditing standards followed by component auditor, if not GAAS *exception in application paragraphs for GASB and FASAB, which address this 29 SAS 127: AU-C 600 Amendments Making Reference Other audit report restricted as to use NO Component F/S use different financial reporting framework MAYBE Other auditor met the relevant requirements of GAAS YES
Making Reference Additional Reporting Requirements When frameworks differ Disclose the financial reporting framework used by component Disclose that the auditor of the group financial statements is taking responsibility for evaluating the appropriateness of the adjustments to convert the component s financial statements to the financial reporting framework used by the group. When other auditing standards used but GAAS requirements met Disclose in report the set of auditing standards used and That the other auditor performed additional procedures to meet the relevant requirements of GAAS SAS No. 127 Amendment to AU-C 800 Special Purpose Frameworks Cash Tax Contractual Other Other Basis Basis A definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements Regulatory Other Basis
SAS No. 128 Using the Work of Internal Auditors Clarity redraft of AU section 322, The Auditor's Consideration of the Internal Audit Function in an Audit of Financial Statements Issued February 2014 Effective for audits of financial statements for periods ending on or after December 15, 2014 SAS No. 128 - Internal Audit Converged with ISA 610 (Revised 2013), Using the Work of Internal Auditors, to reflect developments in the internal auditing environment changes in practice regarding the interactions between the external and internal auditors Amendments to several AU-C sections Conform language used to describe internal audit function Guidance added to AU-C 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
SAS No. 128 - Internal Audit Introduces the concept of a systematic and disciplined approach New requirement, as a prerequisite to being able to use the work of the internal audit function, that the external auditor evaluate the application by the internal audit function of a systematic and disciplined approach, including quality control. Implementation Issues Month 5, 2011
Other Acceptance Considerations Initial Audits Looking at predecessor workpapers is useful but can t be the only procedure to verify opening balances What else is needed? - Prior year balances correctly brought forward. - Prior year balances correctly accounted for. - Evidence from current year and - Look at prior year workpapers and/or - Do work in current year 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!
Group Audits Does AU-C section 600 still apply if my firm is the only firm performing the audit of a parent and all subsidiaries? Yes, the requirements of AU-C section 600 would still apply, even if the same firm is performing the work of the group as well as the component entities Does AU-C section 600 apply only when the auditor makes reference to another auditor in their report on the group financial statements? No. AU-C section 600 applies to all audits of group financial statements. Group Audits Do the requirements of AU-C section 600 apply if a company holds equity method investments? Yes. An investment accounted for under the equity method constitutes a component for purposes of AU-C section 600. If I make reference to the auditor of the equity method investee, what additional procedures might be necessary? Obtain their report Reviewing information in the group (investor s) files that relate to the equity method investee such as minutes, budgets, cash flow information Making inquiries of management about the equity method investee s financial results
Group Audits Am I required to calculate separate component materiality if I am the only firm auditing both the group as well as the component units? You would have to apply judgment. Factors to consider might include: - Whether the components are material to the group as a whole - Whether the component and group share the same location, internal control policies and procedures - Whether the accounting and finance functions are centralized - Whether there are any significant risks or accounts that only reside at the component level 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 42
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/recentlyissuedtechn icalquestionsandanswers.aspx Statements on Standards for Attestation Engagements Month 5, 2011
Clarifying the Attestation Standards Commonly known as attestation standards Apply to engagements that address subject matter other than historical financial statements, e.g: an entity s compliance with laws or regulations the effectiveness of an entity s controls over the privacy of information a financial forecast Address examination, review and agreed-upon procedures (AUP) engagements Clarifying the Attestation Standards 4 general AT sections that provide a framework for developing an attestation engagement AT 20, Defining Professional Requirements in Statements on Standards for Attestation Engagements AT 50, SSAE Hierarchy AT 101, Attest Engagements (which addresses examination and review engagements) AT 201, Agreed-Upon Procedures Engagements
Clarifying the Attestation Standards Currently: 6 topic-specific AT sections for reporting on prospective financial information (AT 301) pro forma financial information (AT 401) internal control over financial reporting (AT 501) compliance with laws and regulations (AT 601) management s discussion and analysis (AT 701) controls at service organizations (AT 801) Clarifying the Attestation Standards Objective: to make AT sections easier to read, understand and apply Redraft in clarity format New structure (objective is to eliminate repetition) Chapter 1: Concepts common to all attestation engagements Chapters 2-4: Levels of service (examination, review, agreedupon procedures). - Each chapter addresses a specific level of service and builds on the common concepts chapter Subject-matter specific chapters - Each chapter builds on common concepts and level of service chapters
Clarifying the Attestation Standards Example Reporting on an examination of prospective financial information under current structure, Currently, the following AT sections apply: - AT 20 - AT 50 - AT 401 Proposed structure, the following sections would apply: - Chapter 1, Common Concepts - Chapter 2, Examinations - Chapter X, Forecasts Clarifying the Attestation Standards Convergence with standards of the International Audit and Assurance Standards Board (IAASB) Foundation for the common concepts, examination, and review sections of the proposed attestation standards: - AICPA s existing attestation standards - IAASB exposure draft, International Standards on Assurance Engagements (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
Clarifying the Attestation Standards Convergence with standards of the International Audit and Assurance Standards Board (IAASB) AT 801 was converged with ISAE 3402, Assurance Reports on Controls at a Service Organization, when SSAE No. 16, Reporting on Controls at a Service Organization, was issued in April 2010 Proposed Reporting on Pro Forma Financial Information, includes elements of ISAE 3420, Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus Clarifying the Attestation Standards July 2013, the ASB issued an exposure draft of the first four chapters Common Concepts Examinations Reviews Agreed-upon Procedures October 2103, the ASB voted to ballot for exposure the following subject-specific chapters: Financial Forecasts and Projections Reporting on Pro Forma Financial Information Compliance Attestation
Clarifying the Attestation Standards AT 801 exposure vote on May 2014 ASB agenda Reporting on Controls at Service Organization Delayed to include guidance from AAG Two sections not being clarified: An Examination of an Entity s Internal Control Over Financial Reporting That Is Integrated With an Audit of Its Financial Statements (AT 501) - Will be moved to auditing standards Management s Discussion and Analysis (AT 701) - Will remain unclarified Clarifying the Attestation Standards Final clarified SSAE will contain all attestation standards One SSAE (SSAE No. 18) even though two exposure drafts - Expected issuance in first half of 2015 (estimate) - Proposed effective date (estimate): - No earlier than for reports dated September 15, 2015
Clarifying the Attestation Standards Exposure drafts http://www.aicpa.org/research/exposuredrafts/accountingandaudi ting/pages/exposuredrafts_asb.aspx More information Dedicated ASB Attest Clarity page on AICPA Website at http://www.aicpa.org/interestareas/frc/auditattest/pages/attestcl arityproject.aspx Helpful Information and Resources 56
Clarifying the Comp. & Review Standards More information Dedicated ARSC Clarity page on AICPA Website at http://www.aicpa.org/interestareas/frc/review/pages/arsccl arityproject.aspx Summary of significant differences between the clarified and existing standards, and effect on practice (to come) 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/a ccounting+and+auditing/audit+and+attest+stan dards/authoritative+standards+and+related+g uidance+for+non-issuers/default.htm
Helpful Information and Resources AICPA Accounting and Auditing Technical Hotline (877) 242-7212 techinquiry@aicpa.org http://www.aicpa.org/professional+resources/accounting+and+ Auditing/Accounting+and+Auditing+Technical+Help/ Questions?