Presentation on theme: "1 Steps Needed to Revise Single Audit Focus for the American Recovery and Reinvestment Act Funding."— Presentation transcript:
1 Steps Needed to Revise Single Audit Focus for the American Recovery and Reinvestment Act Funding
22 Session Objectives Discuss GAO’s Recovery Act mandates and reports Discuss how the Recovery Act could impact single audit work and reporting in the future
33 American Recovery and Reinvestment Act of 2009 (Recovery Act) Signed February 17, 2009 Purposes: – preserve and create jobs and promote recovery – assist those most impacted by the recession – invest in science and health-care technology – invest in infrastructure – stabilize state and local government budgets
44 American Recovery and Reinvestment Act of 2009 (Recovery Act) The estimated total cost of the Recovery Act is about $787 billion in spending and tax provisions About $280 billion will be administered through states and localities (including grants that go through states to individuals) Approximately $48 billion had been outlayed to states and localities as of September 11, 2009 – About 84 percent of this amount was provided through the increased Medicaid Federal Medical Assistance Program and the State Fiscal Stabilization Fund (SFSF)
55 Use of Single Audit Reports in Recovery Act Oversight Non- Federal entities are required to have an annual audit of their Federal awards OMB announced that OMB Circular A-133 Compliance Supplement will notify auditors of compliance requirements which should be tested for Recovery Act programs Federal Inspectors General are to reach out to auditing profession to ensure single audits are properly performed by – Providing technical assistance and training – Performing quality control reviews Federal Inspectors General also will perform follow-up reviews of Single Audit quality with emphasis on Recovery Act funds
66 Use of Single Audit Reports in Recovery Act Oversight Effective internal control is a major part of managing any organization to achieve desired outcomes and manage risk – Results of recent audits are a readily available source of information to use in determining if risks exist and the nature and extent of risks that have been identified Material weaknesses and other conditions identified in an audit represent potential risks that can be analyzed for their significance and occurrence Single Audit report provides a readily available source of information on internal control weaknesses and other risks for state and local governments receiving Recovery Act funding
77 GAO and the American Recover & Reinvestment Act GAO responsibilities include: – conducting bimonthly reviews of selected states’ and localities’ use of funds – commenting on recipient reports on the number of jobs created or preserved – reviewing areas such as trade adjustment assistance, new education incentive grants, and efforts to increase small business lending – monitoring downturn’s long-term effect on states (health care costs)
88 Bimonthly Reviews Examine How States and Localities are Spending Recovery Act Funds The reviews will focus on 16 states and D.C. GAO has reported on April 23, July 7, and September 23, 2009. Next report expected mid-December 2009.
99 Projected Versus Actual Federal Outlays to States and Localities Under the Recovery Act Source: GAO Analysis of data from CBO, Federal Funds Information for States, and Recovery.gov Fiscal year Dollars (in billions)
10 Composition of State and Local Recovery Act Funding Source: GAO analysis of CBO and FFIS data. Fiscal Year 2009Fiscal Year 2012
11 GAO’s Coordination with the Accountability Community GAO is coordinating roles, planned approaches, and timelines with the broader accountability community including: – State and local government auditors – Recovery Accountability and Transparency Board – Inspectors General (IG) – Office of Management and Budget (OMB)
12 Overall Look at Single Audits Program Determination Single Audit Act and OMB Circular No. A-133 call for a “risk based” approach to determine which programs will be included in Single Audit testing – Prescribed approach to determine which programs will be subject to detailed compliance testing relies heavily on the amount of federal expenditures during a fiscal year and whether findings were reported in the previous period
13 OMB Guidance to Date Initial Implementing Guidance (issued February 18, 2009): http://www.recovery.gov/files/Initial%20Recovery%20Act%20 Implementing%20Guidance.pdf http://www.recovery.gov/files/Initial%20Recovery%20Act%20 Implementing%20Guidance.pdf Follow-Up OMB Implementing Guidance (issued April 3, 2009): http://www.recovery.gov/sites/default/files/m09- 15.pdfhttp://www.recovery.gov/sites/default/files/m09- 15.pdf 2009 Compliance Supplement (issued May 26, 2009): http://www.whitehouse.gov/omb/grants http://www.whitehouse.gov/omb/grants Addendum No 1 to the Compliance Supplement (issued August 6, 2009): http://www.whitehouse.gov/omb/asset.aspx?AssetId=1567 http://www.whitehouse.gov/omb/asset.aspx?AssetId=1567 Addendum No. 2 to the Compliance Supplement (to be issued October 16, 2009)
14 Other Recovery Act/Single Audit Issues Timeliness problems (9 month reporting deadline, plus extensions) Usefulness of Single Audit Reports as a grants monitoring and accountability tool Subrecipient monitoring issues
15 Current View on Usefulness of Single Audits Unanimous support that the basic financial audit needs to continue to be performed Broad consensus that the required testing on existing programs should continue – Federal funding currently audited under single audit dwarfs the amounts of stimulus funds IGs use information on internal control and compliance to support conclusions on large grant programs in the financial audit of their departments Federal program officials use the single audit as part of their oversight of grant programs
16 What GAO Found: Single Audit Approach May Need to be Adjusted Single Audit Act and OMB Circular No. A-133 call for a “risk based” approach to determine which programs will be included in Single Audit testing Under the current approach for risk determination, certain risks may not receive full consideration Unique challenges associated with Recovery Act funding: sudden increase in funds that most recipients are experiencing new government programs and programs that are new for the recipient entity need for timely and efficient oversight in response to the Recovery Act’s accountability requirements
17 GAO’s Recommendations to OMB to Adjust Current Single Audit Process – focus on Recovery Act funded programs – develop requirements for reporting on internal controls during 2009, before significant expenditures in 2010, as well for ongoing reporting – evaluate options for providing relief for low-risk programs – develop mechanisms to help fund additional single audit costs – take steps to achieve sufficient participate and coverage in the single audit pilot program
18 GAO’s Recommendations to OMB to Reduce Impact of Untimely Single Audit Reporting Formally advise federal cognizant agencies to adopt a policy of no longer approving extensions to submit single audit reporting package Widely communicate this revised policy to those who have responsibility for conducting single audits and submitting the reporting package
19 GAO’s Matter for Congressional Consideration Congress could consider legislative proposals which could address: – Amending the Single Audit Act that provides for more timely internal control reporting as well as audit coverage for smaller Recovery Act programs with higher risk – Consider mechanisms to provide additional resources to support those charged with carrying out the single audit and related audits
20 Impact of the Recovery Act: Auditor Perspective Economic Recovery and Reinvestment Act of 2009 – Accountability & Transparency Recovery.gov (announcements, agreements, program managers, governors, mayors) Recovery Board, GAO, Inspectors, whistleblowers QCRs built into the OMB guidance – results to be placed on Recovery.gov Single audit reporting packages to be made available on the Internet – Compliance Supplement – OMB Guidance issued on continual basis (see next slide) – Changes to major program determination process? – Other changes? – Stay tuned!
21 Message Points to State and Local Governments Consider whether control procedures in place over federal expenditures are appropriate, working properly, and designed to prevent unallowable expenditures Consider whether additional controls and system requirements will be needed to ensure that Recovery Act funds are able to separately identified and tracked If applicable, consider whether new controls needed to meet the stringent reporting requirements back to federal agencies If Recovery Act funds will be passed down to subrecipients, that controls are in place to ensure appropriate subrecipient monitoring and also whether any new controls will need to be established related to new subrecipient reporting responsibilities
22 Additional Changes in Single Audits Waivers for extensions CPE Requirements Shorten Due Period Consideration of audit threshold Additional monitoring
23 Additional Changes in Single Audits More active GAQC Increase practice aids, training and guidance Revised Government Auditing Standards/A-133 A&A Guide New CPE training efforts Possible revisions to Single Audit Act
24 Government Auditing Standards July 2007 Revision
25 July 2007 Revision July 2007 revision supersedes the 2003 revision – A listing of technical changes from the January 2007 revision is posted to the yellow book web page Effective date -- For financial audits and attestation engagements, the standards are effective for audits of periods beginning on or after January 1, 2008 Still contains 8 chapters
26 Overview of July 2007 Revision Chapters 1-3 Standardized language to define auditor requirements Citing compliance with GAGAS Using GAGAS with other professional standards New chapter 2 – Ethical Principles in Government Auditing Clarified and streamlined the discussion of nonaudit services Incorporated the revised CPE requirements issued in 2005 Internal specialists who are part of the audit organization and perform as a member of the audit team should comply with CPE requirements Added requirements for the audit organization’s system of quality control
27 Chapter 3: General Standards Continuing Professional Education Incorporated the revised CPE requirements that were issued in April 2005 (GAO-05-568G) Under these requirements – All auditors should complete every 2 years at least 24 hours of CPE that relates to GAGAS – Auditors involved in planning, directing, or reporting on GAGAS assignments and all auditors who charge more than 20 percent or more of their time annually to GAGAS assignments, also should obtain at least an additional 56 hours of CPE that enhances the auditors’ professional proficiency to conduct audits – Clarified that auditors still are required to obtain 20 hours of CPE each year Clarified CPE requirements to include internal specialists who are part of the audit organization and part of the team
28 Chapter 3: General Standards Audit Quality Control and Assurance Added a requirement that the quality control policies and procedures collectively address Leadership responsibilities within the audit organization Independence, legal, and ethical requirements Initiation, acceptance, and continuance of audit and attestation engagements Human resources Audit and attestation performance, documentation, and reporting Monitoring of quality
29 Chapter 3: General Standards Audit Quality Control and Assurance Added requirements for – Audit organizations to analyze and summarize the results of monitoring procedures at least annually Include identification of any systematic issues needing improvement Include recommendations for corrective action
30 Chapter 3: General Standards Audit Quality Control and Assurance External audit organizations to make peer review reports publicly available Does not include letter of comment Can be done by posting the peer review opinion on an external we site or to a publicly available file designed for public transparency of peer review results – Internal audit organizations to provide a copy of the peer review report to those charged with governance – Government audit organizations should also communicate the overall results and the availability of their external peer review reports to appropriate oversight bodies
31 Overview of July 2007 Revision Chapters 4-6 Updated for consistency with recent developments in financial auditing and internal control by aligning – Audit documentation with AICPA SAS No. 103, Audit Documentation – Definitions of internal control deficiencies with AICPA SAS No. 112, Communicating Internal Control Related Matters Identified in an Audit Requirements for reporting on the restatement of previously- issued financial statements Encouraged communication of significant concerns, uncertainties or other unusual or catastrophic events Clarified and revised the description of attestation engagements
32 If auditor becomes aware of indications of abuse that could be material, auditors should apply audit procedures specifically to ascertain 1.whether material abuse has occurred, and 2.the potential effect on the subject matter of the audit However, because the determination of abuse is subjective, auditors are not required to provide reasonable assurance of detecting abuse After performing additional work, auditors may discover that the abuse represents potential fraud or illegal acts Chapter 4: Financial Audit Field Work Abuse
33 Overview of July 2007 Revision Chapters 7-8, Appendix Overall framework for high-quality performance audits – Reasonable assurance, significance, and audit risk Revised definition of performance audits (chapter 1) Internal control that is significant within the context of the audit objectives Information systems controls to assess audit risk and plan the audit within the context of the audit objectives Overall assessment of the sufficiency and appropriateness of evidence Subsequent discovery that reported findings or conclusions were not supported by sufficient, appropriate evidence Enhanced GAGAS compliance statement for performance audits Appendix to provide supplemental guidance
34 Implementation of Government Auditing Standards
35 Professional Requirements Tools Contains 4 parts – General requirements for audit organizations – Specific requirements for financial audits – Specific requirements for attestation engagements – Specific requirements for performance audits Guidance to help auditors sort out the use of the terms “must” and “should” Available on Yellow Book Web Page
36 Professional Requirements Tools For financial audits and attestation engagements, GAGAS incorporates – AICPA field work and reporting standards The related Statements on Auditing Standards (SAS) The related Statements on Standards for Attestation Engagements (SSAE) Auditors need to comply with requirements in the AICPA standards in addition to the requirements listed in the tools
38 Interim Guidance on Reporting Deficiencies in Internal Control Issued to assist auditors in complying with – SAS No. 115, Communicating internal Control Related Matters Identified in an Audit – SSAE No. 15, An Examination of an Entity’s Internal Control Over Financial Reporting That Is Integrated With an Audit of Its Financial Statements Revised AICPA standards have different definitions of material weaknesses and significant deficiencies than GAGAS – Can use revised definitions for GAGAS report if provide the revised definitions and describe the scope of testing performed on the entity’s internal control over financial reporting
40 Updates in Future Planned Work on Government Auditing Standards Planned Projects Crosswalk between GAGAS and INTOSAI standards Public sector perspectives for AICPA “clarified” standards Develop guidance to address commonly asked questions Revise Government Auditing Standards based on – Issues associated with independence – Revisions/issues raised by other standard setters Performance Audits--overall risk assessments by government audit organizations
42 Overview of Current GAGAS Independence Standards Organization and scope of GAGAS independence standards – Q&A addresses specific situations rather than a comprehensive approach, resulting in de facto rules – Q&A is dated and does not fully conform with the 2007 GAGAS – 2007 GAGAS recognizes ethical principles but does not provide a uniform approach for dealing with ethical issues – Other standard-setting bodies have made significant developments in the area of auditor independence since 2002
43 Independence Definitions/Independence in Fact and Appearance Issues: – GAGAS does not explicitly define independence in appearance or the types of independence Personal independence External independence Organizational independence – Council also recommended discussing conflicts of interest Action items: – Add definitions to GAGAS Independence in fact and in appearance Types of independence Third parties
44 Conceptual Framework: Principles vs. Rules A conceptual framework – provides a common risk-based approach, including threats and safeguards, for use in analyzing independence matters – requires the use of professional judgment Action items: Continue working with AICPA and others on the conceptual framework Reconsider GAO’s Independence Q&A Update independence standard as necessary
46 Recent Events July 2007 PCIE Study on Single Audit Quality October 2007 Hearing – Senate Subcommittee on Federal Financial Management, Committee on Homeland Security and Governmental Affairs Establishment of Federal Workgroups and AICPA task forces AGA Partnership project – Leveraging Single Audits Ongoing Congressional interest and expectations Persistent single audit quality problems affect grants management and accountability March 2009 GAO report (GAO-09-307R), Single Audit Improvements
47 PCIE Report and Recommendations PCIE report presents compelling evidence that there continues to be a serious problem with single audit quality PCIE report recommended a three-pronged approach to improving the quality of single audits: 1.improving standards and guidance 2.establishing continuing professional education as a prerequisite to conducting single audits 3.enhancing the professional disciplinary processes for unacceptable audits
48 GAO– Oct 2007 Testimony (GAO-08-213T) Actions must be taken to improve single audit quality and the related accountability over federal awards There may be opportunities for – Considering size characteristics when implementing actions to improve single audit quality – Strengthening the cognizant agency oversight for larger auditees Considering the recommendations of the PCIE within this larger context is important in achieving the proper balance between risk and cost-effective accountability
49 Opportunities Exist to Improve Single Audit Process and Oversight In order to monitor risk, cost-benefit, and efficiency and effectiveness of the single audit process, we recommend OMB take the following actions: Designate an entity to (1) evaluate and comprehensively monitor the single audit process government-wide, (2) assess the efficiency and effectiveness of how agencies carry out their single audit responsibilities, and (3) identify additional guidance and resources need to carry out single audit requirements;
50 Opportunities Exist to Improve Single Audit Process and Oversight (Con’t.) – Designate a federal workgroup to evaluate the current single audit process to identify simplified alternatives for meeting the accountability objectives of the Single Audit Act for the audits of small entities, while achieving the proper balance between risk and cost-effective accountability for the smallest to the largest entities; and – Monitor the status of OMB workgroups, AICPA task forces, and NASBA referral project activities, and evaluate completed actions and their impact on addressing the PCIE report recommendations to improve single audit quality
51 American Recovery and Reinvestment Act of 2009 (Recovery Act)
52 American Recovery and Reinvestment Act of 2009 (Recovery Act) Signed February 17, 2009 Purposes: – preserve and create jobs and promote recovery – assist those most impacted by the recession – invest in science and health-care technology – invest in infrastructure – stabilize state and local government budgets Total cost, tax and spending: $787 billion, including over $580 billion in additional spending (CBO estimate)
53 GAO’s Oversight of the Recovery Act GAO responsibilities include: – conducting bimonthly reviews of selected state and localities use of funds, – commenting on the estimates of the number of jobs created and retained by projects and activities, and – reviewing areas such as trade adjustment assistance, new education incentive grants, and efforts to increase small business lending.
54 Bimonthly Reviews Examine How States and Localities are Spending Recovery Act Funds The reviews will focus on 16 states and D.C. GAO has reported on April 23, July 7, and September 23, 2009. Next report expected mid-December 2009.
55 Recovery Act Spending by States and Localities will Occur Over Time Projected timing of Recovery Act funding made available to states and localities by fiscal year: Source: GAO analysis of CBO and FFIS data.
56 What GAO Found: Single Audit Approach May Need to be Adjusted Single Audit Act and OMB Circular No. A-133 call for a “risk based” approach to determine which programs will be included in Single Audit testing. Under the current approach for risk determination, certain risks may not receive full consideration. Unique challenges associated with Recovery Act funding: sudden increase in funds that most recipients are experiencing new government programs and programs that are new for the recipient entity need for timely and efficient oversight in response to the Recovery Act’s accountability requirements
57 GAO’s Recommendations to OMB Single Audit To provide additional leverage as an oversight tool for Recovery Act programs, the Director of OMB should adjust the current audit process to: focus the risk assessment auditors use to select programs to test for compliance with 2009 federal program requirements on Recovery Act funding provide for review of the design of internal controls during 2009 over programs to receive Recovery Act funding, before significant expenditures in 2010 evaluate options for providing relief related to audit requirements for low-risk programs to balance new audit responsibilities associated with the Recovery Act.
58 GAO’s Ongoing Efforts Planning for GAO’s next bimonthly review of states is underway. GAO will review quarterly reports filed by fund recipients and comment on the reports' estimates of the number of jobs created and retained by projects or activities supported by Recovery Act funds. GAO’s first comments are due on August 25, 2009. GAO's oversight work on the Recovery Act will be updated regularly at www.gao.gov/recoverywww.gao.gov/recovery
59 Where to Find the Yellow Book The Yellow Book is available on GAO’s website at: www.gao.gov/govaud/ybk01.htm For technical assistance, contact us at email@example.com
61 Program Objectives Review of the recent activities of the AICPA Auditing Standards Board (ASB) related to an overview of recently issued standards The ASB’s clarity project Standards in the process of being developed by the ASB Potential impact on US auditing standards of the ongoing international convergence activities.
62 Only Two New SAS’s No. 115, Communicating Internal Control Related Matters Identified in an Audit. SAS No. 116, Interim Financial Information
63 SAS 115 SAS No. 115, Communicating Internal Control Related Matters Identified in an Audit. This SAS supersedes SAS No. 112 of the same title and was issued to eliminate differences with other AICPA and PCAOB Standards.
64 SAS 115 The SAS aligns the definitions of the various kinds of deficiencies in internal control and the related guidance for evaluating such deficiencies with the definitions and guidance in those other standards. The SAS is effective for audits of financial statements for periods ending on or after December 15, 2009. Earlier implementation is permitted.
65 SAS 116 SAS No. 116, Interim Financial Information The SAS is effective for reviews of interim financial information for interim periods beginning after December 15, 2009. Early application is permitted.
66 Executive Summary This SAS amends AU section 722, Interim Financial Information (AICPA, Professional Standards, vol. 1), to accommodate reviews of interim financial information of nonissuers, including companies offering securities pursuant to Securities and Exchange Commission (SEC) Rule 144A or participating in private equity exchanges. For example, a nonissuer may, on a quarterly basis, prepare interim financial statements that conform with the requirements of Article 10 of SEC Regulation S-X.
67 Executive Summary This statement would apply when the interim financial information is intended to provide a periodic update to year-end reporting Provides guidance on how to deal with condensed financial information and when reviews of that information is required.
68 ASB Withdraws SAS No. 69 The hierarchies of generally accepted accounting principles (GAAP hierarchies) of nongovernmental, state and local, and federal reporting entities have resided in SAS No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, in the auditing literature.
69 ASB Withdraws SAS No. 69 The FASB, the GASB, and the Federal Accounting Standards Advisory Board (FASAB) have issued the following pronouncements that incorporate their respective GAAP hierarchy into their respective authoritative literature: – FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, as superseded by FASB Statement No. 168, – GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments – Statement of Federal Financial Accounting Standards 34, The Hierarchy of Generally Accepted Accounting Principles, Including the Application of Standards Issued by the Financial Accounting Standards Board
70 ASB Withdraws SAS No. 69 Therefore, the ASB has withdrawn SAS No. 69, effective September 2009. The related interpretation, “The Auditor’s Consideration of Management’s Adoption of Accounting Principles for New Transactions or Events,” has also been deleted.
71 The Clarity Project The AICPA’s Auditing Standards Board (ASB) has undertaken a significant effort to make U.S. generally accepted auditing standards (GAAS) easier to read, understand and apply. This endeavor is similar to a project of the International Auditing and Assurance Standards Board (IAASB) that aims to clarify its International Standards on Auditing (ISAs). www.ifac.org/IAASB/
72 Genesis of The Project In 2004, the ASB considered how best to meet its mission in light of the creation of the Public Company Accounting Oversight Board (PCAOB) and the increasingly widespread acceptance of ISAs. The ASB developed a plan to converge U.S. GAAS with the ISAs while avoiding unnecessary conflict with PCAOB standards.
73 Genesis of The Project Next, the ASB aligned its agenda with that of the IAASB and began to develop its standards based on the ISAs. This allows the ASB to consider projects simultaneously with the IAASB – and more effectively provide input on the international standard-setting process.
74 The Basics The foundation of the clarity project is the establishment of an objective for each auditing standard. These objectives will better reflect a principles- based approach to standard-setting. In March 2007, the ASB sought feedback on its “Improving the Clarity of ASB Standards” discussion paper. In response to that feedback and subsequent discussions, the ASB has established clarity drafting conventions.
75 Clarity Drafting Conventions The conventions will be applied to all new standards issued by the ASB. They include: – Establishing objectives for each of the standards – Including a definitions section, where relevant, in each standard – Separating requirements from application and other explanatory material – Numbering application and other explanatory material paragraphs using an A prefix and presenting them in a separate section (following the requirements section)
76 Clarity Drafting Conventions Using formatting techniques, such as bulleted lists, to enhance readability Special considerations relevant to audits of smaller, less complex entities Special considerations relevant to audits of governmental audits
77 Next Steps Over the next two to three years, the ASB will redraft all of the auditing sections in Codification of Statements on Auditing Standards, apply the clarity drafting conventions and converge the material with the ISAs. The redrafting process will including exposing clarity redrafts, considering comments, making changes and finalizing the standards.
78 Next Steps The ASB expects that nearly all ISA requirements will also be requirements of U.S. GAAS. However, there may be additional GAAS requirements that address issues specific to the U.S. or the retention of current practices.
79 Effective Date The ASB proposes that all redrafted standards will be effective on the same date. Standards that address current issues will have earlier effective dates. The effective date is expected to apply to audits of financial statements for periods beginning no earlier than December 15, 2010.
80 Effective Date It will be amended to a later date, if necessary. The ASB believes having a single effective date will ease the transition to – and implementation of – the redrafted standards. The date will be selected to allow enough time for finalization of the standards as well as training in and updating of firm methodologies.
81 Release Upon Approval To assist in training (including development of training materials) and implementation, the ASB will release the finalized redrafted standards as they are approved. The ASB recognizes that conforming changes may need to be made to approved redrafted standards as a result of the clarification of other standards. The ASB expects these changes will be minor (wording, placement of material) rather than substantial. Thus, the benefits of making the standards available as early as possible support the release of redrafted standards as they are finalized.
82 Supplemental Material An exhibit that identifies differences between the requirements of the proposed redrafted standards and the requirements of the corresponding ISA will be included as an exhibit in each exposure draft. In addition, supplemental material to exposure drafts of proposed standards will be provided to assist respondents in understanding how the ISA, the proposed standard and the extant standard compare to one another.
83 July 2009 Clarity Project Update In response to frequently asked questions regarding the status and ultimate product of the Clarity Project, below are responses to those questions most commonly asked the AICPA. More information on the Clarity Project is available on the AICPA’s web site at: http://www.aicpa.org/Professional+Resources/Accounting+a nd+Auditing/Audit+and+Attest+Standards/Improving+the+Cl arity+of+ASB+Standards/default.htm
84 What is the Clarity Project? To aid CPAs’ understanding of generally accepted auditing standards (GAAS) and to improve compliance with their requirements, the Auditing Standards Board (ASB) in 2004 launched a significant effort to make U.S. GAAS easier to read, understand and apply. In 2009, the International Auditing and Assurance Standards Board completed a similar project to clarify its International Standards on Auditing (ISAs). The ASB is converging U.S. GAAS with the ISAs while avoiding unnecessary conflict with Public Company Accounting Oversight Board standards. In 2007, clarity drafting conventions were developed and are being applied to all standards issued by the ASB after January 2008. All Statements on Auditing Standards (SASs) are being clarified over the next three years..
85 Clarifying Q and A’s Q. When does the ASB expect to complete the Clarity Project? A. Though it is difficult to say with certainty until the Clarity Project has reached the phase at which the last of the current standards has been clarified and exposed for comment, the ASB is working toward a completion date of late Summer/early Fall 2010.
86 Clarifying Q and A’s Q. Once all of the ASB’s clarified standards have been finalized, how will they be issued? A. The ASB will issue all of the clarified standards in one SAS that will be codified in “AU section” format, just as it did in 1972, when SAS No. 1, Codification of Auditing Standards and Procedures, was issued. SAS No. 1 was issued as one “book” that contained all of the standards codified in “AU section” format within the SAS. Each AU section was assigned a number and a title.
87 Clarifying Q and A’s Q. Will the SAS number start over as No. 1? A. No. The SAS number will be the next consecutive number that is available. Thus far, the last SAS that the ASB issued is No. 116, Interim Financial Information. For purposes of the remainder of these questions, let’s presume no other SASs will be issued before the Clarity Project is completed and, therefore, the clarified standards will be issued as “SAS No. 117.”
88 Clarifying Q and A’s Q. What will happen to the SASs currently in effect? A. When “SAS No. 117” becomes effective, SAS Nos. 1–116 will be superseded.
89 Clarifying Q and A’s Q. Once finalized, when will “SAS No. 117” become effective? A. The effective date is expected to apply to audits of financial statements for periods beginning on or after December 15, 2010. This date is provisional, but will not be earlier. The ASB believes having a single effective date for all clarified auditing standards will ease the transition to—and implementation of—the clarified standards. The date will be selected to allow enough time for finalization of the standards as well as updating of, and training in, firm methodologies.
90 Clarifying Q and A’s Q. How will the current AU section numbering and titles change? A. The ASB is conducting the Clarity Project by clarifying all existing AU sections. In some cases, individual AU sections are being clarified “one for one” into individual clarified standards. In other cases, some AU sections are grouped together and clarified into one or more clarified standards. As a result, topics currently associated with certain AU section numbers might be re-titled and assigned different AU section numbers in “SAS No. 117.”
91 Clarifying Q and A’s Q. Will early adoption of “SAS No. 117” be permitted? A. The ASB has decided that adoption before its effective date of any clarified SAS, unless explicitly permitted, would not be appropriate until all clarified SASs are finalized and can be adopted as a set. It is important that, for legal and practice inspection purposes, it be very clear which set of standards is in effect. Therefore, auditors should continue to comply with the current standards until the date that “SAS No. 117” is effective. However, nothing precludes an auditor from implementing aspects of the clarified SASs before their effective date, as long as the auditor continues to comply with the current standards.
92 Clarifying Q and A’s Q. Once “SAS No. 117” is effective, will the ASB continue to issue SASs? A. Yes. Just as it has up until now, the ASB will continue to issue SASs that will create, amend, or supersede AU sections. In this case, SASs issued subsequent to “SAS No. 117” will impact the AU sections that “SAS No. 117” will contain.
93 Get the Information A. As each exposure draft of a clarified auditing standard is issued, it is made available on the AICPA’s web site at http://www.aicpa.org/Professional+Resources/Accounting+a nd+Auditing/Audit+and+Attest+Standards/Improving+the+Cl arity+of+ASB+Standards/default.htm. As each clarified auditing standard is finalized, it is made available on the AICPA’s web site at http://www.aicpa.org/Professional+Resources/Accounting+a nd+Auditing/Audit+and+Attest+Standards/Improving+the+Cl arity+of+ASB+Standards/Final+Clarified+Statements+on+Aud iting+Standards.htm. Please remember, however, that no clarified auditing standard is effective yet.
94 A Review of the Clarity Exposure Drafts So Far
95 Preface to Codification of SASs and Overall Objectives Proposed Preface to Codification of Statements on Auditing Standards, Principles Governing an Audit Conducted in Accordance With Generally Accepted 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
96 Service Organizations Proposed Statement on Auditing Standards, Audit Considerations Relating to an Entity Using a Service Organization Proposed Statement on Standards for Attestation Engagements, Reporting on Controls at a Service Organization
97 Supplementary Information Proposed Statements on Auditing Standards, Required Supplementary Information; Other Information in Documents Containing Audited Financial Statements; and Other Information in Relation to the Financial Statements as a Whole. Supplementary Material: – Comparison of Proposed SAS to ISA 720 – Disposition of AU Section 550 Proposed SAS, Other Information in Documents Containing Audited Financial Statements – Disposition of AU Section 551 in Proposed SAS, Other Information in Relation to the Financial Statements as a Whole – Disposition of AU Section 558 in Proposed SAS, Required Supplementary Information
98 Fraud Proposed SAS, Consideration of Fraud in a Financial Statement Audit (Redrafted)
99 Risk Assessment Explanatory Memo Exhibit A – Comparison of Proposed Statements on Auditing Standards Related to Risk Assessment With the Corresponding International Standards on Auditing Exhibit B – Summary of Differences Between the PCAOB’s and the ASB’s Proposed Risk Assessment Standards Proposed SAS: – Audit Evidence (Redrafted) – Materiality in Planning and Performing an Audit (Redrafted) – Evaluation of Misstatements Identified During an Audit – Planning an Audit (Redrafted) – Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (Redrafted) – Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (Redrafted)
100 Risk Assessment Supplementary Material: – Comparison of Proposed SAS, Audit Evidence (Redrafted) to ISA 500 – Comparison of Proposed SAS, Materiality in Planning and Performing an Audit (Redrafted) to ISA 320 – Comparison of Proposed SAS, Evaluation of Misstatements Identified During the Audit to ISA 450 – Comparison of Proposed SAS, Planning an Audit (Redrafted) to ISA 300 – Comparison of Proposed SAS, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (Redrafted) to ISA 315 – Comparison of Proposed SAS, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (Redrafted) to ISA 330 – Press Release – Questions and Answers on Redrafted Risk Assessment Standards
101 Other Proposed ED’s Consideration of Laws and Regulations in an Audit of Financial Statements (Redrafted) Initial Audit Engagements, Including Reaudits—Opening Balances Audit Sampling (Redrafted) Subsequent Events and Subsequently Discovered Facts External Confirmations
102 Quality Control Proposed SQCS, A Firm’s System of Quality Control (Redrafted) Proposed SAS, Quality Control for an Audit of Financial Statements
103 Recent Additions Auditing Accounting Estimates Including Fair Value Estimates Audits of Group Financial Statements Related Parties
104 Audits of Fair Value The proposed SAS, Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures, would supersede SAS 57 and SAS 101 (AU Sections 342 and 328). It is based on ISA 540, which has the same title. The only significant difference between ISA 540 and the proposed SAS is that sections dealing with requirements for management representations and communications with those charged with governance were left out. Those sections will instead be included in a redrafted version of AU Section 380, The Auditor's Communication With Those Charged With Governance, and the proposed SAS, Written Representations. The ASB observed that it also considered audit standards aimed at derivatives estimates (AU Section 332), and concluded that many of those provisions are very similar to provisions in the AICPA's risk assessment standards (SAS 106-111). Instead of revising the audit standard, the AICPA plans to include interpretative language in its audit guide, Auditing Derivative Instruments, Hedging Activities, and Investments in Securities. Remaining requirements not covered elsewhere will be wrapped into future revisions of SASs.
105 Audits of Group Financial Statements This SAS Audits of Group Financial Statements (Including the Work of Component Auditors) would supersede SAS No. 1 section 543, Part of Audit Performed by Other Independent Auditors (AICPA, Professional Standards, vol. 1, AU sec. 543). The proposed SAS was drafted to apply the ASB’s clarity drafting conventions to SAS No. 1 section 543 and to converge with International Standard on Auditing (ISA) 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) The proposed SAS is significantly broader in scope than AU section 543. The focus of ISA 600 and, accordingly, the proposed SAS is on how to conduct an effective audit of group financial statements. The focus of AU section 543 is on how to conduct an audit that involves component auditors. The focus of any auditing standard should be on the effectiveness with which an audit of any set of financial statements is carried out, thereby increasing the credibility of the auditor’s report
106 Audits of Related Parties The third proposed SAS, Related Parties, would supersede the related parties section of SAS 45, Omnibus Statement on Auditing Standards (AU Section 334). The redrafted standard is based on ISA 550, Related Parties, and there are no significant differences between the proposal and ISA 550, the AICPA said. The proposal is different than current audit standards, which are based on specific accounting guidance on related parties from the Financial Accounting Standards Board. The proposal would be “framework neutral,” meaning that it could apply to FASB standards or to international financial reporting standards.
107 Auditor’s Reports Forming an Opinion and Reporting on Financial Statements, Modifications to the Opinion in the Independent Auditor’s Report, and Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report Supersedes AU sections 410, 431, 508, and 532 in AICPA Professional Standards. Would integrate many ISA requirements.
108 Auditor’s Reports Reporting on Compliance With Aspects of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements (Redrafted) Supersedes paragraphs 19–21 of AU section 623 in AICPA Professional Standards. The proposed SAS does not change or expand paragraphs 19–21 of SAS No. 62 (AU section 623) in any significant respect.
109 Special Reports Special Considerations — Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, and Special Considerations — Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement. Supersedes AU sections 544 and 623 (except paragraphs.19–.21) Engagements to Report on Summary Financial Statements: Supersedes AU section 552 in AICPA Professional Standards. Reporting on Financial Statements Prepared in Accordance With a Financial Reporting Framework Generally Accepted in Another Country. Supersedes AU section 534 in AICPA Professional Standards.
110 The New Compliance Auditing Standard SAS#117
111 Compliance Auditing SAS Background – GAQC/ASB TF charged with reviewing SAS No. 74 and making appropriate changes/enhancements needed in response to federal study on single audit quality – New SAS voted out at ASB September meeting – Will clarify auditor’s responsibilities in a compliance audit performed under GAAS – Will state that all other auditing standards apply to compliance audits unless otherwise noted in the revised SAS – New SAS to be issued in new clarity format – Effective date June 30, 2010, year-ends
112 Clarity Standards Format SAS #117 Introduction Objectives Definitions Requirements and Application Material Appendices and Exhibits
113 Compliance Auditing SAS #117 Supersedes SAS 74 to provide additional auditing guidance when an audit of compliance is performed in connection with a GAAS and GAGAS audit of financial statements (i.e., OMB Circular A-133 Audit). A Compliance examination performed when an audit is not required, would continue to be performed under AT 601
114 Compliance Auditing SAS #117 Specifically, the proposed SAS would revise AU sec 801 by: clarifying its applicability. updating it for changes in the compliance audit environment. establishing a requirement for the auditor to adapt and apply GAAS, including the risk assessment and fraud standards (all of which primarily address audits of financial statements), to a compliance audit and providing guidance on how to do so. identifying the AU sections that are applicable to a compliance audit and those that are not applicable.
115 Compliance Auditing SAS #117 Specifically, the proposed SAS would revise AU sec 801 by: defining terms related to a compliance audit. identifying auditor requirements that are unique to a compliance audit. providing guidance on the factors an auditor may consider in evaluating whether an entity has materially complied with the applicable compliance requirements. identifying the elements to be included in an auditor’s report on compliance.