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Clarifying the Clarity Standards: An Overview February 29, 2012 Moderator R. Kinney Poynter Executive Director NASACT Speaker Randy.

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Presentation on theme: "Clarifying the Clarity Standards: An Overview February 29, 2012 Moderator R. Kinney Poynter Executive Director NASACT Speaker Randy."— Presentation transcript:

1 Clarifying the Clarity Standards: An Overview February 29, 2012 Moderator R. Kinney Poynter Executive Director NASACT Speaker Randy C. Roberts, CPA, CGFM Professional Practice Director AZ Office of the Auditor General Opening Remarks

2 Our Objectives for this Webinar Identify the major revisions of the new clarity standards Understand where the new requirements differ from the previous standards Apply the new standards in future audits 2

3 Clarity Project Status “Clarified standards” issued in October 2011 Most of them in one Statement on Auditing Standards – SAS No. 122 Omnibus Statement to catch up – SAS No. 123 Alert that Restricts the Use – SAS No. 125 issued in December 2011 Effective CY 2012/FY 2013 financial statement audits The standards not to be implemented piecemeal

4 Overall Objectives (AU 200) Preface Provides framework for an audit Place holder for the former “10 generally accepted standards” Principles Structure for an audit Components of each standard Various definitions and terms 4

5 Clarity Format Introduction Objectives Definitions Requirements Application Material Appendices and Exhibits 5

6 Considerations for Audits of Governmental Entities Guidance includes information about: Uniqueness of governmental entities Uniqueness of state audit organizations Opinion units Materiality Laws and regulations, e.g., “withdrawal from engagements” Accounting standards neutrality 6

7 Terms of Engagement (AU 210) Preconditions for an audit Determine the financial reporting framework is acceptable Obtain management’s acknowledgement of its responsibility for Preparing financial statements Designing and implementing internal control Providing the auditor access to information and persons 7

8 Terms of Engagement (AU 210) Practice Issues Q. Do you need an annual engagement letter? A. Only if terms change. If not, still need to remind them. Q. Does the reminder need to be in writing? A. No, can be reminded in writing or orally. Factors to consider: -Management misunderstands scope or objective -Revised or special terms -Change in senior management -Change in reporting requirements -Change in nature of operations or services -Change in financial reporting framework

9 Audit Documentation (AU 230) Pretty much the same as the current standard One potential change in practice new paragraph For audit procedures related to the inspection of significant contracts or agreements, the auditor should include abstracts or copies of those contracts or agreements in the audit documentation 9

10 Materiality in Planning and Performing an Audit (AU 320) 10 $ or % Materiality Performance materiality Planning and evaluation Audit procedures

11 Performing Procedures and Evaluating Audit Evidence (AU 330) The auditor is required to use external confirmations for accounts receivable, except when one or more is applicable: Overall account balance is immaterial External confirmations would be ineffective The assessed level of RMM at the relevant assertion level is low, and other planned substantive procedures address the assessed risk 11

12 Audit Evidence—Specific Consider- ations for Selected Items (AU 501) Covers: Investments in Securities and Derivatives Inventory Litigation, Claims and Assessments Segment Information Only one significant change Requires the auditor to send attorney letters if there is a relevant risk of material misstatement or an indication that material litigation exists 12

13 Opening Balances—Initial Audit Engagements (AU 510) Obtain sufficient appropriate evidence about whether beginning balances contain material misstatements What procedures will obtain sufficient appropriate evidence about opening balances? 13

14 Opening Balances—Initial Audit Engagements (AU 510) Obtain sufficient appropriate evidence about whether beginning balances contain material misstatements Reviewing predecessor auditor helps determine auditor scope, but is not sole basis for sufficient appropriate evidence 14

15 Opening Balances—Initial Audit Engagements (AU 510) Obtain sufficient appropriate evidence about whether beginning balances contain material misstatements Reviewing predecessor auditor helps determine auditor scope, but is not sole basis for sufficient appropriate evidence 15 1.Whether prior period closing balances brought forward correctly 2. Whether opening balances reflect appropriate application of accounting principles 3. Evaluating evidence about opening balances from current period audit procedures and one or both: a.Review predecessor auditor’s work b.Perform specific procedures about opening balances 1.Whether prior period closing balances brought forward correctly 2. Whether opening balances reflect appropriate application of accounting principles 3. Evaluating evidence about opening balances from current period audit procedures and one or both: a.Review predecessor auditor’s work b.Perform specific procedures about opening balances

16 Special Considerations—Audit of Group Financial Statements (AU 600) Key definitions __ Group __ Component __ Component auditor __ Component materiality __ Significant component 16 E.G., Group financial statements Group management Group-wide controls Group audit Group auditor Group audit opinion

17 Special Considerations—Audit of Group Financial Statements (AU 600) Acceptance and continuance - group auditor; identify components; preconditions Understanding - group; components; component auditors; make reference? Materiality decisions and responding to risks of material misstatement Other procedures - consolidation process; subsequent events; evaluating evidence Communications - with component auditors; with group governance and management 17

18 Special Considerations—Audit of Group Financial Statements (AU 600) Identifying components – why is it important? 18 Significant components Gain understanding of components Assess RMM for components Gain understanding of component auditors Make materiality decisions about components Perform procedures related to components Evaluate evidence obtained Evaluate component auditor Communicate with component auditors and management

19 Special Considerations—Audit of Group Financial Statements (AU 600) Governance structure Management structure How centralized is financial reporting Centralized operations Physical locations Control environment Nature of activity Uniqueness to entity Physical location of assets Financial information prepared by others Existence of multiple general ledgers or records Whether information is booked in summary form If risk assessments vary Legal or regulatory requirements/oversight 19 Factors to ConsiderOther Indicators

20 Special Considerations—Audit of Group Financial Statements (AU 600) Preconditions to making reference to others’ work Component f/s prepared on same GAAP basis* Component auditor (CA) followed GAAS Component auditor report is not restricted as to use *exception in application paragraphs for GASB and FASAB, which address this 20

21 Special Considerations—Audit of Group Financial Statements (AU 600) Materiality – the Group Auditor (GA) should determine: Materiality, including performance materiality, for group financial statements Whether circumstances exist that something less than materiality influences users; if so, apply 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 above which misstatements are trivial 21

22 Group versus Component Materiality 22 $ or % Materiality Performance materiality Planning and evaluation Audit procedures Component materiality Component performance materiality

23 Special Considerations—Audit of Group Financial Statements (AU 600) Performing procedures Just like the Risk Assessment Standards and the rest of the other SASs Significant components – an audit of its financial statements performed 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 23

24 Special Considerations—Audit of Group Financial Statements (AU 600) Practice Issues: Group-wide controls & Consolidation Process Test group-wide controls – but who – GA or CA? Test consolidation process – but who – GA or CA? Subsequent events (SE) issues: How often does component audit work finish before group audit team is done? Who is responsible for SE work – GA or CA? 24

25 Special Considerations—Audit of Group Financial Statements (AU 600) Final Thought: 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 component has a SIGNIFICANT increase in requirements compared to: Current guidance on the matter When making reference under this new AU section 25

26 Forming an Opinion and Reporting (AU 700) 26 Opinion Headings and Subheadings Other auditor reporting responsibilities (Yellow Book Report reference)

27 Modifications to the Opinion (AU 705) 27 Basis for qualified, adverse, or disclaimer (placed before opinion paragraph) Modified opinion (Qualified, Adverse, or Disclaimer

28 Emphasis of Matter and Other Matter Paragraphs (AU 706) Going concern Contractual or regulatory reporting frameworks Consistency 28 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 MatterOther Matter -Litigation uncertainty -Major catastrophe -Significant related parties -Subsequent events -“Other” supplementary information

29 Emphasis of Matter and Other Matter Paragraphs (AU 706) 29 Emphasis of Matter Matters appropriately presented or disclosed Other Matter To understand audit matters (Combining statements, SI, RSI, SEFA)

30 Special Considerations—Special Purpose Frameworks (AU 800) Cash BasisTax BasisContractual Regulatory RestrictedGeneral Opinion Single Dual Use EOM? Yes No Describe Purpose No Yes Restrict use? No Yes No 30

31 Alert that Restricts the Use of Auditor’s Written Communication (AU 905) Restricted use language Criteria suitable for limited parties Criteria available to limited parties Matters outside primary objective of audit 31 Important Elements of Requirements “This [report, letter, 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.”

32 Alert that Restricts the Use of Auditor’s Written Communication (AU 905) Communicating internal controls Communications with governance Supplementary information “in relation to” (optional) Summary F/S Single F/S or Elements Compliance with Aspects of Agreements Reports on application of GAAP Letters for Underwriters Compliance audits Special purpose frameworks Group audits 32

33 Alert that Restricts the Use of Auditor’s Written Communication (AU 905) Restricted use language Criteria suitable for limited parties Criteria available to limited parties Matters outside primary objective of audit Names specific parties in language Inability for others to use Currently implicit/ overlooked Under Group Audits AU600, not allowed (For governments) Huge disconnect 33 Requirements ElementsImpact on Practice

34 Alert that Restricts the Use of Auditor’s Written Communication (AU 905) Restricted use language Criteria suitable for limited parties Criteria available to limited parties Matters outside primary objective of audit Now uses language about “intended purpose” Exception for 3 rd criteria if also following GAGAS Don’t name specific parties Removes disconnect Removes Group Audits conflict 34 Requirements ElementsWhat’s Different

35 Alert that Restricts the Use of Auditor’s Written Communication (AU 905) 35 “Restricted” Use“Restricted” Purpose “This [report, letter, 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.” “The purpose of this [report, letter, or communication] is to [describe the purpose of the communication]. Accordingly, this [report, letter, or communication] is not intended to be and should not be used for any other purpose.”

36 Alert that Restricts the Use of Auditor’s Written Communication (AU 905) Currently Under Clarity Standards 36 Remember when we combined restricted use reports with general use reports? + = General use report Restricted use report + = General use report Restricted use report General use report with a restricted use section

37 Summary of Changes – SASs 1 – 120 versus Clarified SASs Really good summary on AICPA web site for more complete comparison downloadabledocuments/clarity/clarity_sas_ summary_of_differences.pdf Two essential Clarified AU sections AU 200 Overall Objectives AU 600 Group Audits 37

38 510-Opening Balances 550-Related Parties 560-Subsequent Events 620-Auditor’s Specialist 700-Forming an Opinion 706-Emphasis of Matter & Other Matter 708-Consistency 800-Special Purpose Framework 805-Single F/S 810-Summary F/S 905-Restricted Use Summary of Changes – SASs 1 – 120 versus Clarified SASs 210-Terms of Engagement 250-Laws and Regulations 265-Communicating Int Ctrls 320-Materiality Plan/Perform Audits 330-Performing Audit Procedures in Response 402-Auditing Considerations for Entity Use of Service Organizations 501-Audit Evidence Selected Items 505-External Confirmations Little-some change 38

39 585-Omitted Procedures 610 Internal Audit (coming) 705-Modifications to Opinion 720-Other Information 725-Suppl Information 730-Required Suppl Info 806-Reports on Compliance 910-Repts of Another Country 915-Rept Appl of Acctg Princ 920-Underwriters 925-SEC Filings 930-Interim Fin Info 935-Compliance Audits Summary of Changes – SASs 1 – 120 versus Clarified SASs 220-Quality Control 230-Audit Documentation 240-Consider Fraud 260-Comm with Governance 300-Planning 315-Understanding the Entity 450-Evaluate Misstatements 500-Audit Evidence 520-Analytical Procedures 530-Audit Sampling 540-Auditing Estimates 570-Going Concern (ED status) 580-Written Representations Essentially no/little change 39

40 Summary of Changes – SASs 1 – 120 versus Clarified SASs BUT WHETHER THERE IS SOME, LITTLE, OR EVEN NO CHANGE, YOU STILL NEED TO GO THROUGH ALL OF THE NEW CLARIFIED AU SECTIONS BECAUSE WITH CLARITY... YOU MAY FIND THAT YOU NEED TO CHANGE OR TWEAK HOW YOU DO THINGS!!! 40

41 Formula for Implementation Success 41 Familiarize yourself with Clarified Standards—including application material, appendixes, and exhibits Read summary of changes between extant standards and new clarified standards Begin “project management” Appoint a person or team to be in charge Consider small task forces of staff at different levels Training, training, training Review your types of auditees to determine who will be affected/first Explain to auditee management how the engagement may change Add, tweak, move, change audit guidance and methodology

42 Thank You for Joining Us! Moderator R. Kinney Poynter Executive Director NASACT Speaker Randy C. Roberts, CPA, CGFM Professional Practice Director AZ Office of the Auditor General Questions and Answers


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