1 Audit and Attest Standards Update Ensuring Integrity: 4 th Annual Audit Conference Harold L. Monk, Jr. CPA, CFE Davis, Monk & Company

2 2 Session Objectives Session Objectives Discuss the recent activities of the ASB Discuss the recent activities of the ASB –Clarity project –SAS No. 115, Communicating Internal Control Related Matters Identified in an Audit –SAS No. 116, Interim Financial Information –SQCS No. 7, A Firm’s System of Quality Control

3 Session Objectives –Newly approved SASs: Compliance Audits Compliance Audits Required Supplementary Information Required Supplementary Information Other Information in Documents Containing Audited Financial Statements Other Information in Documents Containing Audited Financial Statements Supplemental Information in Relation to the Financial Statements as a Whole Supplemental Information in Relation to the Financial Statements as a Whole

4 Recent Auditing Standards Board Activities Clarity Project

5 Clarity Background Background –Discussion paper issued March 2007 –ASB considered comments received and approved direction forward August 2007 Goals: Goals: –Address concerns over length and complexity of standards –Make standards easier to read, understand and implement –Will lead to enhancements in audit quality

6 Clarity Drafting Conventions Introduction Introduction Objective Objective Definitions Definitions –Terms used in the SAS are defined –Establish separate glossary of terms Requirements and Application Material Requirements and Application Material

7 Objective Create objectives for each standard Create objectives for each standard Provide a framework for the application of professional judgment Provide a framework for the application of professional judgment Outcome based goal Outcome based goal Difficult to achieve the overall objective of the audit if individual objectives are not achieved Difficult to achieve the overall objective of the audit if individual objectives are not achieved

8 Requirements and Application Material Application and other explanatory material presented in a separate section that follows the requirements Application and other explanatory material presented in a separate section that follows the requirements Application and other explanatory material paragraphs numbered using an A prefix Application and other explanatory material paragraphs numbered using an A prefix Cross-referencing between requirements and related application material Cross-referencing between requirements and related application material

9 Clarity and Convergence Convergence with ISAs Convergence with ISAs –Removal of unnecessary differences Supplemental materials with EDs Supplemental materials with EDs –Mapping of the requirements and guidance contained within extant AU section to the proposed SAS; and –Schedule of proposed changes in requirements and explanatory material as a result of redrafting. –Schedule of detailed changes in language between the proposed SAS and the ISA. –Exhibit of substantive differences with ISA

10 Audit and Attest Update Clarity Project Once finalized, they’ll be made available to practitioners. Once finalized, they’ll be made available to practitioners. However, the standards will not become effective piecemeal. However, the standards will not become effective piecemeal. With limited exceptions, all “clarified standards” will become effective at the same time With limited exceptions, all “clarified standards” will become effective at the same time –Most likely 2011

11 Implementation Issues Of Risk Assessment Standards

12 Q&A—Use of Walkthroughs Question—How often do walkthroughs need to occur? Question—How often do walkthroughs need to occur? Answer—Auditors will most likely perform walkthroughs annually to document their understanding of internal control and to establish the continued reliance of audit evidence obtained in prior periods. Answer—Auditors will most likely perform walkthroughs annually to document their understanding of internal control and to establish the continued reliance of audit evidence obtained in prior periods. TIS

13 Q&A—Journal Entries Question—Paragraph 52 of SAS No. 110 refers to “adjustments made during the course of preparing the financial statements” to address entries prepared by the client during the process of drafting the financial statements (rather than all entries posted in the accounting system at year end). Is this correct? Question—Paragraph 52 of SAS No. 110 refers to “adjustments made during the course of preparing the financial statements” to address entries prepared by the client during the process of drafting the financial statements (rather than all entries posted in the accounting system at year end). Is this correct? Answer—Yes, this requirement relates to entries posted during the financial statement closing process. SAS 99 establishes requirements to test journal entries during the audit period. TIS Answer—Yes, this requirement relates to entries posted during the financial statement closing process. SAS 99 establishes requirements to test journal entries during the audit period. TIS

14 Recently Issued Standards Statement on Auditing Standards No. 115, Communicating Internal Control Related Matters Identified in an Audit

15 SAS 115 Effective for periods ending after 12/15/09 Effective for periods ending after 12/15/09 –Early adoption is allowed Supersedes SAS 112 of the same title Supersedes SAS 112 of the same title

16 SAS 115 Why revised? – Why revised? – –To eliminate differences resulting from the issuance of SSAE No. 15, An Examination of an Entity’s Internal Control Over Financial Reporting That is Integrated With an Audit of Financial Statements SSAE 15 conform definitions of control deficiency, material weakness and significant deficiency to AS 5 SSAE 15 conform definitions of control deficiency, material weakness and significant deficiency to AS 5 –Provide for more professional judgment –Not intended to reduce quality of communication

17 Control Deficiency A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis.

18 Material Weakness A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected on a timely basis. –Reasonable possibility = the likelihood of the event is either "reasonably possible" or "probable," as those terms are used in SFAS No. 5, Accounting for Contingencies

19 The Significant Deficiency A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

20 Deficiencies As with SAS 112, nothing is an automatic material weakness or significant deficiency As with SAS 112, nothing is an automatic material weakness or significant deficiency –Preparation of financial statements –Professional judgment must be applied

21 Deficiencies Revises the list of deficiencies in internal control that are indicators of a material weaknesses to consist of: Revises the list of deficiencies in internal control that are indicators of a material weaknesses to consist of: –Identification of fraud, whether or not material, on the part of senior management –Restatement of previously issued financial statements to reflect the correction of a material misstatement due to fraud or error

22 Deficiencies –Identification by the auditor of a material misstatement of the financial statements under audit in circumstances that indicate that the misstatement would not have been detected by the entity’s internal control; and –Ineffective oversight of the entity’s financial reporting and internal control by those charged with governance

23 Deficiencies SAS 115 does not include the list of deficiencies that ordinarily would be considered at least significant deficiencies SAS 115 does not include the list of deficiencies that ordinarily would be considered at least significant deficiencies

24 Communication Needs to be in writing Needs to be in writing –SAS 115 contains a revised illustrative written communication to management and those charged with governance of material weaknesses and significant deficiencies Prior year comments can be communicated by reference to the prior year letter Prior year comments can be communicated by reference to the prior year letter Best made by report release date but needs to be made by 60 days from release date Best made by report release date but needs to be made by 60 days from release date

25 Recently Issued Standards Statement on Auditing Standards No. 116, Interim Financial Information

26 SAS 116 Effective for reviews of interim financial information for interim periods beginning after December 15, Early application is permitted Effective for reviews of interim financial information for interim periods beginning after December 15, Early application is permitted Supercedes SAS 100 Supercedes SAS 100

27 SAS 116 Amends SAS 100/AU 722 to accommodate reviews of interim financial information of nonissuers. Amends SAS 100/AU 722 to accommodate reviews of interim financial information of nonissuers. Would apply when the interim financial information is intended to provide a periodic update of year end reporting Would apply when the interim financial information is intended to provide a periodic update of year end reporting

28 SAS 116 Applies when: Applies when: –The entity’s latest annual financial statements have been audited by the accountant or a predecessor; –The accountant has been engaged to audit the entity’s current year financial statements, or the accountant audited the entity’s latest annual financial statements and expects to be engaged to audit the current year financial statements

29 SAS 116 –The client prepares its interim financial information in accordance with the same financial reporting framework as that used to prepare the annual financial statements If any of the following are not met, the review should be performed in accordance with SSARSs. If any of the following are not met, the review should be performed in accordance with SSARSs.

30 SAS 116 If the interim financial information is condensed all of the following are met: If the interim financial information is condensed all of the following are met: –The condensed interim financial statements purport to conform with an appropriate financial reporting framework –The condensed interim financial information includes a note that the financial information does not represent complete financial statements and should be read in conjunction with the entity’s latest annual audited financial statements

31 SAS 116 –The condensed interim financial information accompanies the entity’s latest audited financial statements or such audited annual financial statements are made readily available by the entity. Readily available = a third party can obtain the financial statements without any further action by the entity. Readily available = a third party can obtain the financial statements without any further action by the entity. –F/S on the web may be readily available –“Available upon request” are not readily available

32 SAS Compliance Audits Revises AU 801 by: Revises AU 801 by: –Changing the title –Clarifying its Applicability –Establishing a requirement for the auditor to adapt and apply GAAS to a compliance audit –Identifies AU sections applicable to compliance audits –Defines terms related to a compliance audit

33 SAS Compliance Audits Revisions to AU 801 (continued) Revisions to AU 801 (continued) –Identifies auditor requirements unique to compliance audits Design and perform further audit procedures, including tests of details, to obtain sufficient appropriate audit evidence about the entity’s compliance with each of the applicable compliance requirements in response to assessed risks of material noncompliance. Design and perform further audit procedures, including tests of details, to obtain sufficient appropriate audit evidence about the entity’s compliance with each of the applicable compliance requirements in response to assessed risks of material noncompliance.

34 SAS Compliance Audits Requirements (continued) Requirements (continued) –Identify audit requirements specified in the government audit requirement that is supplementary to GAAS and GAS and perform appropriate procedures –If audit guidance provided by government agency has not been updated or conflicts with current GAAS or GAS, comply with the most current applicable GAAS and GAS instead of the outdated or conflicting guidance

35 Audit and Attest Standards Update Other Current ASB Projects

36 Audit and Attest Standards Update Other Current ASB Projects Revisions to SAS 70 Revisions to SAS 70 –Move Service Organization examination to AT Standards Revisions to auditing estimates and fair value Revisions to auditing estimates and fair value Withdrew SAS 69 to remove GAAP hierarchy for FASB, GASB and FASAB incorporation Withdrew SAS 69 to remove GAAP hierarchy for FASB, GASB and FASAB incorporation Revise AU 534 “Financial Statements Prepared for Use in Other Countries” because IFRS is now recognized as equivalent U.S. GAAP Revise AU 534 “Financial Statements Prepared for Use in Other Countries” because IFRS is now recognized as equivalent U.S. GAAP

37 Audit and Attest Standards Update- Other Current ASB Projects Newly approved standard – Proposed Preface to the Codification of Statements on Auditing Standards and Newly approved standard – Proposed Preface to the Codification of Statements on 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 Proposed Statement on Auditing Standards – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards

38 Proposed Preface Supersede SAS 95, Generally Accepted Auditing Standards Supersede SAS 95, Generally Accepted Auditing Standards –Currently contains the general, field work, and reporting standards If an auditor fulfills the overall objective of the auditor and meets applicable ethical requirements, the ASB believes they will have fulfilled the requirements of the 10 standards. Accordingly the new SAS does not contain the equivalent of the 10 standards. If an auditor fulfills the overall objective of the auditor and meets applicable ethical requirements, the ASB believes they will have fulfilled the requirements of the 10 standards. Accordingly the new SAS does not contain the equivalent of the 10 standards. –They are restated in guiding fundamental principles.

39 Proposed Preface Proposed Preface Proposed Preface –An audit is conducted on the premise that management and those charged with governance have responsibility For the preparation and presentation of the financial statements which includes the design, implementation and maintenance of internal control For the preparation and presentation of the financial statements which includes the design, implementation and maintenance of internal control To provide the auditor with all information required or requested and unrestricted access to those within the entity To provide the auditor with all information required or requested and unrestricted access to those within the entity

40 Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards Establishes the auditors overall responsibilities when conducting an audit Establishes the auditors overall responsibilities when conducting an audit Sets out the overall objectives Sets out the overall objectives Explains the nature and scope of an audit Explains the nature and scope of an audit Explains the scope, authority and structure of GAAS Explains the scope, authority and structure of GAAS Includes requirements establishing the general responsibilities of the auditor in all audits Includes requirements establishing the general responsibilities of the auditor in all audits

41 Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards Purpose of an audit is to enhance the degree of confidence that intended users can place in the financial statements Purpose of an audit is to enhance the degree of confidence that intended users can place in the financial statements –Achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework FASB, GASB, FASAB, OCBOA, IFRS (General Purpose / Fair Presentation) or Special Purpose Framework FASB, GASB, FASAB, OCBOA, IFRS (General Purpose / Fair Presentation) or Special Purpose Framework

42 Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards Opinion based on obtaining reasonable assurance financial statements are free from material misstatement Opinion based on obtaining reasonable assurance financial statements are free from material misstatement Opinion deals with financial statements as a whole so auditor is not responsible for the detection of misstatements not considered material. Opinion deals with financial statements as a whole so auditor is not responsible for the detection of misstatements not considered material.

43 Proposed SAS – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards Auditor should comply with relevant ethical requirements including independence and due care Auditor should comply with relevant ethical requirements including independence and due care Auditor should plan and perform the audit with professional skepticism Auditor should plan and perform the audit with professional skepticism Comply with all relevant AU sections Comply with all relevant AU sections Auditor should have an understanding of the entire text of an AU section Auditor should have an understanding of the entire text of an AU section Auditor may make suggestions about or draft in whole or in part the financial statements Auditor may make suggestions about or draft in whole or in part the financial statements

44 AU 558 –Supplementary Information Broken into three separate standards: Broken into three separate standards: –Required Supplementary Information –Other Information in Documents Containing Audited Financial Statements –Supplemental Information in Relation to the Financial Statements as a Whole

45 RSI Required Supplementary Information is defined as information that a designated accounting standard setter requires to accompany an entity’s basic financial statemetns Required Supplementary Information is defined as information that a designated accounting standard setter requires to accompany an entity’s basic financial statemetns Objective is to communicate through a written report if the auditor has identified any material modifications that should be made to the RSI for it to conform with standard Objective is to communicate through a written report if the auditor has identified any material modifications that should be made to the RSI for it to conform with standard

46 RSI Required procedures: Required procedures: –Inquire of management about methods of preparing –Compare information for consistency with management responses to inquiries, audited financial statements, other knowledge obtained during the audit –Obtain written representations

47 RSI Provides Reporting Guidance Provides Reporting Guidance –When all RSI is included –When a portion of RSI has been omitted –When none of the RSI is included Auditors’ opinion on the basic financial statements is not affected by any of the above Auditors’ opinion on the basic financial statements is not affected by any of the above

48 Other Information (OI) in Documents Containing Audited Financial Statements Eliminates distinction between OI included in an auditor submitted document and in a client- prepared document Eliminates distinction between OI included in an auditor submitted document and in a client- prepared document Auditor must read the OI to identify material inconsistencies, if any Auditor must read the OI to identify material inconsistencies, if any Arrange to obtain the OI before release of the report Arrange to obtain the OI before release of the report Provides guidance if inconsistencies are identifed Provides guidance if inconsistencies are identifed

49 Proposed SAS - OI Eliminates the distinction between OI that is included in an auditor submitted document that contains the client’s basic financial statements and the auditor’s report thereon and OI that is in a client prepared document Eliminates the distinction between OI that is included in an auditor submitted document that contains the client’s basic financial statements and the auditor’s report thereon and OI that is in a client prepared document Auditor should read the OI to identify material inconsistencies with the financial statements Auditor should read the OI to identify material inconsistencies with the financial statements

50 Proposed SAS - OI Auditor should make appropriate arrangements with management or those charged with governance to obtain the OI prior to the report release date Auditor should make appropriate arrangements with management or those charged with governance to obtain the OI prior to the report release date Auditor should communicate with those charged with governance Auditor should communicate with those charged with governance –The auditor’s responsibility with respect to OI –Any procedures performed relating to the OI –Results –When revision of the OI is necessary but management refuses to make the revision

51 Proposed SAS - OI If material inconsistencies are identified, the auditor should determine whether the financial statements or the OI needs to be revised If material inconsistencies are identified, the auditor should determine whether the financial statements or the OI needs to be revised –If prior to the report release date and management refuses to make the revision: Modify the report on the AFS Modify the report on the AFS Communicate with those charged with governance Communicate with those charged with governance Where permitted, withhold the report or withdraw from the engagement Where permitted, withhold the report or withdraw from the engagement

52 Proposed SAS - OI –If subsequent to the report release date Follow the requirements in AU 561 Follow the requirements in AU 561 If management refuses to make the revision, the auditor should communicate with those charged with governance If management refuses to make the revision, the auditor should communicate with those charged with governance

53 Proposed SAS - IRT Establish as a condition for opining on the fair presentation of other information in relation to the financial statements as a whole that: Establish as a condition for opining on the fair presentation of other information in relation to the financial statements as a whole that: –The other information was derived from and relates directly to the underlying accounting records used to prepare the financial statements –The other information relates to the same period as the financial statements –The financial statements were audited and the auditor served as the principal auditor –Neither an adverse opinion or a disclaimer of opinion was issued on the financial statements

54 Proposed SAS - IRT In addition to the audit procedures, the auditor should In addition to the audit procedures, the auditor should –Inquire of management about the purpose of the other information and the criteria under which it was prepared –Obtain an understanding about the methods for preparing the other information

55 Proposed SAS - IRT –Compare and reconcile the other information to the underlying accounting records and other records used in preparing the financial statements or to the financial statements themselves –Inquire of management whether there were any significant assumptions or interpretations underlying the measurement or presentation of the other information

56 Proposed SAS - IRT –Evaluate the appropriateness and the completeness of the other information considering procedures and other knowledge obtained during the audit –Obtain written representations from management

57 Proposed SAS - IRT Include an explanatory paragraph in the auditor’s report that includes Include an explanatory paragraph in the auditor’s report that includes –A statement that the audit was performed for the purpose of forming an opinion on the financial statements as a whole –A statement that the other information is presented for the purpose of additional analysis and is not a required part of the financial statements

58 Proposed SAS - IRT –A statement that the other information was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements –A statement that the other information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures

59 Proposed SAS - IRT –A statement that the purpose of the additional procedures is to provide the auditor with a basis for expressing an opinion on whether the other information is not misstated by an amount that would be material to the financial statements –If an unqualified opinion on the financial statements is being issued, a statement that, in the auditor’s opinion, the other information is fairly stated in all material respects in relation to the financial statements as a whole

60 Proposed SAS (Exposure Draft) – Quality Control for an Audit of Financial Statements Supersedes SAS No. 25, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards Supersedes SAS No. 25, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards Contains requirements and application material that address specific responsibilities of the auditor regarding quality control procedures Contains requirements and application material that address specific responsibilities of the auditor regarding quality control procedures

61 Proposed SAS (Exposure Draft) – Quality Control for an Audit of Financial Statements Engagement partner should: form a conclusion on compliance with independence requirements form a conclusion on compliance with independence requirements Be satisfied that appropriate procedures regarding acceptance & continuance have been followed Be satisfied that appropriate procedures regarding acceptance & continuance have been followed Be satisfied engagement team has appropriate competence and capabilities Be satisfied engagement team has appropriate competence and capabilities Proper reviews are performed Proper reviews are performed Sufficient evidence has been obtained Sufficient evidence has been obtained

62 Documentation Required by QC SAS Conclusions on compliance with independence requirements Conclusions on compliance with independence requirements Conclusions regarding acceptance & continuance of clients Conclusions regarding acceptance & continuance of clients Nature & scope of and conclusions resulting from consultations Nature & scope of and conclusions resulting from consultations

63 Documentation Required by QC SAS Engagement Quality Control Reviewer should document: Procedures required by firm’s QC policies have been performed Procedures required by firm’s QC policies have been performed Date QCR was completed Date QCR was completed Reviewer is not aware of any unresolved matters concerning significant judgments and conclusions Reviewer is not aware of any unresolved matters concerning significant judgments and conclusions

64 New SQCS Exposure Draft Some requirements that are duplicative of broader requirements have been moved to application material Some requirements that are duplicative of broader requirements have been moved to application material Requirement previously included in SAS 108, Planning and Supervision has been included in revised SQCS to make it applicable to all engagements Requirement previously included in SAS 108, Planning and Supervision has been included in revised SQCS to make it applicable to all engagements –Procedures established for dealing with differences of opinion should enablel a member of the engagement team to document that member’s disagreement with conclusions reached after appropriate consultation

65 Questions?