clarifying the clarity standards: an overview february 29, 2012 moderator r. kinney poynter...
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Clarifying the Clarity Standards: An Overview February 29, 2012
ModeratorR. Kinney Poynter
Executive DirectorNASACT
SpeakerRandy C. Roberts, CPA, CGFM
Professional Practice DirectorAZ Office of the Auditor General
Opening Remarks
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
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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
Overall Objectives (AU 200)
Preface
Provides framework for an auditPlace holder for the former “10 generally accepted standards”
Principles
Structure for an audit
Components of each standardVarious definitions and terms
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Clarity Format
• Introduction• Objectives• Definitions• Requirements• Application Material• Appendices and
Exhibits
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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
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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 persons7
Terms of Engagement (AU 210)
Practice IssuesQ. 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
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
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Materiality in Planning and Performing an Audit (AU 320)
10
$ or %
Materiality Performance materiality
Planning and evaluation Audit procedures
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
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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
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Opening Balances—Initial Audit Engagements (AU 510)Obtain sufficient
appropriate evidence about
whether beginning
balances contain material
misstatementsWhat procedures
will obtain sufficient
appropriate evidence about
opening balances?
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Opening Balances—Initial Audit Engagements (AU 510)Obtain sufficient
appropriate evidence about
whether beginning
balances contain material
misstatementsReviewing predecessor auditor helps
determine auditor scope, but is not sole
basis for sufficient appropriate
evidence
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Opening Balances—Initial Audit Engagements (AU 510)Obtain sufficient
appropriate evidence about
whether beginning
balances contain material
misstatementsReviewing predecessor auditor helps
determine auditor scope, but is not sole
basis for sufficient appropriate
evidence
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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
workb. Perform specific procedures
about opening balances
Special Considerations—Audit of Group Financial Statements (AU 600)Key definitions__ Group__ Component__ Component auditor__ Component materiality__ Significant component
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E.G.,Group financial statementsGroup managementGroup-wide controlsGroup auditGroup auditorGroup audit opinion
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
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Special Considerations—Audit of Group Financial Statements (AU 600)Identifying components – why is it important?
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Significant components
Gain understanding of components
Assess RMM for components
Gain understanding of component
auditors
Make materiality decisions about
components
Perform procedures related
to componentsEvaluate evidence
obtainedEvaluate component auditorCommunicate with
component auditors and management
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/oversight19
Factors to Consider Other Indicators
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
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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
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Group versus Component Materiality
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$ or %
Materiality Performance materiality
Planning and evaluation Audit procedures
Component materiality Component performance materiality
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 procedures23
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?
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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
section25
Forming an Opinion and Reporting (AU 700)
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Opinion
Headings and Subheadings
Other auditor reporting responsibilities (Yellow Book Report reference)
Modifications to the Opinion (AU 705)
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Basis for qualified, adverse, or disclaimer (placed before opinion paragraph)
Modified opinion (Qualified, Adverse, or Disclaimer
Emphasis of Matter and Other Matter Paragraphs (AU 706)
• Going concern• Contractual or regulatory
reporting frameworks• Consistency
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• Audit reports of prior periods presented
• Materially inconsistent “other information”
• “In relation to” opinion• RSI• General use regulatory F/S• “In connection with”
compliance reporting
Emphasis of Matter Other Matter
-Litigation uncertainty
-Major catastrophe
-Significant related parties
-Subsequent events
-“Other” supplementary
information
Emphasis of Matter and Other Matter Paragraphs (AU 706)
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Emphasis of Matter• Matters appropriately
presented or disclosed
Other Matter• To understand audit
matters (Combining statements, SI, RSI, SEFA)
Special Considerations—Special Purpose Frameworks (AU 800)
Cash Basis Tax Basis Contractual Regulatory
Restricted General
Opinion Single Single Single Single Dual
Use EOM?
Yes Yes Yes Yes No
DescribePurpose
No No Yes Yes Yes
Restrict use?
No No Yes Yes No
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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
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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.”
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
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
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Requirements Elements Impact on Practice
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 3rd criteria if also following GAGAS• Don’t name specific
parties• Removes disconnect• Removes Group Audits
conflict34
Requirements Elements What’s Different
Alert that Restricts the Use of Auditor’s Written Communication (AU 905)
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“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.”
Alert that Restricts the Use of Auditor’s Written Communication (AU 905)
Currently Under Clarity Standards
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Remember when we combined restricted use reports with general use reports?
+ =
General use report
Restricted use report
Restricted use report
+ =
General use report
Restricted use report
General use report with a restricted use section
Summary of Changes – SASs 1 – 120 versus Clarified SASsReally good summary on AICPA web site for more complete comparison• www.aicpa.org/interestareas/frc/
auditattest/downloadabledocuments/clarity/clarity_sas_summary_of_differences.pdf
Two essential Clarified AU sections• AU 200 Overall Objectives• AU 600 Group Audits
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• 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
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• 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
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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!!!
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Formula for Implementation Success
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• 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
Thank You for Joining Us!
ModeratorR. Kinney Poynter
Executive DirectorNASACT
SpeakerRandy C. Roberts, CPA, CGFM
Professional Practice DirectorAZ Office of the Auditor General
Questions and Answers