Sunday, August 30, 2009

Reminder about FAS no. 165, Subsequent Events

Just a reminder that FAS no. 165, Subsequent Events, is effective for interim or annual financial periods ending after June 15, 2009. The FASB issued this Standard to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It sets forth:


  • The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements
  • The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements
  • The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

FAS no. 165 does not result in significant changes in the subsequent events that an entity reports through recognition or disclosure in its financial statements. It does however,

  • Introduce the concept of financial statements being available to be issued.
  • Require the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date whether that date represents the date the financial statements were issued or were available to be issued.

This disclosure then alerts all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented.
Key Terms
This Standard contains a number of key terms, including a description of what is meant by "financial statements are available to be issued." Let’s look at three of these key terms.
1. Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. The two types of subsequent events are (1) events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (recognized subsequent events) and (2) events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (nonrecognized subsequent events).
2. Financial statements are issued. Financial statements are considered issued when they are widely distributed to shareholders and other financial statement users for general use and reliance in a form and format that complies with GAAP.
3. Financial statements are available to be issued. Financial statements are considered available to be issued when they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained, for example, from management, the board of directors, and/or significant shareholders. The process involved in creating and distributing the financial statements will vary depending on an entity’s management and corporate governance structure as well as statutory and regulatory requirements. An entity that has a current expectation of widely distributing its financial statements to its shareholders and other financial statement users, including a public entity shall evaluate subsequent events through the date that the financial statements are issued. All other entities shall evaluate subsequent events through the date that the financial statements are available to be issued.

Disclosure
This Standard requires that the entity disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued.

In addition some nonrecognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. In that case the entity shall disclose:
a. The nature of the event
b. An estimate of its financial effect or a statement that such an estimate cannot be made.

The entity also shall consider supplementing the historical financial statements with pro forma financial data, if a nonrecognized subsequent event is so significant that disclosure can best be made by means of pro forma financial data.

How will FAS no. 165 affect your practice?
Tell us how you think it will affect your practice by adding a comment.

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Thursday, August 27, 2009

How Do Ethics Rules Affect Our Audits?

I’m sure most of us would answer that we must comply with the AICPA Code of Professional Conduct and the rules of applicable state boards of accountancy in all functional areas of practice. A quick read of the disciplinary actions reported at www.aicpa.org, however, indicates not everyone understands the rules!

Some practitioners forgot requirements like we have to know what we’re doing when we engage to audit, we have to understand accounting principles and we can’t audit our own non-attest services. In the current economic environment, threats to our noncompliance with ethical requirements increase exponentially.

In 2008, the AICPA issued a Conceptual Framework for AICPA Independence Standards and a Guide for Complying with Rules 102-505. These pronouncements establish a framework for evaluating noncompliance with ethical rules. Among seven threats to impairment of independence, and to noncompliance with other ethical rules, is the familiarity threat. Members having a close or longstanding relationship with a client, the pronouncements indicate, may have an increased threat to violation of ethical rules.

While there are professional, client and CPA firm safeguards that may be implemented to eliminate or mitigate the threats, CPAs auditing smaller entities may be more at risk. The Framework and Guide will not only be used to evaluate our compliance with ethical rules, they will be the tools plaintiff’s attorneys use against us in adversarial actions! Discussions of the risk of potential violations of ethical standards due to client familiarity should be part of ongoing engagement planning on every audit.

Monday, August 24, 2009

FAF and FASB Response to CIFiR Report

The FASB and the FAF recently issued a response to the Recommendations of the Advisory Committee on Improvements to Financial Reporting to the United States Securities and Exchange Commission (CIFiR or the Committee). The Committee was chartered by the SEC in July 2007 and issued their final report August 1, 2008. The FASB and FAF response was issued August 7, 2009.

The CIFiR's final report contains a number of recommendations that are intended to increase the usefulness of financial information to investors. At the same time the recommendations were designed to reduce the complexity of the financial reporting system to investors, preparers, and auditors.

The FAF and the FASB strongly supported the formation of the Committee and its work. Robert Herz, FASB Chairman, was an Official Observer to the Committee while other FASB members participated as observers to each of the Committee’s four subcommittees. In addition the FASB provided several staff resources to the Committee.

The FAF and the FASB response explains the actions they are taking or will be taking with respect to each of the Committee’s recommendations. The response contains two parts (1) an Executive Summary that includes their response to key Committee recommendations related to accounting standards; and (2) an Appendix detailing their response to each of the Committee’s recommended improvements to accounting standard setting.

The response is available for download at http://www.fasb.org/.

Why this FAF and FASB response is important to you.

The recommendations of the Committee emphasize:

  • The investors as the primary users of financial statements
  • The need for a disclosure framework
  • That accounting standards should be based on business activities broadly and not on specific industries.
  • Improvement needed for gathering input about potential benefits and costs of proposed standards.

Additional details on the FAF and FASB response are available at www.cpafirmsupport.com.

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Monday, August 17, 2009

The Foundation for Audit Documentation

Underpinning the small audit documentation outlined in my last blog, a CPA firm’s operating philosophies can contribute significantly to engagement efficiency. First on the list is the involvement of leadership on engagements.

Involvement on audit engagements for many CPA firm partners or sole proprietors is often limited to a brief meeting with staff personnel before the engagement begins and a review of the working papers and report after the engagement is finished. While this may limit the executive’s time charges on an audit, it also limits the opportunities to train personnel, to set the tone at the top, to ensure audit quality and to deal with engagement problems throughout the job. Limited executive participation usually results in increased time charges during the wrap-up phase to clean up review points and resolve problems after the fieldwork is finished.

Auditing standards now require participation of the top line authority in planning meetings on all audit engagements. Many executives also require in-charge accountants to communicate the status and problems of engagements throughout the performance phase. Some executives perform their engagement reviews in stages to avoid last minute problems. The result of all these practices is that engagement problems are dealt with early and engagement procedures are done correctly the first time! On large or small audits, much wasted time is eliminated and higher profitability is achieved when executives are involved in all phases of engagements.

Small Audit Documentation that Satisfies SASs

For all audit engagements, documentation must evidence compliance with the requirements of applicable SASs. Because SASs are written to be applicable audit engagements of all sizes, compliance for a small audit will likely be different than for a large audit. Audit documentation of compliance, therefore, is also likely to be different.

Here is a list of annual “key” documentation that will support most small audit strategies:

• Client acceptance and retention evaluations
• General ledger analysis worksheet
• Small audit internal control questionnaire, flowcharts or memos by financial statement classification
• Systems walk-through memo or other documentation
• Analytical procedures worksheets for engagement planning and review
• Risk of material misstatements evaluation by financial statements classification
• Linking working paper to guide the selection of tests of controls and tests of balances procedures based on risk
• Tolerable misstatements calculation by financial statements classification
• Sampling and non-sampling decisions worksheet
• Audit planning document summarizing audit strategies
• Small audit programs tailored for audit risk

Future blogs will discuss the impact of a CPA firm’s quality control, preparation of this documentation, formulation of audit strategies and related opportunities for efficiencies. Visit us often!

Thursday, August 13, 2009

The Root of Audit Requirements and Documentation

There is good news and bad news. First, the good news: for over two decades, publishers of auditing practice aids have supplied us with forms, checklists and programs to comply with existing professional standards. The bad news: the volumes of accounting and auditing pronouncements have increased exponentially causing huge stacks of paper or long lists of electronic forms for even the smallest audits.

When the new audit risk assessment standards were effective in 2007, the length and number of audit practice aids from most publishers increased substantially. Because it became very difficult to determine which documentation was required to comply with the new standards, conservatism ruled and many auditors used all the practice aids available. Audit quality was good but budget overrun was high!

Here is a foundational principle of audit efficiency. The root of audit requirements is not the practice aids purchased from a provider. Audit requirements for non-public and non-profit entities are rooted in the Statements on Auditing Standards (SASs) published by the Auditing Standards Board of the AICPA. Audit efficiency begins with choosing documentation that, first, satisfies the applicable requirements in SASs and, second, is the most efficient considering engagement circumstances. Watch for examples in future blogs on this site.

Wednesday, August 12, 2009

AICPA to Release Proposed Revisions to Ethics Rules

You should be aware that the AICPA Professional Ethics Executive Committee (PEEC) is about to release exposure drafts of revisions to guidance regarding the AICPA Code of Professional Conduct (the Code). The exposure drafts will be released in August for a 60-day comment period. The expoure drafts are designed to make clarifying revisions to:

  • An ethics ruling under Rule 301, "Confidential Client Information,"
  • Two interpretations and one ethics ruling under Rule 101—Independence.
  • Revisions to related guidance including Ethics Ruling no. 107, "Participation in Health and Welfare Plan Sponsored by Client" (under Rule 101) and the “Retirement, Savings, Compensation, or Similar Plans” section of Interpretation 101-15 "Financial Relationships."

Rule 301

The proposed revisions to the ethics ruling under Rule 301:


If client information that is not in the public domain or available to the public, such as statistical information and other data, is shared with a third-party on a “no-name” basis for research or benchmarking purposes, it would be considered a breach of confidentiality unless the member received the client’s consent.

The Committee is proposing a new definition to ET Section 92, "Definitions" that would provide further clarification into what information would be considered confidential client information.


Interpretation 101-1

Proposed revisions to the “Application of the Independence Rules to Covered Members Formerly Employed by a Client or Otherwise Associated with a Client” section of Interpretation 101-1:

  • Are intended to make clear that both individuals on the attest engagement and individuals in a position to influence the attest engagement that were formerly employed by or associated with a client also need to disassociate from the client.
  • Would ease restrictions on participation of immediate family members in client sponsored employee benefit plans.

Current guidance permits, with safeguards, immediate family members of only certain covered members to participate in a retirement, savings, compensation, or similar plan that is a client, is sponsored by a client or that invests in a client, whereas all immediate family members in permitted employment positions are allowed, with safeguards, to participate in client sponsored health and welfare plans.

The revision would allow all immediate family members to participate in all employee benefit plans with the exception of certain share-based compensation arrangements or nonqualified deferred compensations plans, provided certain safeguards are in place.

Other Revisions

The ED also calls for revisions to related guidance including Ethics Ruling no. 107, "Participation in Health and Welfare Plan Sponsored by Client" (under Rule 101) and the “Retirement, Savings, Compensation, or Similar Plans” section of Interpretation 101-15, "Financial Relationships."

We will bring you more details when the Committee releases the exposure drafts.

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Saturday, August 8, 2009

Achieving Small Audit Efficiency

Welcome to the first of many practical blogs dedicated to maximizing profitability on small audits. Normally you’ll find one or two blogs here each week which will be progressive in their order. In other words, foundational subjects will be presented first with applications discussed later in the series. If you miss a few days, be sure to catch up before reading the most current blogs. Plan to visit often.

It may seem that putting the word “efficiency” in the same sentence as the word “audit” seems like an oxymoron. Given the costly explosion of professional standards’ in recent years, it’s not surprising that many smaller CPA firms have given up their audit practices. The truth is, however, we can still make money on small audits!

Here’s the key: To maximize efficiency on small audits, every planning and performance decision must emphasize efficiency. I call this the “Ten-Minute Rule.” Taking advantage of every opportunity to save 5 or 10 minutes can result in huge overall engagement time savings! Read this blog often to accumulate your list of time savers!

For questions and consultations regarding all accounting and auditing issues, please visit our website, www.cpafirmsupport.com and check out our Subscription Plan.

Tuesday, August 4, 2009

EITF and Revenue Recognition

TheFASB Emerging Issues Task Force has issued Draft Abstracts Issues No. 08-1, "Revenue Arrangements with Multiple Deliverables," and No. 09-3, "Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That Contain Software Elements." These draft abstracts address:

● How to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting,
● How the arrangement consideration should be allocated among the separate units of accounting, and
● Changes to the accounting for multiple element arrangements under AICPA Statement of Position 97-2, Software Revenue Recognition, that contain software-enabled products.

This is a reexposure of Issue 08-1. As a result of comments received and in connection with Issue 09-3 the Task Force made substantive changes to Issue 08-1. The Task Force reached a consensus-for-exposure on Issue 08-1 that:

● Eliminates the use of the residual method of allocation.
● Requires a vendor to allocate arrangement consideration at the inception of an arrangement to all deliverables in the arrangement using the relative-selling price method.
● Requires an entity to estimate the selling price for all deliverables within an arrangement if vendor specific objective evidence (VSOE) or third-party evidence (TPE) does not exist.

A vendor with a multiple-deliverable revenue arrangement is required to apply SOP 97-2 when the arrangement contains software that is "more than incidental" to a product.

Lest you think that this EITF consensus may not apply to any of your clients, Exhibit 08-1B contains examples of the application of the EITF consensus on Issue 08-1. The examples are designed to provide guidance with respect to determining whether a multiple-deliverable revenue arrangement contains more than one unit of accounting and, if so, how to measure and allocate the arrangement consideration to the separate units of accounting. Among the examples are a cellular phone contract, automobile sold with life time maintenance services, sale of home appliances with installation and maintenance services, and a painting contract.

You may download this draft abstract at www.fasb.org. The comment period for this abstract ends August 14, 2009.

How do you think this will affect your clients?
Tell us how you think it will affect your practice by adding a comment.

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