SAS No. 118 Other Information in Documents Containing Audited Financial Statements

The ASB recently issued SAS No. 118, Other Information in Documents Containing Audited Financial Statements. It is effective for audits of financial statements for periods beginning on or after December 15, 2010 with early application permitted. Along with SAS No. 119, Supplementary Information in Relation to the Financial Statements as a Whole it supersedes the requirements and guidance in AU section 550. It also supersedes the requirements and guidance in AU section 551.

You’ll find that this Standard:

• Eliminates the distinction between other information that is included in an auditor-submitted document that contains the client’s basic financial statements and the auditor’s report and other information that is in a client-prepared document.
• Establishes a presumptively mandatory requirement that:
  
  • the auditor read the other information of which the auditor is aware in order to identify material inconsistencies, if any, with the audited financial statements.
  • the auditor make appropriate arrangements with management or those charged with governance to obtain the other information prior to the report release date.
  • if it is not possible to obtain all of the other information prior to the report release date, that the auditor read such other information as soon as practicable.
  • the auditor communicate with those charged with governance the auditor’s responsibility with respect to the other information, any procedures performed relating to the other information, and the results.
  • if, on reading the other information, the auditor identifies a material inconsistency prior to the report release date that requires revision of the audited financial statements and management refuses to make the revision, that the auditor modify the auditor’s opinion in accordance with AU section 508, Reports on Audited Financial Statements (AICPA, Professional Standards, vol. 1).
  • when the auditor identifies a material inconsistency prior to the report release date that requires revision of the other information and management refuses to make the revision, that the auditor communicate that matter with those charged with governance and include in the auditor’s report an explanatory paragraph describing the material inconsistency, in accordance with paragraph .11 of AU section 508; withhold the auditor’s report; or when withdrawal is possible under applicable law or regulation, withdraw from the engagement.
  • when revision of the audited financial statements is necessary as a result of a material inconsistency with other information and the auditor’s report on the financial statements has already been released, that the auditor apply the relevant requirements in AU section 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report (AICPA, Professional Standards, vol. 1).
  • when revision of the other information is necessary after the report release date and management agrees to make the revision, that the auditor carry out the procedures necessary in the circumstances.
  • when revision of the other information is necessary after the report release date but management refuses to make the revision, that the auditor notify those charged with governance of the auditor’s concerns regarding the other information and take any further appropriate action.
  • if, on reading the other information for the purpose of identifying material inconsistencies, the auditor becomes aware of an apparent material misstatement of fact, that the auditor discuss the matter with management. If, after discussion, the auditor still considers that there is an apparent material misstatement of fact, the statement establishes a presumptively mandatory requirement that the auditor request management to consult with a qualified third party, such as the entity’s legal counsel, and that the auditor consider the advice received by the entity in determining whether such matter is a material misstatement of fact.
  • when the auditor concludes that there is a material misstatement of fact in the other information and management refuses to correct, that the auditor notify those charged with governance of the auditor’s concerns and take any further appropriate action.
    

  Become a subscriber.
  To receive more detailed updates, become a subscriber by going to www.cpafirmsupport.com and clicking on “Join Us.”

  
  

SAS No. 117 Compliance Audits

The AICPA Auditing Standards Board (ASB) issued SAS No. 117, Compliance Audits in December 2009. It is effective for compliance audits for fiscal periods ending on or after June 15, 2010. Early application is permitted.

As you know governments frequently establish governmental audit requirements for entities to undergo an audit of their compliance with applicable compliance requirements. The ASB issued this SAS to address such governmental audit requirements. It supersedes SAS No. 74, Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance. It was primarily developed in response to the results of a federal study on the quality of audits performed under Office of Management and Budget Circular A-133, Audits of States, Local Governments and Non-Profit Organizations (also referred to as single audits), which showed that improvements were needed in many areas.

SAS No. 117

• Establishes standards and provides guidance on performing and reporting (in accordance with GAAS, Government Auditing Standards, and a governmental audit requirement that requires an auditor to express an opinion on compliance) on an audit of an entity’s compliance with applicable compliance requirements of a governmental audit requirement. (For example, single audits and audits performed under the U.S. Department of Housing and Urban Development (HUD) Consolidated Audit Guide for Audits of HUD Programs.)


• Updates SAS No. 74 to reflect changes in the compliance audit environment and incorporates the risk assessment standards.


• Requires the auditor to adapt and apply the AU sections of AICPA Professional Standards to a compliance audit and provides guidance on how to do so.


• Identifies the AU sections that are not applicable to a compliance audit,


• Defines terms related to compliance audits and used in the SAS, and


• Identifies the elements to be included in an auditor’s report on a compliance audit.
  

Going Concern is Still Going!

Summary of FASB Decisions Reached to Date (As of 01/13/10)

Based upon discussions surrounding issues raised in comment letters received on the proposed FASB Statement, Going Concern, and subsequent Board meetings, the Board has decided the following:

1. To provide guidance that defines a going concern.
2. To clarify that the time period for the going concern assessment is not a bright-line 12 months but also is not intended to be an indefinite look-forward period.
3. To broaden the scope of the project to address three additional areas:
   a) Enhancing the disclosures of short-term and long-term risks, specifically risks for which there is more-than-remote likelihood of occurrence.
   b) Defining substantial doubt in terms of an entity’s ability to continue as a going concern.
   c) Developing guidance surrounding the adoption and application of the liquidation basis of accounting.
   

Next Steps

The staff will draft language to clarify the disclosure requirements related to management’s going-concern assessment, including the development of language to replace the term substantial doubt, and develop guidance surrounding the liquidation basis of accounting. The Board will review these developments and decide whether it will issue a revised Exposure Draft by the end of the first quarter of 2010.

Clarified Risk Assessment Standards

As you are aware the Auditing Standards Board (ASB) is involved in a Clarity Project. Over the past few months existing Statements on Auditing Standards (SASs) have been redrafted to comply with clarity drafting conventions.

The ASB has issued six “clarified statements” related to risk assessment. You will recall that the ASB previously issued SAS Nos. 104-111 (the risk assessment standards) effective for audits of financial statements for periods beginning on or after December 15, 2006. The clarified Risk Assessment Standards are the redrafting of SAS Nos. 106-110.

The six clarified statements also converge with International Standards on Auditing (ISA). The statements are:

• Planning an Audit
• Materiality in Planning and Performing an Audit
• Evaluation of Misstatements Identified During the Audit
• 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)
• Audit Evidence (Redrafted)
  

The SASs are effective for audits of financial statements for periods beginning on or after Dec. 15, 2010. The effective date is provisional but will not be earlier.

When all the clarified SASs are issued, one SAS will be issued containing all clarified SASs in codified format.

The SASs are available for download on the AICPA’s web site, http://www.aicpa.org/.

Become a subscriber.
To receive more detailed updates, become a subscriber by going to http://www.cpafirmsupport.com/ and clicking on “Join Us.”