The Principles and Objectives for Redrafted SASs

Here is a summary of the first redrafted and clarified SAS issued by the Auditing Standards Board which will become effective for periods ending after December 15, 2012:

Preface to Codification of Statements on Auditing Standards, Principles Underlying an Audit Conducted in Accordance With Generally Accepted Auditing Standards and Statement on Auditing Standards, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards

This released document contains two elements:

· Preface to Codification of Statements on Auditing Standards, Principles Underlying an Audit Conducted in Accordance With Generally Accepted Auditing Standards, and

· Statement on Auditing Standards, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards.

Changes from Existing Standards

Will supersede SAS No. 95, as amended, which contains the general, field work, and reporting standards (the 10 standards).

Consideration by the ASB of the 10 standards

· SASs are codified within the framework of the 10 standards, viewed as the historical basis for generally accepted auditing standards (GAAS). The clarity drafting conventions adopted by the ASB include establishing an objective or objectives for each SAS.

· The SAS establishes the overall objectives of the auditor, which are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thus, enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report on the financial statements, or otherwise as required by the SASs, in accordance with the auditor’s findings.

· Each SAS contains an objective, or objectives that provide a link between the requirements and the overall objectives of the auditor. The SASs taken together provide the standards for the auditor’s work in fulfilling the overall objectives of the auditor.

· If an auditor fulfills the overall objective of the audit and meets applicable ethical requirements, such as the AICPA Code of Professional Conduct, the ASB believes that the auditor will have fulfilled the requirements currently stated in the 10 standards. Accordingly, the proposed SAS does not contain 10 unconditional requirements that are the direct equivalent of the 10 standards.

Replacement of the 10 standards with principles

· To preserve the functions of the 10 standards, the ASB has developed the Principles Governing the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards (referred to as the principles).

· The principles identified in the preface:

§ have been drafted in the present tense.

§ are not requirements and

§ do not carry any authority.

§ are the fundamental principles that govern an audit and are supported by the objectives and requirements of the individual SASs.

Structure of the Principles

· The purpose of an audit (purpose). To provide financial statement users with an opinion by the auditor on whether the statements are presented fairly, in all material respects, in a manner that conforms to an applicable financial reporting framework

· Personal responsibilities of the auditor (responsibilities). These include competence and capabilities, compliance with appropriate ethical standards and approaching the work with appropriate professional skepticism and judgment.

· Auditor actions in performing the audit (performance). Perform the work necessary to be reasonably, but not absolutely, sure that the financial statements are free from material misstatement due to fraud or error.

· Reporting (reporting). Based on the results of the performance of the audit, express an opinion or state that an opinion cannot be expressed on the financial statements.

Applicable Financial Reporting Frameworks

The SAS introduces the following terms:

Financial reporting framework. A set of accounting principles that are used to determine measurement, recognition, presentation, and disclosure of all material items for preparing financial statements in accordance with principles generally accepted in the U.S.(GAAP), International Financial Reporting Standards (IFRSs), issued by the International Accounting Standards Board (IASB), or a special purpose framework prepared on a comprehensive basis of accounting other than GAAP (OCBOA– now referred as Special Purpose Framework).

Applicable financial reporting framework— The financial reporting framework adopted by management in the preparation and presentation of the financial statements.

Fair-presentation framework— Refers to a financial reporting framework that requires compliance with the requirements of the framework and acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances. Current reporting requirements do not permit. departures from GAAP.

Regulatory and contractual-based framework—Refers to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgments in (c) above This type of framework is referred to in the ISAs as a compliance framework; the term was changed for purposes of GAAS to regulatory or contractual-based framework to avoid confusion with the term compliance audit.

Registration for live auditing standards update webcasts is available on the left side of our home page at www.cpafirmsupport.com. You may also purchase our Quarterly Accounting and Auditing Update Reference Guide on the Products page of our website.