Statement on Auditing Standards Consistency of Financial Statements
1. SAS Consistency of Financial Statements supersedes
a) SAS No. 1, section 420, Consistency of Application of Generally Accepted Accounting Principles, as amended (AICPA, Professional Standards, vol. 1, AU sec. 420), and
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b) SAS No. 58, Reports on Audited Financial Statements, paragraphs .16–.17 and .53–.57 (AICPA, Professional Standards, vol. 1, AU sec. 508).
2. Scope
a) This SAS addresses the auditor‘s evaluation of the consistency of the financial statements between periods, including:
(1) Changes to previously issued financial statements and
(2) The effect of that evaluation on the auditor‘s report on the financial statements.
3. Effective Date
This SAS is effective for audits of financial statements for periods ending on or after December 15, 2012.
4. Objectives of the Auditor – The objectives of the auditor are to
a) Evaluate the consistency of the financial statements for the periods presented and
b) Communicate appropriately in the auditor‘s report when the comparability of financial statements between periods has been materially affected by a change in accounting principle or by adjustments to correct a material misstatement in previously issued financial statements.
5. Requirements — This SAS covers the following areas:
a) Evaluating Consistency—The auditor should evaluate whether the comparability of the financial statements between periods has been materially affected by a change in accounting principle or by adjustments to correct a material misstatement in previously issued financial statements. The periods included in the auditor‘s evaluation of consistency depend on the periods covered by the auditor‘s opinion on the financial statements and include the year prior to the reporting period.
b) Change in Accounting Principle—The auditor should evaluate a change in accounting principle to determine whether the newly adopted accounting principle is in accordance with the applicable financial reporting framework, the method of accounting for the effect of the change is in accordance with the applicable financial reporting framework, the disclosures related to the accounting change are appropriate and adequate, and the entity has justified that the alternative accounting principle is preferable.
(1) If the auditor concludes that the criteria above has been met, and the change in accounting principle has a material effect on the financial statements, the auditor should include an
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emphasis-of-matter paragraph in the auditor‘s report that describes the change in accounting principle and provides a reference to the entity‘s disclosure.
(2) If the criteria above are not met, the auditor should evaluate whether the accounting change results in a material misstatement and whether the auditor should modify the opinion accordingly.
c) Correction of a Material Misstatement in Previously Issued Financial Statements—The auditor should include an emphasis-of-matter paragraph in the auditor‘s report when there are adjustments to correct a material misstatement in previously issued financial statements. The auditor should include this type of emphasis-of-matter paragraph in their report when the related financial statements are restated to correct the prior material misstatement. The paragraph need not be repeated in subsequent periods. The emphasis-of-matter paragraph should include
(1) A statement that the previously issued financial statements have been restated for the correction of a material misstatement in the respective period and
(2) A reference to the entity‘s disclosure of the correction of the material misstatement.
d) Change in Classification—The auditor should evaluate a material change in financial statement classification and the related disclosure to determine whether such a change is also either a change in accounting principle or an adjustment to correct a material misstatement in previously issued financial statements. If so, the requirements of the paragraphs above apply.

SAS Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

(1) Addresses circumstances when the auditor considers it necessary or is required to include additional communications in the auditor’s report that are not modifications to the auditor’s opinion.

(2) Uses the terms emphasis of matter and other matter paragraphs in the auditor’s report. The SAS describes an emphasis of matter as a paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements.

(3) Describes an other matter paragraph as a paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.

(4) Change from current practice

(a) The number and nature of paragraphs included in the auditor’s report that address matters appropriately presented or disclosed in the financial statements (emphasis of matters) and matters other than those presented or disclosed in the financial statements (other matters) is not expected to change from current practice.

2. Changes from Existing Standards

a) Forming an Opinion and Reporting on Financial Statements

(1) Most significant changes to extant standards:

(a) A requirement to describe management’s responsibility for the preparation and fair presentation of the financial statements in more detail than what was required in extant AU section 508.

(b) The description includes an explanation that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework, and that this responsibility includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

(c) The ASB believes that this addition to the auditor’s report will communicate more clearly the responsibilities of management for the preparation of the financial statements.

(d) The SAS requires the use of headings throughout the auditor’s report to clearly distinguish each section of the report.

b) Modifications to the Opinion in the Independent Auditor’s Report

No significant changes exist from extant standards.

c) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

(1) Most significant changes to extant standards if the proposed standard was issued.

(a) Paragraph .11 of extant AU section 508 indicates that certain circumstances, although not affecting the auditor's unqualified opinion, may require that the auditor add an explanatory paragraph (or other explanatory language) to the standard report. The auditor may add an explanatory paragraph to emphasize a matter regarding the financial statements. As described in paragraph .19 of AU section 508, emphasis paragraphs are never required; they may be added solely at the auditor's discretion.

(b) Uses the terms emphasis of matter and other matter paragraphs.

(i) The SAS describes an emphasis of matter as a paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements. The SAS describes an other matter paragraph as a paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.

(ii) Under the SAS, an emphasis of matter paragraph would refer to any paragraph added to the auditor’s report that relates to a matter that is appropriately presented or disclosed in the financial statements. Some of these paragraphs would be required by certain SASs, whereas others would be added at the discretion of the auditor, consistent with current practice.

(iii) All such paragraphs would be considered emphasis of matter paragraphs because they are intended to draw users’ attention to a particular matter.

(iv) The concept of an “explanatory paragraph” would no longer be included in U.S. generally accepted auditing standards (GAAS). Instead, additional communications in the auditor’s report would be labeled as either “emphasis of matter” or “other matter” paragraphs.

(c) The SAS, consistent with ISA 706, requires an emphasis of matter or other matter paragraph to always follow the opinion paragraph and be included in a separate section of the auditor’s report under the section heading “Emphasis of Matter” or “Other Matter.”

SAS Modifications to the Opinion in the Independent Auditor’s Report

SAS Modifications to the Opinion in the Independent Auditor’s Report

(1) Addresses the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with proposed SAS Forming an Opinion and Reporting on Financial Statements, the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary.

(2) The SAS defines a modified report to include a qualified or adverse opinion or a disclaimer of opinion.

(3) Addresses the issuance of a qualified, adverse, or disclaimer of opinion using the auditor’s judgment about the materiality of the matters giving rise to the modification and the pervasiveness of their effects or possible effects on the financial statements.

(4) The ASB believes that the terms material and pervasive, although not explicitly stated in extant AU section 508, are consistent with the concepts embedded in the extant standards and, therefore, will not change, but will, rather, support current practice.

(5) The ASB also believes that the framework, as discussed in the text and in the application material to the proposed SAS, will help auditors better apply the concepts in determining whether a modification to the opinion in the auditor’s report is appropriate.

(6) Consistency of Accounting Principles

(a) Extant standards (AU sec. 508 par. 16–.18 and AU section 420 par. .01–.05) require the auditor to include an explanatory paragraph in the auditor’s report if there has been a change in accounting principles or in the method of their application that has a material effect on the comparability of the company's financial statements. PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements, (AICPA, PCAOB Standards and Related Rules, Rules of the Board, “Standards”), contains the same requirement.

(b) The ISAs do not include a requirement for the auditor to include an emphasis of matter paragraph in the auditor’s report if there has been a change in accounting principles, provided that the nature and magnitude of the change is disclosed in the financial statements under audit.

(c) ISA 705 discusses consistency of application of accounting policies in the context of evaluating whether a material misstatement of the financial statements exists that would give rise to the need for a modified opinion. The proposed SAS Modifications to the Opinion in the Independent Auditor’s Report also contains this requirement.

(d) The ASB has determined that the auditing standards in the United States should retain the extant requirement and include an emphasis of matter paragraph in the auditor’s report if there has been a change in accounting principles or in the method of their application that has a material effect on the comparability of the entity’s financial statements. The redrafted, SAS (AU section 420), Consistency of Application of Generally Accepted Accounting Principles (AICPA, Professional Standards, vol. 1), requires the inclusion of an “emphasis of matter” paragraph in the auditor’s report.

SAS Forming an Opinion and Reporting on Financial Statements

a) SAS Forming an Opinion and Reporting on Financial Statements

(1) Addresses the auditor’s responsibility to form an opinion on the financial statements as a whole.

(2) Addresses the form and content of the auditor’s report issued as a result of an audit of financial statements and is written in the context of a complete set of general purpose financial statements, prepared in accordance with a fair presentation framework.

(3) Specifically addresses situations when the auditor would be expressing an unmodified opinion on the financial statements and establishes the basic form of the auditor’s report. This proposed SAS also includes requirements and application material related to auditing and reporting on comparative financial statements.

(4) Comparative Financial Statements

(a) Extant AU section 508 includes guidance on comparative financial statements, which are common in the United States.

(b) The ISAs address comparative information in a separate standard—ISA 710.

(c) ISA 710 addresses reporting circumstances in other jurisdictions that are not relevant in the United States, including corresponding figures that are not covered by the auditor’s report.

(d) The ASB decided to include the requirements and guidance for comparative financial statements in this proposed SAS rather than have a separate SAS.

(e) The ASB believes that combining the guidance related to comparative financial statements and the guidance for issuing an auditor’s report in connection with an audit of financial statements will assist auditors when reporting in the United States.

(5) Auditor’s Signature

(a) Paragraph 37 of the SAS Forming an Opinion and Reporting on Financial Statements, consistent with ISA 700, Forming an Opinion and Reporting on Financial Statements, requires the auditor’s report to include the manual or printed signature of the auditor’s firm.

(b) In regard to this requirement, the ASB discussed the U.S. Treasury Department’s Advisory Committee on the Auditing Profession report, “Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury” (Treasury Report) that was issued on October 6, 2008.

(c) This report urged the Public Company Accounting Oversight Board (PCAOB) to “undertake a standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report.”

(d) The ASB discussed the recommendations in the Treasury Report and decided that it would not be appropriate for auditors of nonpublic companies to include the engagement partner’s signature in the auditor’s report.

(e) The SAS retains the requirement, consistent with ISA 700 and extant AU section 508 paragraph .08(i) to include the manual or printed signature of the auditor’s firm in the auditor’s report.

Statements on Auditing Standards, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks

Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement

1. This Exposure Draft of proposed Statements on Auditing Standards (SAS), contained two proposed SASs. Those SASs were issued as:

a) Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, and

b) Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement.

c) These SASs will supersede SAS No. 1, Codification of Auditing Standards and Procedures, section 544, Lack of Conformity with Generally Accepted Accounting Principles, as amended and SAS No. 62, Special Reports, as amended, except paragraphs 19–21(AICPA, Professional Standards, vol. 1, AU sec. 544 and 623, except paragraphs .19–.21).

d) Redrafts of AU sections 544 and 623 to apply the ASB’s clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

2. Convergence

a) The SASs were drafted using ISA 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, and ISA 805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement, as a base.

b) There are no differences between these SASs and ISAs 800 and 805 other than those for which the ASB believes a compelling reason for the difference exists.

c) The ASB has made various changes to the language of the ISAs to use terms or phrases that are more common in the United States, and to tailor examples and guidance to the U.S. environment.

3. Effective Date

The SASs will be effective for audits of financial statements for periods ending on or after December 15, 2012.

4. Changes From Existing Standards

a) SAS Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks is converged with ISA 800. It

(1) Addresses special considerations in the application of the AU sections to an audit of financial statements prepared in accordance with a special purpose framework, which now includes cash, tax, regulatory, or contractual basis of accounting.

(a) The cash, tax, and regulatory bases of accounting were commonly referred to as other comprehensive bases of accounting (OCBOA).

(b) The term OCBOA was replaced with the term special purpose framework. The new term no longer includes the broader concept of a definite set of criteria having substantial support that is applied to all material items appearing in financial statements.

(2) Requires the auditor to obtain an understanding of:

(a) the purpose for which the financial statements are prepared,

(b) the intended users, and

(c) the steps taken by management to determine that the special purpose framework is acceptable in the circumstances.

(3) Requires the auditor to obtain the agreement of management that it acknowledges and understands its responsibility to include all informative disclosures that are appropriate for the special purpose framework being used.

(4) Requires the explanation of management’s responsibility for the financial statements in the auditor’s report, and if management has a choice of financial reporting frameworks in the preparation of the financial statements, to make reference to management’s responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances.

(5) Requires the auditor, if the financial statements are prepared in accordance with a contractual basis of accounting, to obtain an understanding of any significant interpretations of the contract that management made in the preparation of those financial statements and to evaluate whether the financial statements adequately describe such interpretations.

(6) Requires the auditor’s report, if the financial statements are prepared in accordance with a regulatory or contractual basis of accounting, to describe the purpose for which the financial statements are prepared or refer to a note in the special purpose financial statements that contains that information.

(7) Requires the auditor’s report to include specific elements if the auditor is required by law or regulation to use a specific layout, form, or wording of the auditor’s report.

b) SAS Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement is converged with ISA 805. It

(1) Addresses special considerations in the application of the AU sections to an audit of a single financial statement or of a specific element, account, or item of a financial statement.

(2) Clarifies that a single financial statement and a specific element of a financial statement includes the related notes.

(3) Related notes ordinarily comprise a summary of significant accounting policies and other explanatory information relevant to the financial statement or to the element.

(4) Requires the auditor, if the auditor is not also engaged to audit the entity’s complete set of financial statements,

(a) To determine whether the audit of a single financial statement or of a specific element of those financial statements in accordance with generally accepted auditing standards is practicable and

(b) To determine whether the auditor will be able to perform procedures on interrelated items.

(c) In the case of an audit of a specific element that is, or is based upon, the entity’s stockholders’ equity or net income or the equivalent, the proposed SAS requires the auditor to perform procedures necessary to obtain sufficient appropriate audit evidence about financial position, or financial position and results of operations, respectively.

(5) Requires the auditor to determine the acceptability of the financial reporting framework, including whether application of the financial reporting framework will result in a presentation that provides adequate disclosures to enable the intended users to understand the information conveyed in the financial statement or the element, and the effect of material transactions and events on the information conveyed in the financial statement or the element.

(6) Requires the auditor, if, in conjunction with an engagement to audit the entity’s complete set of financial statements, the auditor undertakes an engagement to audit a single financial statement or a specific element of a financial statement, to issue a separate auditor’s report and express a separate opinion for each engagement.

(7) Requires the auditor, if an audited single financial statement and an audited specific element of a financial statement are published together with the entity’s audited complete set of financial statements, to inform management that it may not publish the auditor’s report containing the opinion on the single financial statement or on the specific element of a financial statement together with the entity’s complete set of financial statements unless the auditor is satisfied with the differentiation or separation from the complete set of financial statements.

(8) Requires the auditor, if the opinion in the auditor’s report on an entity’s complete set of financial statements is modified, or that report includes an emphasis of matter or an other matter paragraph,

(a) To determine the effect that this may have on the auditor’s report on a single financial statement or on a specific element of those financial statements.

(b) In the case of an audit of a specific element of a financial statement, if the modified opinion on the entity’s complete set of financial statements is relevant to the audit of the specific element or an interrelated item of the specific element, the proposed SAS requires the auditor to:

(i) Express an adverse opinion on the specific element when the modification on the complete set of financial statements arises from a material misstatement.

(ii) Disclaim an opinion on the specific element when the modification on the complete set of financial statements arises from an inability to obtain sufficient appropriate audit evidence.

(c) Allows the auditor, if the auditor concludes that it is necessary to express an adverse opinion or disclaim an opinion on the entity’s complete set of financial statements as a whole but, in the context of a separate audit of a specific element that is included in those financial statements, the auditor nevertheless considers it appropriate to express an unmodified opinion on that element, to do so only if

(i) That opinion is expressed in an auditor’s report that is neither published together with nor otherwise accompanies the auditor’s report containing the adverse opinion or disclaimer of opinion; and

(ii) The specific element does not constitute a major portion of the entity’s complete set of financial statements or the specific element is not, or is not based upon, the entity’s stockholders’ equity or net income or the equivalent.

A new SAS is proposed to address the requirements in paragraphs .19–.21 of AU section 623 that relate to compliance with aspects of contractual agreements or regulatory requirements in connection with an audit of financial statements.

Statement on Auditing Standards, Engagements to Report on Summary Financial Statements

1. This SAS:

a) Superseded SAS No. 42, Reporting on Condensed Financial Statements and Selected Financial Data (AICPA, Professional Standards, vol. 1, AU sec. 552).

b) Redrafted AU section 552 to apply the ASB’s clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

2. Convergence

a) Drafted using ISA 810, Engagements to Report on Summary Financial Statements, as a base.

b) Differences between this SAS and ISA 810 for which the ASB believes no compelling reason exists for the difference have been eliminated.

c) The ASB has made various changes to the language of the ISA to use terms or phrases that are more common in the United States, and to tailor examples and guidance to the U.S. environment.

3. Effective Date

The SAS will be effective for audits of financial statements for periods ending on or after December 15, 2012.

4. Changes From Existing Standards

In converging with ISA 810, the proposed SAS:

a) addresses the auditor’s responsibilities for specified procedures and reporting formats when reporting on summary financial statements derived from financial statements audited by that same auditor.

b) Procedures required:

(1) requires the auditor to determine whether the criteria applied by management in the preparation of the summary financial statements are acceptable.

(2) requires the auditor to obtain management’s agreement that it acknowledges and understands its responsibilities for the summary financial statements, including its responsibility to make the audited financial statements readily available to the intended users of the summary financial statements. The audited financial statements need not accompany the summary financial statements.

(3) requires the auditor to request management to provide, in the form of a representation letter addressed to the auditor, written representations relating to the summary financial statements.

(4) stipulates specific procedures to be performed as the basis for the auditor’s opinion on the summary financial statements.

c) Reporting requirements. In addition to standard reporting elements the new standard:

(1) eliminates reporting on selected financial data

(2) stipulates specific elements of the auditor’s report, including management’s responsibility and a description of the auditor’s procedures.

(3) requires the auditor to deny an opinion on the summary financial statements when the auditor issued an adverse opinion or disclaimer of opinion on the audited financial statements. This type of report will require the auditor to:

(a) state that the auditor’s opinion on the audited financial statements contains an adverse opinion or disclaimer of opinion

(b) describe the basis for that adverse or disclaimer of opinion.

(c) state that, as a result of the adverse opinion or disclaimer of opinion, it is inappropriate to express, and the auditor does not express an opinion on the summary financial statements. The auditor is not required to include the paragraph describing the procedures. However the auditor should indicate that the report is prepared in accordance with the standards established by the American Institute of Certified Public Accountants.

d) clarifies the auditor’s responsibilities related to subsequent events and subsequently discovered facts when the date of the auditor’s report on the summary financial statements is later than the date of the auditor’s report on the audited financial statements.

e) includes requirements relating to comparatives, unaudited information presented with summary financial statements, and other information included in a document containing the summary financial statements and related auditor’s report.

Statement on Auditing Standards, Quality Control for an Engagement Conducted in Accordance With Generally Accepted Auditing Standards

1. This SAS

a) Supersedes SAS No. 25, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards (AICPA, Professional Standards, vol. 1, AU sec. 161).

b) Redrafts SAS No. 25 to apply the Auditing Standards Board’s (ASB) clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

2. Convergence

a) Drafted using ISA No. 220 Quality Control for an Audit of Financial Statements, as a base.

b) There are no differences between this SAS and ISA No. 220 other than those for which the ASB believes compelling reasons exists.

c) The ASB has made various changes to the language of the ISA to use terms or phrases that are more common in the United States, and to tailor examples and guidance to the U.S. environment. The ASB believes that such changes will not create differences between the application of ISA No. 220 and the application of the proposed SAS.

3. Effective Date
The SAS will be effective for audits of financial statements for periods endingon or after December 15, 2012.

4. Changes from Existing Standards

a) Supersedes SAS No. 25, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards (AICPA, Professional Standards, vol. 1, AU sec. 161).

b) The explanatory memorandum to the ASB's exposure draft of the redrafted Risk Assessment standards stated that paragraphs .28–.32 of extant AU section 311, Planning and Supervision (AICPA, Professional Standards, vol. 1), which address supervision in an audit, were omitted from the SAS, Planning an Audit "because it is expected that these requirements and guidance will be included in the proposed SAS, Quality Control for Audit Engagements when this proposed SAS is prepared in connection with convergence with ISA 220 (Redrafted), Quality Control for an Audit of Financial Statements, as part of the ASB's Clarification and Convergence project.”

c) The SAS contains requirements and application material that address specific responsibilities of the auditor regarding quality control procedures for an audit of financial statements.

d) Quality control systems, policies, and procedures are the responsibility of the audit firm.

e) The SAS specifies quality control procedures at the engagement level that assist the auditor in achieving the objectives of the quality control standards.

f) Since these procedures are required to be established by SQCS No. 8, A Firm’s System of Quality Control (Redrafted) (AICPA, Professional Standards, vol. 2, QC sec. 10), the SAS should not result in a change to existing practice.

g) The SAS would strengthen existing standards by making it easier for auditors to understand and apply those quality control procedures that apply to an audit of financial statements.