Statement on Auditing Standards, Related Parties (Redrafted)

1. Supersedes the “Related Parties” section of SAS No. 45, Omnibus Statement on Auditing Standards—1983 (AICPA, Professional Standards, vol. 1, AU sec. 334). It represents the redrafting of the “Related Parties” section of SAS No. 45 to apply the Auditing Standards Board’s (ASB’s) clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

2. Effective for audits of financial statements for periods ending on or after December 15, 2012.

3. Changes From Existing Standards

a) Extant AU section 334 is premised on the related party requirements in Financial Accounting Standards Board (FASB) Statement No. 57, Related Party Disclosures. Therefore it is focused on auditing the amounts and disclosures pursuant to GAAP the United States and is centered on the provisions of FASB Statement No. 57.

b) This SAS is framework neutral so it includes all approved financial reporting frameworks, including special purpose frameworks described in the SAS Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks.

c) The applicability of the objectives, requirements, and definitions in the SAS are irrespective of whether the framework establishes such requirements.

4. Scope

a) Addresses the auditor’s responsibilities relating to related party relationships and transactions in an audit of financial statements.

b) Expands on how the SASs 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), and Consideration of Fraud in a Financial Statement Audit (Redrafted) are to be applied in relation to risks of material misstatement.

c) The SAS Forming an Opinion and Reporting on Financial Statements requires the auditor to evaluate whether the financial statements achieve fair presentation.

d) The SAS Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks requires that the auditor (1) evaluate whether the financial statements include informative disclosures similar to those required by generally accepted accounting principles (GAAP), and (2) evaluate whether additional disclosures beyond those specifically required by the framework and related to matters that are not specifically identified on the face of the financial statements or other disclosures may be necessary for the financial statements to achieve fair presentation. Thus, this SAS applies to all audits of financial statements.

5. The SAS contains sections on:

a) Nature of Related Party Relationships and Transactions—Many related party transactions are in the normal course of business and they may carry no higher risk of material misstatement of the financial statements than similar transactions with unrelated parties. However, the nature of related party relationships and transactions may give rise to higher risks of material misstatement of the financial statements than transactions with unrelated parties.

b) Responsibilities of the Auditor:

(1) Because related parties are not independent of each other, financial reporting frameworks establish specific accounting and disclosure requirements for related party relationships, transactions, and balances to enable users of the financial statements to understand their nature and actual or potential effects on the financial statements. Therefore, the auditor has a responsibility to perform audit procedures to identify, assess, and respond to the risks of material misstatement arising from the entity’s failure to appropriately account for or disclose related party relationships, transactions, or balances.

(2) An understanding of the entity’s related party relationships and transactions is relevant to the auditor’s evaluation of whether one or more fraud risk factors are present, as required by the SAS Consideration of Fraud in a Financial Statement Audit (Redrafted), because fraud may be more easily committed or disguised through related parties.

c) An audit has inherent limitations, so an unavoidable risk exists that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with US GAAS. In the context of related parties, the potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater because management may be unaware of the existence of all related party relationships and transactions. Related party relationships may present a greater opportunity for collusion, concealment, or manipulation by management.

d) Planning and performing the audit with professional skepticism–The SAS Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards, requires the auditor to plan and perform the audit with professional skepticism. It is in context, given the potential for undisclosed related party relationships and transactions.

6. Requirements

a) Risk Assessment Procedures and Related Activities

b) Identification and Assessment of the Risks of Material Misstatement Associated With Related Party Relationships and Transactions

c) Responses to the Risks of Material Misstatement Associated With Related Party

d) Relationships and Transactions Evaluation of the Accounting for, and Disclosure of, Identified Related Party Relationships and Transactions

e) Communication With Those Charged With Governance

f) Documentation

Statement on Auditing Standards, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors)

1. Supersedes SAS No. 1 section 543, Part of Audit Performed by Other Independent Auditors (AICPA, Professional Standards, vol. 1, AU sec. 543).

2. Drafted to apply the Auditing Standards Board’s (ASB’s) clarity drafting conventions and to converge with ISA 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors).

3. Will be effective for audits of financial statements for periods beginning on or after December 15, 2012.

4. The SAS was drafted using ISA 600 as a base.

(1) ISA 600 addresses group audits. It defines a group audit as an audit of group financial statements. Group financial statements are financial statements with more than one component. Component is defined as an entity or business activity for which management prepares financial information that should be included in the group financial statements.

(2) Under both ISA 600 and the proposed SAS, the auditor responsible for signing the auditor’s report on the group financial statements (referred to as the group engagement partner) is responsible for:

(a) the direction, supervision, and performance of the group audit engagement in compliance with professional standards and regulatory and legal requirements and

(b) determining whether the auditor’s report that is issued is appropriate in the circumstances.

b) Diverges from ISA 600 in that ISA 600 does not permit the auditor’s report on the group financial statements to make reference to another independent auditor (referred to as a component auditor), unless required by law or regulation to include such reference.

5. The SAS, consistent with extant AU section 543, permits the auditor’s report to make reference to a component auditor.

6. Contains requirements and application material that are not in ISA 600, which results in substantive differences in the wording of the objectives, requirements, and application material between ISA 600 and the proposed SAS.

7. The ASB’s convergence policy requires compelling reasons for differences between its standards and those of the IAASB. The ASB believes:

a) That the ability to make reference to the report of another auditor is appropriate in the United States.

b) No compelling practice issues suggest a need to change an approach that has always been permitted by generally accepted auditing standards (GAAS) in the United States.

c) The size, complexity, and diversity of some audits, in particular the federal government in which withdrawal or disclaimer of opinion are not viable options, make eliminating the option to make reference to a component auditor problematic.

d) That there will be considerable practical problems with access issues, particularly with equity investments, under the ISA approach.

e) That there is no difference in the effectiveness of the audit following either approach when the audits are conducted in accordance with GAAS.

8. When no reference is made to a component auditor in the auditor’s report on the group financial statements, no substantive differences in the requirements exist between ISA 600 and the proposed SAS.

9. This SAS contains Exhibit G “Comparison of Requirements of Statement on Auditing Standards, Special Considerations, Audits of Group Financial Statements (Including the Work of Component Auditors)” that shows the differences in requirements between the SAS and ISA 600.

10. The SAS is broader than AU section 543. It lists the procedures necessary for the group engagement team to perform in order to be involved with component auditors to the extent necessary for an effective audit. It explains the degree of involvement required when reference is made to component auditors in the auditors’ report.

11. Requirements —The requirements of the SAS address the following:

a) Acceptance and continuance considerations

b) The group engagement team’s process to assess risk

c) The determination of materiality to be used to audit the group financial statements

d) The determination of materiality to be used to audit components

e) The selection of components and account balances for audit testing

f) Communications between the group engagement team and component auditors

g) Assessing the adequacy and appropriateness of audit evidence by the group engagement team in forming an opinion on the financial statements

12. In situations when the group engagement partner does not make reference to a component auditor in the audit report on the group financial statements, all of the requirements of the proposed SAS apply, when relevant in the context of the specific group audit engagement.

Statement on Auditing Standards, Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures (Redrafted)

1. Supersedes SAS No. 57, Auditing Accounting Estimates and Auditing Fair Value Measurements and Disclosures and SAS No. 101, Auditing Fair Value Measurements and Disclosures (AICPA, Professional Standards, vol. 1, AU sec. 342 and 328).

2. Issued September 4, 2009 with a comment period that ended November 30, 2009.

3. Effective for audits of financial statements for periods ending on or after December 15, 2012.

4. Changes From Existing Standards

a) Does not change or expand SAS No. 57 or SAS No. 101 in any significant respect.

b) The SAS is restructured to reflect a more principles-based approach to standard setting.

c) As done in other revised SASs, certain requirements that are duplicative of broader requirements (in this case SAS No. 57 and SAS 101) have been moved to application and other explanatory material, consistent with ISA 540.

d) Consistent with the approach taken by the IAASB in the development of ISA 540 (Revised and Redrafted), Auditing Accounting Estimates, Including Fair Value Estimates and Related Disclosures, the proposed SAS combines AU section 342, Auditing Accounting Estimates with AU section 328, Auditing Fair Value Measurements and Disclosures (AICPA, Professional Standards, vol. 1).

5. Other considerations

a) The ASB considered the disposition of AU section 332, Auditing Derivatives Estimates (AICPA, Professional Standards, vol. 1) and concluded that many of the requirements of AU section 332 are redundant with or very similar to other requirements in the risk assessment standards.

b) Believe these are better addressed as interpretative guidance in the Audit Guide Auditing Derivative Instruments, Hedging Activities, and Investments in Securities.

c) A few requirements that were not covered elsewhere in the standards were included along with related application guidance in the SAS Audit Evidence Specific Considerations for Selected Items when AU section 331, Inventories and AU section 337, Inquiry of a Client’s Lawyer Concerning Litigation, Claims and Assessments (AICPA, Professional Standards, vol. 1), were redrafted for clarity and convergence using ISA 501 (Redrafted), Other Evidence as a base.

6. Supplements to the Exposure Draft

The Audit and Attest Standards Staff prepares supplementary materials for many of the proposed SASs. However, supplementary material for proposed SASs was not a part of the Exposure draft or the SAS and includes:

a) A matrix document, which compares ISA 540, the proposed SAS, and extant AU sections 342 and 328. The schedule contains the following:

(1) ISA 540

(2) The proposed SAS, marked to show differences in language between the ISA and the proposed SAS (new and deleted material are shown in colored track changes.)

(3) The requirements and guidance in extant AU section 342, mapped against the proposed SAS, to demonstrate how the material in AU section 342 has been reflected in the proposed SAS

(4) The requirements and guidance in extant AU section 328, mapped against the proposed SAS, to demonstrate how the material in AU section 328 has been reflected in the proposed SAS

b) Mapping documents, which map the requirements and guidance contained within SAS No. 57 and SAS No. 101 to the proposed SAS to demonstrate how the material in SAS No. 57 and SAS No. 101 has been reflected in the proposed SAS.

c) The supplementary materials can be found on the AICPA website, www.aicpa.org under the Professional Resources – Accounting and Auditing tab.

Redrafted Statement on Auditing Standards, External Confirmations

1. This SAS

a) Supersedes SAS No. 67, The Confirmation Process (AICPA, Professional Standards, vol. 1, AU sec. 330).

b) Redrafts SAS No. 67 to apply the Auditing Standards Board’s (ASB’s) clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

2. Convergence

a) Drafted using International Standard on Auditing (ISA) No. 560, Subsequent Events, as a base.

b) Differences between the proposed SAS and ISA No. 560, for which the ASB believes no compelling reason for the difference exists, 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. The ASB believes that such changes will not create differences between the application of ISA No. 560 and the application of the proposed SAS.

3. Effective Date

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

4. Changes from Existing Standards

a) Is not expected to change practice in any significant respect;

b) To reflect a more principles-based approach to standard setting, certain requirements that are duplicative of broader requirements in SAS No. 67 have been moved to application and other explanatory material, consistent with ISA No. 505. In the ASB’s view, this has not changed the overall effectiveness of the proposed SAS.

c) Most significant changes to existing standards are as follows:

(1) Responsibilities of the auditor when management refuses to allow the auditor to send a confirmation request. These responsibilities include inquiries as to reasons for the refusal, evaluating alternative procedures and impact on the risk assessment. When and if the auditor concludes that management’s refusal is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures the auditor should include communicate with those charged with governance These procedures are not currently required by AU section 330.

(2) Added application material to the proposed SAS regarding the use of oral responses to confirmation requests as audit evidence.

(a) It clarifies that the receipt of an oral response to a confirmation request does not meet the definition of an external confirmation.

(b) Provides guidance on how the response may be considered part of alternative procedures performed in order to obtain sufficient appropriate audit evidence.

(c) The definition of confirmation has been changed.

(i) The ASB has expanded the ISA definition of an external confirmation to include direct access by the auditor to information held by a third party.

(ii) Third-party involvement is increasingly common, and the ASB believes that the inclusion of this concept clarifies the definition.

(iii) The ASB believes this clarification is an improvement to the ISA definition because it specifically addresses a situation that is becoming increasingly common, and this change to the ISA definition is not inconsistent with the intent of the IAASB’s definition.

Statement on Auditing Standards, Audit Sampling (Redrafted)

1. This SAS

a) Supersedes SAS No. 39, Audit Sampling (AICPA, Professional Standards, vol. 1, AU sec. 350).

b) Redrafts SAS No. 39 to apply the Auditing Standards Board’s (ASB’s) clarity drafting conventions and to converge with International Standard on Auditing (ISA) No. 530 (Redrafted), Audit Sampling,

2. Convergence

a) Drafted using ISA No. 530 (Redrafted) as a base.

b) Differences between the proposed SAS and ISA No. 530 (Redrafted) for which the ASB believes no compelling reason for the difference exists have been eliminated.

c) The ASB has made various changes to the language of the ISA to use terms or phrases that are more commonly used in the United States, and to tailor examples and guidance to be more appropriate to the U.S. environment. The ASB believes that such changes will not create differences between the application of ISA No. 530 (Redrafted) and the application of the proposed SAS.

3. Effective Date

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

4. Changes from Existing Standards

a) The SAS does not change or expand SAS No. 39 in any significant respect.

b) To reflect a more principles-based approach to standard setting, certain requirements that are duplicative of broader requirements in SAS No. 39 have been moved to application and other explanatory material, consistent with ISA No. 530 (Redrafted). In the ASB’s view, this has not changed the overall effectiveness of the proposed SAS.

Clarified SAS, Initial Audit Engagements, Including Reaudits—Opening Balances

1. The SAS

a) Supersedes SAS No. 84, Communications Between Predecessor and Successor Auditors (AICPA, Professional Standards, vol. 1, AU sec. 315).

b) Applies the ASB clarity drafting conventions and converges with International Standards on Auditing.

2. Convergence

a) Drafted using International Standard on Auditing (ISA) No. 510, Initial Audit Engagements—Opening Balances, as a base.

b) Differences between the proposed SAS and ISA No. 510, for which the ASB believes no compelling reason for the difference exists, have been eliminated.

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

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

4. Changes from Existing Standards

a) Incorporates guidance from ISA No. 510, Initial Audit Engagements—Opening Balances, which requires the auditor to obtain sufficient appropriate audit evidence about whether

(1) Opening balances contain misstatements that materially affect the current period's financial statements;

(2) Accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, and whether changes in the accounting policies have been properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

b) Incorporates relevant guidance from SAS No. 84, as amended

c) Clarifies that initial audit engagements include reaudits, and eliminates from AU section 315 requirements and guidance directed to reaudits that are repetitive with other generally accepted auditing standards.

Significant Changes in Redrafted SAS on Risk Assessment

SAS, Planning an Audit (AU section 311) (Redrafted)

(1) The ASB proposes to delete Paragraphs .05–.10 of AU section 311, Planning and Supervision, which address the auditor’s responsibilities about the early appointment of the independent auditor and establishing the terms of the engagement. These requirements are expected to be included in the proposed SAS, Terms of the Engagements, in connection with the convergence with ISA 210 (Redrafted), Agreeing the Terms of Audit Engagements.

(2) The ASB proposed to delete Paragraphs .28–.32 of AU section 311 which covers supervision in an audit. It is expected that these requirements and guidance will be included in proposed SAS, Quality Control for Audit Engagements, in connection with convergence with ISA 220 (Redrafted), Quality Control for an Audit of Financial Statements.

SAS, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (AU section 314) (Redrafted)

(1) Most of the paragraphs written in the form of presumptive and mandatory requirements, particularly in the content dealing with internal control are proposed to be moved to application guidance because the ISA was drafted in a more principles based manner.

(2) Paragraph .19 of AU section 314 contains a requirement of the auditor to perform the audit with professional skepticism. This requirement is proposed to be deleted from AU section 314 because it is addressed by the proposed SAS, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards.

(3) Paragraph .45 of AU section 314 contains a requirement that the auditor consider whether the entity has disclosed a particular matter appropriately. This requirement is proposed to be deleted because it is expected that this requirement will be addressed when AU section 508, Reports on Audited Financial Statements is redrafted.

We have modified the ASB's Roadmap to Redrafted SASs to include the numbers of existing SASs linked to redrafted and clarified SASs. For a free email copy, please send a request to larry@cpafirmsupport.com.