Clarified U.S. Auditing Standards

What Management Should be Aware Of

The AICPA has had a project going on for the past few years that is intended to align U.S. auditing standards (Statements on Auditing Standards – known as SASs) with international standards (International Standards on Auditing – known as ISAs).  Most of the changes will not be apparent to management as they mainly affect how auditors of privately held entities conduct their audits.   However, it is important for audit committees, management and those charged with governance to understand the impact this will have on them.

The project is referred to as ‘The Clarity Project’ or the ‘Super SASs."   The purpose of the project is to redraft and recodify U.S. generally accepted auditing standards to make them easier to read, understand and implement.   The revisions to U.S. GAAS do not create many new requirements, but will require auditors to more carefully consider documentation requirements as they perform their audit engagements and to be aware of the fact that the clarified SASs have more explicit documentation requirements (many of which were previously implicit).  The changes are effective for fiscal years ending on or after December 15, 2012.

The sections of the clarified SASs which will be most apparent to management are as follows (this is not all inclusive):

Consideration of Laws and Regulations in an Audit of Financial Statements

An auditor is required to inspect any correspondence with relevant licensing or regulatory authorities.   Management will want to be aware of this, as they will need to ensure that all such correspondence is made available to their auditors for inspection.  Also, auditors will now be required to obtain written representation from management concerning the absence of noncompliance with laws and regulations.

Communicating Internal Control Related Matters Identified in an Audit of Financial Statements

While such information was already communicated to those charged with governance, auditors will now be required to include with their written communication of any significant deficiencies or material weaknesses identified, if any, an explanation of the potential effects (quantitative or qualitative) of the items identified.

Forming an Opinion and Reporting on Audited Financial Statements

The clarified SASs include a new format and new content in the independent auditor’s report.  The most significant changes are:

  • The use of headings throughout the report to clearly distinguish each section (e.g., management’s responsibility for the financial statements, auditor’s responsibility, and opinion).
  • The section on management’s responsibility will include responsibility for the preparation and fair presentation of the financial statements in more detail than what is currently required.
  • The section on auditor’s responsibility will include mention of their responsibility to obtain sufficient and appropriate evidence to provide a basis for issuing an opinion.
  • Additional Paragraphs in the Independent Auditor’s Report.  The term ‘explanatory paragraph’ will no longer be included in U.S. GAAS, but will be replaced with the terms ‘emphasis-of-matter’ and ‘other-matter’ paragraphs.  An emphasis-of-matter paragraph refers to a matter appropriately presented or disclosed in the financial statements (e.g., going concern, litigation uncertainty, subsequent events, etc.).  An other-matter paragraph refers to a matter that is not presented or disclosed in the audited financial statements but that is relevant to the user’s understanding of the audit (e.g., supplemental information, etc.).

In summary, the above mentioned matters only highlight the most significant changes as a result of the clarified SAS project that will be apparent to management and others as their external auditors perform 2012 audits.

If you need any additional information, feel free to contact your Meaden & Moore representative or Kelli Bernstein at (216) 241-3272 for more information.