The American Institute of Certified Public Accountants (AICPA) is in the final stages of updating its generally accepted auditing standards (GAAS) for financial statement audits of companies in the United States that are not subject to the rules and regulations established by the Public Company Accounting Oversight Board (PCAOB). Several years ago the AICPA decided its auditing standardsshould be updated to make them clearer, and at the same time strive to conform them to the standards issued by the International Auditing and Assurance Standards Board.
Termed the Clarity Project, this effort was undertaken to update the standards to more clearly set forth the objectives of the auditor and the requirements that an auditor must use when conducting an audit in accordance with GAAS.
As a result, most all of GAAS has been rewritten and must be applied by auditors when auditing financial statements for periods ending on or after December 15, 2012. In most instances, that means they must first be applied to calendar year 2012 audits. Early application of these revised standards by auditors is not permitted.[i]
The new standards are not likely to “revolutionize” the auditing profession, nor will auditors have to significantly do things differently when conducting a financial statement audit. But auditors need to understand the new rules and assess whether any changes to audit testing or documentation are necessary. For example, the guidance in the clarified standards regarding “group audits” is different.
Auditors should also ensure that their documentation in work papers, checklists, etc., mirrors the updated guidance. For example, AICPA auditing guidance has historically been issued in the form of Statement on Auditing Standards (SAS) No. XXX, which in turn was codified by topic into various auditing sections, termed “AU sections.” All of the existing 58 AU sections are being replaced by “AU-C sections” beginning with the issuance of SAS No. 122 in 2011, Statements of Auditing Standards: Clarification and Recodification. The AICPA has since issued SAS Nos. 123-125, and has a couple of additional proposed SASs to finalize before the Clarity Project is considered complete.
The new structure will have about 50 AU-C sections. The designation of AU-C is a temporary identifier to distinguish them from the original 58 existing AU sections. The AICPA plans to change the AU-C designation back to AU sections once it believes the former guidance is no longer relevant (i.e., financial statement audits for periods ending much later than December 15, 2012, for example, November 30, 2013, have been completed). The AICPA believes this date will be in 2014.
Firms and their engagement personnel should be reviewing the revised GAAS literature and answer, among other questions, what we need to change, if anything. Considerations include:
- Is it necessary to educate our clients on the revised structure, and the effect on audit testing and possible impacts on audit fees?
- Is a direct communication—such as a newsletter—for our client base needed?
- Do we need to change how we audit any of our clients?
- Do we need to change references in our practice tools (e.g., audit programs, checklists, confirmations, etc.) or other internal guidance?
- Are there procedures and processes in place for applying the revised standards, and are we still able to apply the former standards (since they cannot be applied early)?
- Do any of these changes affect how a practice-monitoring program (commonly known as a “PEER review”) of our firm might be affected?
- Is there any need to consult with outside legal counsel on these changes?
- Have we designed internal changes to avoid needing a major effort once the AICPA “re-designates” the guidance from AU-C to AU?
- Has our engagement personnel been trained on use of the new AU-C sections and how they compare and contrast to existing AU-sections?
- If we “audit-share” a client with another CPA firm, has that firm considered the above questions on its portion of the audit, and are we comfortable with the answers?
The AICPA has provided useful guidance and tools to help CPAs transition to the new clarified standards. It is available here AICPA Standards.
The guidance provided by the AICPA includes a mapping tool that auditors can use to find where the existing AU section literature is covered in the new AU-C sections. It also identifies key changes.
While the Clarity Project may not have the significant learning curvethat frustrated CPAs when the Financial Accounting Standards Board issued its Codification on July 1, 2009, it is nonetheless something that auditors should become familiar with—particularly as 2011 audits are being completed, and planning for 2012 audits begins.
As a reminder from the opening of this blog, these changes do not affect how audits of companies subject to PCAOB oversight are performed. Such financial statement audits must be conducted using standards issued and approved by the PCAOB not those issued by the AICPA.
About the Author
Ron Pippin is an experienced CPA based in Wheaton, IL. His 40 plus year career includes being an audit partner in Arthur Andersen, a member of Andersen’s Professional Standards Group (“national office”) in Chicago, the Director of Financial Reporting for a Fortune 50 company and most recently, the editorial director of CCH’s Accounting Research Manager. Currently, Ron does independent writing and analysis together with accounting consultation on a variety of topics.
[i] SAS 117 through SAS 121 were issued as clarified standards and are already effective to address certain “practice issues” covering compliance audits and supplementary information.