The American Institute of CPAs has finalized several documents that should improve the auditing of private companies and the development of nonaudit reports and compilations.
Three of the documents, approved by the Accounting and Review Services Committee, are final statements on standards of accounting and review services.
One, an omnibus statement, amends SSARS 1 to establish an accountant's responsibility to inform management of any evidence of fraud or an illegal act that may have occurred. The statement, which applies to reviews and compilations, but not audits, does not require accountants to look for or find any such evidence. When evidence arises, however, it must be passed on to management.
A concurrent new statement, "Restricting the Use of an Accountant's Compilation or Review Report," provides guidance to accountants on restricting the use of reports. The statement defines the terms "general use" and "restricted use," and the circumstances in which the use of accountants' reports should be restricted.
The committee also divided a proposed statement to create two final statements. One, on compilation of specified elements, accounts or items of a financial statement, expands SSARS to allow for the compilation of information that is the representation of management. The statement deals with performance and reporting requirements, and reaching an understanding with management regarding the scope of the engagement. Examples of specified elements, accounts or items of a financial statement that an accountant may compile include schedules of accounts receivable, inventory, fixed assets and provision for income taxes.
The other statement divided out of the original proposal deals with pro forma financial information that demonstrates what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date. Such information is commonly requested for business combinations, changes in capitalization, disposition of a significant portion of the business, changes in the form of business organization, and proposed sales of securities and the application of the proceeds.
The statement also expands the scope of services covered by SSARS beyond the review or compilation of historical financial statements. The AICPA's director of auditing and attestation, Chuck Landes, said that many accountants were confused as to what guidance they needed to follow when asked by a client to compile information that was not a historical financial statement.
"We had members who would frequently call us and say, 'I have a client who wants me to compile a pro forma presentation. Can I do that?'" Landes said. "I would have to tell them that SSARS only applied to historical financial information."
All three SSARS are effective for periods ending after Dec. 15, 2005, with earlier application permitted. The ARSC has not yet assigned titles or numbers to the statements.
Shortly after the ARSC approved its new standards, the Auditing Standards Board voted to expose a handful of proposed new standards.
The most significant of the proposals is on communication of material weaknesses and significant deficiencies. It changes the definitions of those concepts to match those of the Public Company Accounting Oversight Board's Auditing Standard No. 2. It also requires that such weaknesses or deficiencies be communicated to the client in writing. The communications would have to be annual, repeated even if issued in an earlier year.
The comment period on the exposure draft will close by the end of September, so that the ASB can assess comments and continue deliberations by January 2006.
Landes said that the board also hopes to propose a change to SAS 58, on auditor reports. The board is looking for ways to better articulate the function of auditors so that it is better understood by the users of audited information.
"This is not a new issue," Landes said. "It has been kicking around the profession for years and years and years. The users of financial reports need to understand not only what an audit is, but what it isn't. There are a lot of misunderstandings about what an audit covers."
The ASB is working with the International Audit and Assurance Standards Board on this project so that auditors throughout the world will be reporting on the same things and using the same words to report them.
The ASB is also assessing comments on its recent exposure draft on audit documentation. A final statement may be issued as early as October, and is expected to move the standard for private companies closer to that of public companies and governmental entities. One expected difference, however, is in the lock-down period during which an auditor can make administrative and clerical changes to documents after an audit report is issued. The period for public companies is 45 days; the ASB is likely to approve a period of 60 days for private companies.
"This rule came about as a result of the Arthur Andersen issue with regard to Enron," Landes said.
The final statement is also likely to reflect a change requested by the National Association of State Boards of Accountancy to add a five-year document retention period.
The board is also continuing work on an amendment to Attestation Standard 501, which parallels the PCAOB's Auditing Standard 2, on testing the effectiveness of internal controls. Landes said that the board hopes to issue an exposure draft in October. The ASB project was put aside a few years ago while the PCAOB worked on its version. The ASB had previously issued an exposure draft, but would re-expose the document now that the profession has some experience with AS 2.
"Now that we have one year of experience under our belt with AS 2, we thought we needed to go back and finish this project," Landes said.
He said that the differences from AS 2 will be not so much on the issues of performance, evidence or testing, but on reporting and terminology.
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