In a long-awaited shift in purview, the Auditing Standards Board has eliminated its standard on the hierarchy of generally accepted auditing standards just as the Financial Accounting Standards Board issued a new standard establishing the same hierarchy.Chuck Landes, the American Institute of CPAs’ director of auditing and attestation, said that the ASB fully approved of the shift in a vote at its quarterly meeting in May.

“We totally supported FASB in bringing that hierarchy out of the auditing literature and into their accounting literature,” he said. “We think it’s important that it be in the accounting literature because it is the accounting hierarchy.”

Accounting professionals have long complained that the hierarchy should apply primarily to the preparers of financial reports, not the auditors of those reports. It was therefore only logical that responsibility for the standard be under the purview of FASB, rather than the ASB.

FASB, too, was glad to add the hierarchy to its set of statements. The new standard, Statement 162, identifies a consistent framework — or hierarchy — for selecting the order of accounting principles to be used in preparing financial statements presented in conformity with U.S. generally accepted accounting principles.

“The new GAAP hierarchy will make financial reporting more consistent and provide more clarity for investors and other users of financial statements,” said FASB communications manager Christine Klimek.

The statement will be effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board auditing amendments to

AU Section 411, “The Meaning of Present Fairly in Conformity with [GAAP].”

The ASB also issued an exposure draft of amendments to Attest Standard 501, which deals with examinations of internal controls of financial reporting, and an associated auditing standard, SAS 112, on the communication of identified internal control weaknesses and deficiencies. The amendment to AT 501 tweaked the definitions of “significant deficiencies” and “material weaknesses,” so parallel changes had to be made to SAS 112. The changes bring those statements into consistency with Standard 5 of the PCAOB and international standards.

“This is not something that most practitioners will ever deal with in their lifetimes,” Landes said. “It’s a very narrow niche essentially used only by financial institutions.”

The board requests comments by July 31, 2008, and hopes to issue a final statement by the end of the year.

At the May meeting, the board also discussed SAS 74, on audits of compliance with federal requirements. The federal government often requires the so-called “single audit” of state and local governmental entities and not-for-profit entities receiving federal funds. Single audits are conducted on not only financial reports but on compliance with the requirements of federal programs.

The board has been working on amending the statement since 2007, when the President’s Council on Integrity and Ethics issued a report that noted audit quality deficiencies. Landes said that the board expects the amendment to provide more detail about planning compliance audits, the types of evidence needed to support an opinion, and communication of the findings of an audit.

“The SAS 74 project is on a fast track,” Landes said. “We want to get something exposed this year so that we can be responsive to the council.”

The board also discussed possible amendments to SAS 70, on audits involving service organizations, such as companies that perform payroll functions for other companies, known as “user companies.” Auditors currently have to extend the audit of a given user company to verify controls in place at the service company.

Due to this requirement, service companies have always been inundated by inquiries from their clients’ auditors. The ASB hopes to alleviate this burden by allowing an independent auditor to issue an examination report on the effectiveness of a service company’s controls and processes. User company auditors will be able to accept this report as evidence of sufficient control.

“This standard will effectively split SAS 70 into two parts,” Landes explained. “We will carve out what the user auditor needs to understand, and that piece of it will stay within the statements on auditing standards. The service auditor part will be carved out and put into an attestation standard.”

The board hopes to issue an ED at its July meeting.

The board also discussed a project on auditing supplemental information that is optional and “required supplemental information” that is increasingly required of governmental entities. Landes said that any changes would likely be minimal and would apply only to RSI circumstances.

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