As the American Institute of CPAs' director of auditing and attestation, Chuck Landes has guided the Auditing Standards Board through the upheavals of the Sarbanes-Oxley Act, and in late October, he saw the board issue 11 inaugural standards for the audits of private companies."This was a monumental meeting," Landes said of the most recent ASB meeting. "I am just thrilled. I'm very proud of the technical staff, who have worked very hard and are finally seeing the fruits of all their labor come to fruition in the issuance of these new auditing standards. These standards make significant changes in how some auditors perform their work, and clearly they will improve the quality of auditing."

Before Sarbanes-Oxley was enacted, the ASB set standards for the auditing of publicly traded and privately held companies. The passage of SOX, however, mandated the creation of the Public Company Accounting Oversight Board.

The PCAOB eventually usurped Securities and Exchange Commission standard-setting from the institute, prompting the ASB to set standards for audits of private companies.

The ASB was subsequently reorganized, and in October 2005, its first standards - 10 on auditing and one on attestation - emerged from the board's due process. The board also issued an exposure draft of a proposed attestation standard.

Landes said that the board's quarterly meeting in October was important not only for the first issuance of post-SOX audit standards, but for the fact that so many of them were issued at the same time.

Eight of the 10 auditing standards are part of what Landes refers to as a "suite" of related standards on risk assessment. "We received some excellent comment letters on the suite of standards, and we made some revisions," he said. "But let me assert that we did not make any fundamental changes."

More work, but worth it

The eight standards provide guidance concerning the auditor's assessment of the risks of material misstatement in a financial statement audit. As an interrelated set, the standards help auditors gain more in-depth understanding of an audited entity and its environment to identify the risks of material misstatement in the financial statements and what the entity is doing to mitigate them. They require more rigorous assessment of the risks and improve linkages between the assessed risks and the nature, timing and extent of audit procedures performed in response to those risks.

Harold Monk, ASB vice chair and a partner with the Florida firm of Davis, Monk & Co., believes that the eight standards will mean more work for auditors, but it will be worth the effort.

"I think these standards will require auditors to have a better understanding of the industry and the client, and the more we know about our clients, the better we can perform as auditors," Monk said. "It also makes us look at the picture from a broader risk perspective as well, and will require more work. The quality of the audits will be enhanced, but at the same time, the time needed to perform the audits is going to go up."

Monk said that the ASB members considered whether the improvements in the quality of the work were worth the additional cost, and there was general agreement that the standards would be better and more complete and clearer on the responsibilities of the auditor.

The tentative titles of the standards, whose numbers have yet to be assigned, are:

* Amendment to "Due Professional Care in the Performance of Work" of Statement on Auditing Standards No. 1, Codification of Auditing Standards and Procedures;

* Amendment to Statement on Auditing Standards No. 95, Generally Accepted Auditing Standards;

* Audit Evidence;

* Audit Risk and Materiality in Conducting an Audit;

* Planning and Supervision;

* Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement;

* Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained; and,

* Amendment to Statement on Auditing Standards No. 39, Audit Sampling.

Landes said that one part of one standard has not quite been resolved - that on the question of materiality and how an auditor should handle prior years' past adjustments.

The board issued the standard with language that it felt was appropriate, but it is waiting to see a similar pronouncement from the SEC, which Landes expected would be issued in a matter of weeks. That pronouncement would be applicable to the preparers of public company financial statements. The PCAOB will, in all likelihood, use the same guidance for auditors of public companies, and the ASB will adjust its standard appropriately.

"If for some reason the SEC has taken a different position from the one we think they will take, then we will convene a board meeting and decide whether we want to make any changes to what we voted out," Landes said.

Because of the extent of the changes in guidance expressed in the eight standards, the board wanted to give practitioners plenty of time to implement the new rules. The effective date was therefore set for periods beginning on or after Dec. 15, 2006.

Changes to SAS 96

The board also issued an amendment to its existing standard on documentation, SAS 96. Landes said that no substantive changes were made from the exposure draft. The main improvement from existing guidance is that it requires documentation that would allow an "experienced auditor" to understand how the audit was performed, the procedures used, and the conclusions reached. The new guidance also determines that an auditor should date her report not with the date that fieldwork is finished, but on a date no earlier than the date when she has sufficient audit evidence to conclude the audit. The standard, SAS 103, will be effective for periods ending on or after Dec. 15, 2006.

Monk sees the standard on documentation complementing the standards on risk assessment. "Tying together the risk assessment standards and the documentation standard, clearly the emphasis is going to be on better and more complete documentation of just what the auditor has done, which, in my opinion, is good for the audit profession," he said. "Often we do things that we never get credit for just because we didn't get it documented. I think these standards will make clear that additional procedures have to be performed, and they have to be clearly documented. So while these standards increase the amount of work, auditors will be in a better position to support their opinions."

Monk said that the AICPA would soon be issuing guidance to help auditors implement the new standards.

Chronologically, the first of the new standards is on "use of terms," which has also been known informally as the "must/should" document.

"Until this point, we have never used the word 'must' in a standard," Landes said. "We have always used the word 'should.' Many old-timers like myself grew up understanding that the word 'should' meant 'must.' Unfortunately, some members of the profession did not quite see it that way."

The ASB had to establish the concept of "must" in order to harmonize its standards with those of the International Audit and Attestation Standards Board and the PCAOB. Henceforth, the use of the word "must" indicates a mandatory requirement, while "should" indicates a "presumptively mandatory" requirement.

In the case of presumptively mandatory procedures, Landes explained, auditors would be able to implement other procedures, but would have to document the reasons why the alternate procedure was preferable.

Since some of the other nine standards issued in October employ the word "must," this statement, SAS 102, had to be issued before the others.

The board also issued a virtually identical attestation standard that reflects the same must/should concepts. The board also issued an exposure draft of a proposed attestation standard on the examination of an entity's internal control over financial reporting, amending Attestation Standard 501. The amendments move AT 501 much closer to the PCAOB's Standard 2. The comment period will end around the end of 2005. Landes said that he expects a final statement to be issued no later than April of 2006.

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