In an effort to foster dialogue between auditors and those who govern non-public companies - including not-for-profits and governmental entities - the Auditing Standards Board has issued a standard requiring auditors to communicate certain issues with whomever is charged with corporate governance.The board has also established a formal attestation hierarchy and fine-tuned a few existing standards.
In the past, under Statement of Auditing Standards 61, Communication with Audit Committees, auditors were required to report significant matters only to a company's audit committee. If a company had no audit committee, the auditor simply did not have to report those matters to anyone.
The ASB has been concerned about that loophole ever since the Public Company Accounting Oversight Board took over the writing of audit standards for public companies. Now that the ASB writes standards only for the auditors of companies that do not issue securities, it has noticed that many of those companies do not have audit committees.
With the issuance of a statement titled The Auditor's Communication with Those Charged with Governance, that loophole closes.
"We started down this path with our risk-assessment standard, which looked at the auditor's responsibility not to management but to those charged with governance," said Chuck Landes, American Institute of CPAs' director of auditing and attestation. "As a result of that, we thought that it shouldn't make any difference whether a company has an audit committee. We ought to be communicating with whomever is charged with governance. Now these communications will take place with every single audit."
The new standard, which will be designated either SAS 113 or SAS 114, depending on the date of issuance, has little effect on the types of information that had to be reported under SAS 61. Three types of information are typically reported: what the auditor's responsibilities are, an overview of the timing and scope of the audit, and the significant findings of the audit.
In a change from an exposure draft of the statement, the board decided that these communications may be oral, and not necessarily written, unless the auditor feels that oral communication is not sufficient. The objective, Landes explained, was to encourage an open dialogue between the auditor and its client governors.
Though the communication itself may be oral, the auditor must include in its workpapers the nature of such communications - what was said to whom and when - thus establishing documented evidence of compliance.
SAS 112, Communication of Material Weaknesses, however, continues to require written communication of material weaknesses and significant deficiencies.
The new standard will be effective for audits of financial statements for periods beginning on or after Dec. 15, 2006.
Harold Monk Jr., a partner with Davis, Monk & Co. and recently appointed chair of the ASB, is satisfied with the new standard, which he said is very much in line with a proposed international standard.
"This standard makes it clear that we need to make communications with somebody in every company, not just public companies," Monk said. "It stresses as well the need for two-way communication between auditor and client in the audit process, so that auditors can get all the information that they need."
The board also voted out an omnibus statement that touches up a few existing standards.
The omnibus statement also extends SAS 103, issued earlier this year, to clarify the meaning of "should" and "must" in the 10 basic auditing standards that serve as the foundation of the ASB's auditing principles.
"We've gone back and inserted the term 'must' into these 10 standards," Landes said. "They are so important to everything thing that we do, so we wanted to make it clear to everybody exactly what they 'must' do, where there's no option, that you can't do an audit in accordance with generally accepted auditing standards and not do these 10 things."
The omnibus statement also touches on SAS 99 on auditing for fraud, rewording certain phrases to make them more clearly consistent with eight subsequent statements on risk assessment.
The board also issued Statement on Standards of Attestation Engagements 14, Attestation Hierarchy. The statement established three tiers of priority, with ASB standards at the top, and interpretive documents, such as statements of position and attestation guidance, at the second level.
The third tier would include widely known but non-authoritative documents - such as articles appearing in Accounting Today.
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