With its role in standard-setting now clearly defined, the Auditing Standards Board has been making up for lost time as it moves toward a series of new proposed standards.
One should be available this month, and another in July.
"We're as busy now as we've been over the last four or five years," said Chuck Landes, director of auditing and attestation at the American Institute of CPAs.
Landes said that the frenetic pace of production at the ASB comes after an intentional slowdown that started when the Public Company Accounting Oversight Board assumed the function of writing auditing standards for public companies. As the two boards ironed out their mutual responsibilities, the ASB cut back its activities.
Now, charged with writing audit standards for non-public companies, the board is tackling several tough issues.
At its quarterly meeting in April, the board voted to issue an exposure draft of a suite of proposed changes to standards on risk assessment. This is the second time that this set of proposals has been issued for exposure. The first exposure preceded the formation of the PCAOB. The subsequent overhaul of auditing standards necessitated several changes, which, together, warranted yet another request for comments.
The draft should be posted by June.
The ASB also voted to amend its hierarchy of generally accepted accounting principles. As all accounting principles have been handed over to the Financial Accounting Standards Board, the ASB has decided to eliminate all but governmental standards from its hierarchy.
"We had always thought that the accounting GAAP hierarchy should be in accounting standards, not auditing standards," Landes said. "So as a result of FASB's action, we need to amend Statement of Auditing Standard 69 to remove the GAAP hierarchy."
The board is also preparing to issue a proposal to amend SAS 60, "Communication of Internal Control-Related Matters Noted in an Audit," and another on a similar attestation standard, AT 501, "Reporting on an Entity's Internal Control over Financial Reporting."
The two proposals share a number of concepts and definitions.
Landes said that the AICPA expects to see more attestation on internal controls.
"Given the spotlight of the Sarbanes-Oxley Act, more non-public companies, governmental entities and not-for-profit organizations will undertake voluntary engagements to have auditors perform audits or examinations of their internal controls," Landes said.
Revisions to SAS 60 were proposed in an exposure draft issued in March 2003, but the board decided that the extent of the changes to the revisions necessitates another public exposure for comment.
The ASB has not yet reached a consensus on all related issues, but Landes said that they are getting close. Among the delicate issues that they resolved in April is the definition of "significant deficiency," which the board has decided should be the same as that used by the PCAOB.
Spectrum of problems
In accordance with the PCAOB's spectrum of reporting problems, "significant deficiency" will replace the term "reportable condition" in ASB literature. Lower on the spectrum will be "control deficiency." At the upper end will be the more serious "material weakness."
Landes said that the significant progress on this "threshold issue" at the April meeting could result in a consensus on an exposure draft at the board's next meeting, which will be in Washington, D.C., in July.
The board also made the crucial decision that communications with management regarding deficiencies and weaknesses under the amended SAS 60 must be made in writing. Under the current standard, oral communication is acceptable.
"What we have found in practice is that, unfortunately, auditors, because they don't have to write these things down, simply don't communicate what the reportable conditions are," Landes said. "Since about 10 years ago, we have all become much more sensitive to the importance of paper trails, so we're thinking differently from when SAS 60 was originally issued."
Landes expected the proposed standard to recommend that auditors should communicate perceived problems "sooner rather than later," and no later than the time that the audit report is used.
The board also agreed to require that the communication indicate whether the questionable issue is a significant deficiency or a material weakness.
"We believe that it is important for the management to know where on the spectrum the auditor is finding fault," Landes said.
The ASB is working on several different projects in cooperation with the International Audit and Assurance Standards Board. The most important is a revision of SAS 58, "Reports on Audited Financial Statements," which Landes said is important enough to auditors all over the world that the ASB feels that it should be working on it at a global level, regardless of any work that is being done at the PCAOB. He said that an exposure draft is possible by the end of the year.
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