When the Auditing Standards Board met back in August, its discussions were appropriate for a mid-to-late summer session - relatively quiet, with no pronouncements issued, no exposure drafts, just some pensive ponderings on progress soon to come.While topics included communication, clarity and auditor reports, and although it did not reach any decisions, the board felt that the roundtables could eventually lead to broad and substantive changes in the nature and form of information relating to audits.
The project on communication is a proposed amendment of Statement of Auditing Standards 61, Communication with Audit Committees. An exposure draft was approved at the board's previous meeting, but at press time had not reached the end of its comment period.
The proposed amendment would apply to auditors of companies that do not have audit committees. Currently, auditors must provide certain information to audit committees. Many companies do not have audit committees, however, so the amendment would require them to pass that information to whomever is charged with governance - often the owner of the company.
The proposal also specifies the areas of information that should be communicated, such as whether the company's accounting policy is appropriate, what audit adjustments were made, and any disagreements with management. The types of information proposed are essentially the same as those in SAS 61, but comments on the exposure draft may suggest changes.
The board's project on clarity is assessing whether the format of auditing statements should be changed. Historically, standards have been issued by topic, each identified by a numbered statement. In that the statements are later codified into a document of interlocking standards - a document that auditors use more commonly than the original statements - the board is considering writing standards directly into the codification and abandoning the use of individual statements.
"Many practitioners don't use the individual statements anymore," said Chuck Landes, American Institute of CPAs director of auditing and attestation. "They rely on the codification, so the question becomes, maybe we shouldn't be issuing individual SASes anymore. Maybe we should be reaching into the codification and revising its sections."
Landes also said that the board is toying with a number of ideas on how to make the intent of statements clearer, such as by introducing each with a statement of objectives or by segregating requirements from guidance.
"Looking at technical things that can make it easier for our members to understand and use these standards is the guiding reason that we're looking at these things," he explained. "Is there a way that we can present the information that will ease members' use of the standards and understand their purpose?"
Landes said that since the topics were a matter of process, the board was not expecting to issue an exposure draft or other document. He expected that the board would reach its first conclusions at its October meeting.
The board is also working on a project on auditor's reports, with an exposure draft possibly coming out in October.
Part of that project goes beyond the scope of that draft. The ASB is collaborating with the American Accounting Association and the International Audit and Assurance Standards Board in issuing a request for research proposals that could, in time, result in an overhaul of both the form and intent of auditor reports.
Douglas F. Prawitt, chair of the ASB's audit report research task force and Glen Ardis Professor of Accountancy at Brigham Young University, said that academic research was necessary to better understand an apparently common experience among people who use financial statements.
"Anecdotal evidence points to financial statement users not consistently understanding communications in an unqualified auditor's report, but there's little rigorous evidence to support the anecdotal observations," Prawitt said. "This project should provide the required information, as well as anchor any effective modifications necessary to clarify the communication of information to financial statement users."
Landes said that the research would also explore whether an auditor's report should include some sort of statement on the user's responsibility. "It's an interesting topic to think about," he said. "If a company hands a user an audited financial statement, does the user have any responsibility to understand basic concepts before relying on those statements?"
The three organizations have issued a request for proposals. The deadline is Oct. 2, 2006, with the completed project expected before Oct. 1, 2007.
The ASB and IAASB are offering funding of $10,000 to $20,000 per research project.
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