AICPA to align its auditing standards with public company standards
- February 19, 2019
- Posted by: Hood & Strong
- Category: AICPA
The AICPA’s Auditing Standards Board (ASB) is taking steps to enhance the consistency of financial reporting between public and private companies. A new omnibus auditing standard will cover standards on related parties, communications with audit committees, and consideration of fraud in a financial statement audit.
Syncing the standards
Auditors of public companies are required to follow the standards set by the Public Company Accounting Oversight Board (PCAOB). But auditors of private companies generally adhere to the ASB guidance. In some cases, the existing auditing standards may differ.
In January, the ASB voted to issue a final standard to more closely align its guidance with the PCAOB’s standards. Statement on Auditing Standards (SAS) Omnibus Statement on Auditing Standards — 2019 will primarily amend:
- AU-C Section 550, Related Parties,
- Clarified Statement on Auditing Standards (AU-C) Section 260, The Auditor’s Communication With Those Charged With Governance, and
- AU-C Section 240, Consideration of Fraud in a Financial Statement Audit.
The final standard is based on Proposed SAS Omnibus Statement on Auditing Standards — 2018, which the AICPA published in November 2017. The proposal was issued after the AICPA completed its Clarity Project in 2012. The Clarity Project was carried out to make the AICPA’s audit guidance easier to understand and use.
Promoting audit consistency
The ASB believes that the amendments will improve the quality of private company audits. The PCAOB originally based its standards on ASB guidance. However, in recent years, the PCAOB has enhanced its rules to help prevent and detect accounting scandals like Enron and WorldCom.
Specifically, the PCAOB’s Auditing Standard (AS) 2410, Related Parties, toughened the requirements for auditors when they review the business deals of a company’s officers and directors for conflicts of interest. And AS 1301, Communications with Audit Committees, strengthened communications that auditors have with audit committees.
The ASB’s omnibus standard adds communication requirements regarding the auditor’s views about a company’s significant unusual transactions. The changes will require auditors to communicate the potential effect of uncorrected misstatements on future financial statements.
In addition, the new ASB standard adds a requirement to look for previously unidentified or undisclosed related parties or significant related-party transactions. The requirement is intended to enhance the auditor’s response to the risks of material misstatement associated with related-party transactions, taking into account the information gathered during an audit.
A final standard will be issued early in the year in conjunction with an updated standard on auditor reporting. See “ASB addresses audit disclosures” below. The ASB wants the standards to have the same effective dates to improve their implementation. That date is expected to be no earlier than for financial statement audits of periods ending on or after December 15, 2020.
Sidebar: ASB addresses audit disclosures
In January, the AICPA’s Auditing Standards Board (ASB) voted to finalize a standard that would converge its rules with international standards that expand the auditor’s report. The international version was issued in 2015 by the International Auditing and Assurance Standards Board (IAASB). The ASB’s final standard will expand the auditor’s report and make it more useful to investors.
The new-and-improved guidance will be based on Proposed Statements on Auditing Standards (SAS) Auditor Reporting and Proposed Amendments ― Addressing Disclosures in the Audit of Financial Statements, with some modifications. The exposure draft, issued in November 2017, proposed several changes to the form and content of the auditor’s report.
At an October 2018 meeting, the ASB supported including a reference in Proposed SAS Forming an Opinion and Reporting on Financial Statements to remind auditors that, when audits are conducted using Public Company Accounting Oversight Board (PCAOB) and AICPA standards, auditors should follow the PCAOB standards.
So, instead of following the key audit matter (KAM) requirements under international standards, auditors must determine and report critical audit matters (CAMs) in accordance with PCAOB Auditing Standard (AS) 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. Similar to KAMs, CAMs are issues that were especially challenging, subjective or complex, and are required to be communicated to the audit committee.
The ASB also agreed that the final standard should include a description of management’s responsibilities for assessing the company’s ability to continue as a going concern in the auditor’s report only when the applicable financial reporting framework contains such a requirement.
The final standard is scheduled to go into effect at the same time as SAS Omnibus Statement on Auditing Standards — 2019, which is effective no earlier than for audits of financial statements for periods ending on or after December 15, 2020.