Clarified Auditing Standards Custom Designed BLI Seminar for NABA Convention

Transcription

1 Clarified Auditing Standards Custom Designed BLI Seminar for NABA Convention Presented by Jennifer Elder CPA, CMA, CIA, CFF Business Learning Institute Partner Presented to NABA Convention Nashville, TN June 6,

2 INSTRUCTOR BIOGRAPHY Jennifer Elder Jennifer Elder is a CPA, CMA, CIA, CFF, with a master s in Organizational Leadership. She has worked in accounting and finance for the past 25 years in a variety of industries including manufacturing, residential construction and development, and angel investing. She spent five years in public accounting, seven years as the Accounting Department Chair of a community college, and the previous ten years in the role of CFO. Recently, Jennifer started her own business, The Sustainable CFO, providing business consulting, on-demand CFO services, and business coaching services. The company s target market is small and medium-sized businesses looking to improve their bottom-line and overall performance. In addition to running her own company, Jennifer teaches finance in the Green MBA program at Antioch University New England. She is also a contributing writer for the National Association of Home Builders and TriplePundit, and a frequent presenter for the Maryland Association of CPA's, the Institute of Management Accountants, and the Society for Human Resource Management. Copyright 2012 Business Learning Institute, Inc.

3 OTHER COURSES BY THIS INSTRUCTOR Applying Ethics in the Real World Awesome Financial Presentations Better Forecasting Using Backcasting Ethics: It's Not Just What You Do, but How You Do It! Financial Statements Analysis Fraud: Detection and Prevention Lions, and Tigers, and Numbers Oh My! FInance for the Non-FinancialManager Personality Styles in the Workplace Planning and Implementing the Balanced Scorecard Preparing a Winning Business Plan Risk Management - Disaster Recovery Planning Smarter Decision-Making Strategic Skills for Finance Successful Project Approval Using a Business Case Sustainability Reporting Sustainability: Using the "Triple Bottom Line" to Increase Your Success The Eight Hour MBA Pam Devine Customized Learning Manager , ext. 321 pam@bizlearning.net

4 Clarified Auditing Standards N 2 A 0 B 1 A 3 Jennifer H. Elder CPA, CMA, CIA, CFF, CGMA, MS Overview of the ASB Clarity Project Address concerns over the clarity, use of terms, and the length and complexity of auditing standards Make standards easier to read, understand, and implement Improve audit quality with consistent application of auditing standards 1

5 Overview of the ASB Clarity Project First complete redraft of GAAS since 1972 Covers all original AU standards Types of changes include: Primarily Formatting Primarily Clarifying Substantive Primary Impact of Clarity Project To establish objectives of each of the standards that provide a conceptual framework for the Application of professional judgment and Obligation related to the objective Make SASs easier to read and understand by restructuring format 2

6 Clarity Project Status Effective Dates: SAS Nos already effective SAS Nos effective for periods ending on or after December 15, 2012 Temporarily designated AU-C through 2014 Clarity Project almost complete, the final issue, Use of Internal Auditors, is in ED Clarity Formatting Provisions Begins with Introduction of Standard Establish objectives for each standard Separates requirements from applications Use formatting techniques, such as bulleted lists Include special considerations for small, less complex, and government audits 3

7 Clarity Formatting Provisions New format includes: Scope Objectives Definitions Requirements Application Appendices/Exhibits Standards That Did Not Change AU 110, Responsibilities and Functions of the Independent Auditor (new AU-C 200) AU 120, Defining Professional Requirements in Statements on Auditing Standards (new AU-C 200) AU 150, Generally Accepted Auditing Standards (new AU-C 200) 4

8 Standards That Did Not Change AU 201, Nature of the General Standards (new AU-C 200) AU 210, Training and Proficiency of the Independent Auditor (new AU-C 200) AU 220, Independence (new AU-C 200) AU 230, Due Professional Care in the Performance of Work (new AU-C 200) Standards That Did Not Change AU 312, Audit Risk and Materiality in Conducting an Audit (new AU-C 320 and AU-C 450) AU 314, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (new AU-C 315) 5

9 Standards That Did Not Change AU 316, Consideration of Fraud in a Financial Statement Audit (new AU-C 240) AU 318, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (new AU-C 330) AU 326, Audit Evidence (new AU-C 500) Standards That Did Not Change AU 328, Auditing Fair Value Measurements and Disclosures (new AU-C 540) AU 329, Analytical Procedures (new AU-C 520) AU 333, Management Representations (new AU-C 580) AU 339, Audit Documentation (new AU-C 230) 6

10 Standards That Did Not Change AU 341, The Auditor s Consideration of an Entity s Ability to Continue as a Going Concern (new AU-C 570) AU 342, Auditing Accounting Estimates (new AU-C 540) AU 350, Audit Sampling (new AU-C 530) Standards That Did Not Change AU 380, The Auditor s Communication With Those Charged With Governance (new AU-C 260) AU 390, Consideration of Omitted Procedures After the Report Date (new AU-C 585) AU 431, Adequacy of Disclosure (new AU-C 705) 7

11 Standards That Did Not Change AU 550, Other Information in Documents Containing Audited Financial Statements (new AU-C 720) AU 551, Supplementary Information in Relation to the Financial Statements as a Whole (new AU-C 725) AU 558, Required Supplementary Information (new AU-C 730) Standards That Did Not Change AU 560, Subsequent Events (new AU-C 560) AU 561, Subsequent Discovery of Facts Existing at the Date of the Auditor s Report (new AU-C 560) AU 625, Reports on the Application of Accounting Principles (new AU-C 915) 8

12 Standards That Did Not Change AU 634, Letters for Underwriters and Certain Other Requesting Parties (new AU-C 920) AU 711, Filings Under Federal Securities Statutes (new AU-C 925) AU 722, Interim Financial Information (new AU-C 930) AU 801, Compliance Audits (new AU-C 935) Effect on Current Practice Primary requirements of an audit stayed the same Standards were organized Some current practices were formalized New terminology New auditor s report New procedures for opening balances New requirements related to illegal acts 9

13 SASs That Did NOT Change Analytical Procedures AU 329 Written Representation AU 333 Audit Documentation AU 339 Auditing Estimates AU 342 Audit Sampling AU 350 Omitted Procedures AU 390 SASs That Did NOT Change Modification of Opinion AU 550 Supplementary Information AU 551, 558 Subsequent Events AU 560 Reports on Compliance with Contractual Agreements AU 623 Reports on Application of Reporting Framework AU

14 Scope of Changes Two objectives of an audit a) to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error, enabling the auditor to express an opinion on whether the financial statements are prepared in accordance with an applicable financial reporting framework and Scope of Changes Objectives of an audit b) to report on the financial statements in accordance with the auditor s findings 11

15 Scope of Changes New Terminology: Applicable financial reporting framework Special purpose framework Emphasis-of-matter and Other-matter paragraphs Group Engagement Partner and Component Auditors Scope of Changes Format for standard auditor s report New requirements: Opening balances Illegal acts External confirmations 12

16 Effective Date Fiscal years ending after 12/15/2012 Helpful Information and Resources Numerous resources Mapping of new to old standards Summary of Differences Between Clarified SASs and Existing SASs 13

17 Helpful Information and Resources AICPA Accounting and Auditing Technical Hotline (877) Terminology 14

18 Applicable Financial Reporting Framework Management is responsible for selecting framework Auditor responsible for evaluating acceptability of that framework Auditor should document management s understanding of that responsibility in engagement letter Special Purpose Framework No more OCBOA Five types: 1. Cash Basis 2. Tax Basis 3. Contractual basis 4. Regulatory basis 5. Other Basis of accounting (logical set of criteria) 15

19 Special Purpose Framework obtain an understanding of the purpose, intended users, and steps taken by management to determine that the special purpose framework is acceptable obtain management s acknowledgement of its responsibility to include all informative and additional disclosures beyond those required by the reporting framework necessary to achieve fair presentation Special Purpose Framework include an emphasis-of-matter paragraph that, states that the special purpose framework is a basis of accounting other than GAAP 16

20 Emphasis-of-Matter and Other-Matter Paragraphs No more explanatory paragraphs Intended to draw user s attention to a particular matter May be required by SASs or at discretion of auditor Emphasis-of-Matter Paragraph 34 Only refer to matters appropriately disclosed in the financial statements Litigation uncertainty Major catastrophe Going concern Important subsequent events 17

21 Emphasis-of-Matter Paragraph 35 Format Include immediately after Auditor s opinion Paragraph Heading Describe matter and location of disclosures Indicate opinion is not modified Other-Matter Paragraph 36 For matters not presented or disclosed in the financial statements but is relevant to user s understanding of audit, auditor s responsibilities, or auditor s report Auditor s additional responsibilities due to law, regulation, or other generally accepted practice 18

22 Other-Matter Paragraph 37 Format Include immediately after Auditor s opinion paragraph and any emphasis-of-matter paragraph Heading Indicate matter is not required to be presented or disclosed May not use to include information that is the responsibility of management Emphasis-of-Matter and Other-Matter Paragraphs Emphasis of Matter Going concern Contractual or regulatory reporting frameworks Consistency Other Matter Audit reports of prior periods presented Materially inconsistent other information RSI General use regulatory F/S 19

23 Group and Component Auditors Principal auditor replaced with group engagement partner or team Other auditor replaced with component auditor New Audit Report 20

24 Applicable Standards AU-C 700, Forming an Opinion and Reporting on Financial Statements AU-C 705, Modifications to the Opinion in the Independent Auditor s Report Audit Opinions Unmodified Financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework Modified Financial statements are materially misstated Auditor is unable to obtain sufficient evidence 21

25 Format of the Report Title Addressee Introductory Paragraph Identify the entity being audited State the financial statements have been audited Identify title of each financial statement Specify date or period covered by each financial statement Format of the Report Management s Responsibility Paragraph Heading Management is responsible for the preparation and fair presentation of the financial statements Management s responsibility includes the design, implementation, and maintenance of internal controls relevant to financial reporting 22

26 Format of the Report Auditor s Responsibility Paragraph Heading Auditor is responsible for expressing opinion Audit was conducted in accordance with auditing standards generally accepted in US Plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material error Format of the Report Auditor s Responsibility Paragraph (cont.) Audit involves procedures to obtain evidence about amounts and disclosures Procedures selected depend on auditor s judgment Auditor considers internal controls Auditor does not express an opinion on internal controls 23

27 Format of the Report Auditor s Opinion Paragraph Heading For unmodified: Financial statements present fairly, in all material respects in accordance with applicable reporting framework Signature of auditor Auditor s address Date of report Comparative Financial Statements Auditor s report should refer to each period presented Continuing auditor should update the report on the financial statements of the prior periods presented Date no earlier than date sufficient audit evidence was obtained 24

28 Prior Period Financials & Predecessor Auditor If predecessor auditor is unwilling to reissue the auditor s report on prior period Current auditor may include an other-matter paragraph including Financials were audited by predecessor Type of opinion expressed by predecessor If modified, include reason for modification If any, describe emphasis-of-matter or other matter paragraph in previous report Modifications to Opinion Decision to modify based on: Nature of matter Whether financials are materially misstated Whether auditor was able to obtain sufficient audit evidence Auditor s professional judgment regarding pervasiveness of the effects 25

29 Types Modifications 51 Modifications to Opinion Qualified Opinion Misstatements are material but not pervasive Unable to obtain sufficient evidence, could be material but not pervasive Disclaimer Unable to obtain sufficient evidence but is pervasive Adverse Material and pervasive 26

30 Format of Modified Opinion Include paragraph immediately before Auditor s Opinion Paragraph Heading Description of misstatement and quantification of effects if practicable Description of omitted disclosures if any Reasons for inability to collect sufficient evidence Format of Modified Opinion Heading for Opinion Paragraph changes to: Qualified Opinion Disclaimer of Opinion Adverse Opinion Possible changes to Auditor s Responsibility Paragraph 27

31 New Requirements Opening Balances Auditor must obtain sufficient evidence that: Opening balances do not contain misstatements that materially affect the current period Accounting policies have been consistently applied, or changes in accounting principles have been properly accounted for and disclosed 28

32 Opening Balances Reviewing predecessor auditor s documentation cannot be only procedure to obtain sufficient evidence regarding opening balances External Confirmations When management refuses to allow confirmation requests: If refusal is unreasonable, must communicate with those charged with governance Oral response to confirmation is not sufficient 29

33 Illegal Acts Auditors now required to inspect correspondence with licensing and regulatory authorities as part of every audit Other Major Changes Audits of Group Financial Statements Going Concern Issue 30

34 Audits of Group Financial Statements Group Engagement Partner/Team Determines whether to act as the auditor of group financial statements, and if so Establish overall audit strategy Obtain sufficient audit evidence regarding the financial information of the components in order to express an opinion on the group financial statements 31

35 Group Engagement Partner/Team Communicates with component auditors Evaluates evidence as basis for forming opinion Must assess whether sufficient appropriate evidence obtained to provide basis for opinion on group financial statements Decide whether to make reference to the audit of the component auditor in the report Changes in Terms Component An entity or business activity which is required to be included in the group financial statements Includes equity method investments Component materiality Materiality threshold for the component determined by the group engagement team for the purposes of the group audit 32

36 Changes in Terms Component auditor An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit May be a part of the group engagement partner s firm, a network firm of the group engagement partner s firm, or another firm New Terms Group All components whose financial information is included in the group financial statements Group engagement partner Person responsible for the group audit engagement and for the auditor s report on the group financial statements May be joint auditors who collectively constitute the group engagement partner 33

37 New Terms Group engagement team Partners and staff, including the group engagement partner Establish the overall group audit strategy Perform work on the consolidation process Evaluate conclusions drawn from audit evidence as basis for forming an opinion New Terms Group financial statements Financial Statements that include the financial information of more than one component Includes combined financial statements aggregating components under common control 34

38 New Terms Significant component Component identified by group engagement team that is of individual financial significance, or Due to its nature is likely to include significant risks of material misstatement to the group financial statements Engagement Acceptance or Continuance Determination to accept depends on belief of group engagement partner that sufficient audit evidence can be obtained Group engagement team must obtain understanding of Group Components Their environments 35

39 Engagement Acceptance or Continuance Belief in availability of sufficient audit evidence is dependent upon work of component auditor Decision whether or not to assume responsibility for component auditor s work is critical to acceptance or continuance Sufficient Evidence NOT Available If group engagement partner concludes that it is not possible to obtain sufficient appropriate audit evidence Not accept the new engagement Withdraw from continuing engagement Issue disclaimer of opinion if by law or regulation the auditor cannot withdraw 36

40 Group Engagement Team Must Evaluate Whether group engagement team and component auditor share common policies and procedures Consistency between group engagement team and component auditors regarding Applicable laws and regulations Professional oversight Quality Assurance Group Engagement Team Must Evaluate Independence of component auditor Component auditor s professional competence including knowledge, skills, and understanding of auditing standards Extent of involvement by group engagement team Whether component auditor operates in appropriate regulatory environment 37

41 Responsibility For Subsequent Events Group engagement team or component auditors are required to perform procedures related to subsequent events Group engagement team request should component auditor to notify group engagement team of circumstances requiring adjustment or disclosure Communications With Component Auditor Specific communications required in all group audits Group engagement team to component auditor Component auditor to group engagement team Additional communications required when assuming responsibility Group engagement team required to evaluate component auditor s communication 38

42 Communications With Component Auditors Group engagement team should confirm Component auditor will cooperate with group team Ethical requirements related to the group audit List of related parties Identify significant risks of material misstatement Component auditor will communicate matters relevant to group team s conclusions Communications With Component Auditors Group engagement team should evaluate Component auditors communications Discuss significant findings and issues Whether sufficient appropriate audit evidence has been obtained on Consolidation process Financial information of component Impact of uncorrected misstatements Instances of insufficient evidence 39

43 Decision to Assume Responsibility For Component Auditor Decision to assume responsibility or not lies with group engagement partner Factors affecting decision include Differences in applicable reporting framework Will component audit be completed in time Differences in audit standards applied by component auditor Impracticable for group engagement team to be involved in work of component auditor Auditor Assumes Responsibility For Component Auditor No reference made to component auditor in auditor s report on group financial statements 40

44 Auditor Does Not Assume Responsibility Auditor will reference the audit of the component auditor in the auditor s report on the group financial statements Effect on Auditor s Report When making reference to component auditor the auditor s report on group financial statements should clearly state Component was not audited by the auditor of the group financial statements Magnitude of the portion of financial statements audited by component auditor 41

45 Effect on Auditor s Report Auditor should get express permission from component auditor Component auditor s report should be presented with the auditor s report on the group financial statements If component auditor has modified their opinion, group engagement team needs to consider impact on their audit report Going Concern Issue 42

46 Going Concern Issue If the auditor believes there is substantial doubt about the entity s ability to continue as a going concern for a reasonable period of time (not to exceed one year) Going Concern Indicators Inability to meet obligations Default on debt Significant restructuring of debt Externally forced revisions to operations Negative trends Legal proceedings Loss of significant customer 43

47 Auditor s Responsibilities Evaluate and conclude whether there is substantial doubt Assess possible financial statement effects Determine implications for auditor s report Consider management s plans Obtain written representations Effect on Auditor s Report Emphasis-of-Matter Paragraph Without the words substantial doubt May issue Unmodified report with emphasis-of-matter Qualified report with emphasis-of-matter Disclaimer report without emphasis-of-matter 44

48 Key Points for Planning Familiarize yourself with changes Consider what new AU-Cs apply for each client Change in audit report impacts engagement letter and management letter JENNIFER H. ELDER CPA, CMA, CIA, CFF, CGMA THE SUSTAINABLE CFO EXECUTIVE COACHING & FINANCIAL TRAINING

49 WHAT IS BLI? BLI is the training affiliate of the MACPA. BLI s mission is to deliver competency-based courses, content and community that enhance learning and foster organizational and executive leadership. BLI has grown into the largest provider of on-site training in the country. Pam and the Customized Learning Solutions team have grown the business in three core segments Corporate, Firm and Government. THE BLI CURRICULA Today s business environment demands the need to gain competencies and share strategic knowledge. BLI delivers competency-based curriculum, courses, content, and community to enhance learning and grow intellectual capital for organizational and executive leadership. These soft skills are essentially people skills the non-technical, intangible, performance skills that determine your strengths as a leader, manager, and team member. STRATEGIC MANAGEMENT Strategic conversation reflects the dynamics between the organization and its environment. The closer the language reflects current and potential customer dynamics, the higher the company s profit potential. LEADERSHIP DEVELOPMENT Great leadership is one of the most valued of all human activities. Modern myth holds that leaders are born not made, but leadership is a set of observable and learnable practices - it is the process people use when they bring out the best in others and themselves. BUSINESS MANAGEMENT As the business world moves at an incredible pace, keeping up is a key to success. Today s financial managers must be able to translate strategy to operational and corporate growth. PERFORMANCE MEASUREMENT MANAGEMENT Executives and managers must effectively transform their firms or companies into high performance organizations and progressively identify and develop the appropriate core competencies and link them to their business strategies. COMMUNICATION SKILLS Many people in the business field cannot communicate effectively and, even more damaging, don t realize it. Success is not defined solely by a product line or service - it relies on relationships formed and maintained through skillful communications. Your competitors know this. Do you? TECHNICAL EXPERTISE Keeping up with technical competencies is a core business requirement for financial professionals. Staying attuned to the latest changes, updates, and regulations are necessary components to staying competitive in an ever-changing business environment. TECHNOLOGY AND COMPUTER SKILLS Harness the technology you use every day to make your business life easier and allow you to work smarter. Please note that many programs in this catalog are available in Webcast format. Contact a BLI Customized Learning consultant if you are interested in a Webcast