LIST OF SUBSTANTIVE CHANGES AND ADDITIONS PPC's Guide to Audits of Nonpublic Companies. Thirty third Edition (February 2015)

Transcription

1 Route To: Partners Managers Staff File LIST OF SUBSTANTIVE CHANGES AND ADDITIONS PPC's Guide to Audits of Nonpublic Companies Thirty third Edition (February 2015) Highlights of this Edition The following are some of the important new features of the 2015 Edition of PPC's Guide to Audits of Nonpublic Companies: Revised AICPA Code of Professional Conduct. The AICPA published a revised Code of Professional Conduct in 2014, which is primarily effective as of December 15, When applicable, we have fully updated your Guide, including the practice aids, for the revised Code of Conduct. New SAS on Using the Work of Internal Auditors. SAS No. 128, Using the Work of Internal Auditors, replaces the guidance on using internal audit, whether using the work of the internal audit function or using personnel from the internal audit function in a direct assistance capacity. We ve updated your guidance and practice aids for the issuance of SAS No New Practice Aids. Your Guide includes New Confirmation and Correspondence Letter. We ve added a new letter that will help component auditors communicate findings and results of their work to the group auditor. New Practice Aid. We ve added a new practice aid that can be used to document conclusions on compliance with independence requirements applicable to the engagement, including the identification of any threats to independence and safeguards that apply. Also, the form can be used to satisfy the documentation requirements pertaining to the understanding with the client of permissible nonattest services to be performed. Accounting Standards Update. Since the last edition of this Guide, the Financial Accounting Standards Board (FASB) has issued 14 new Accounting Standards Updates (ASUs). Where applicable, among other matters, your Guide has been updated For ASU No , Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. The standard provides private company lessees the option of not applying GAAP for VIEs to lessor entities that are under common control when certain criteria are met. To include a summary of the long anticipated ASU No , Revenue from Contracts with Customers (Topic 606), which was issued in May ASU introduces a core revenue principle that applies across all industries and revenue transactions. (Because of the extended effective date of ASU , a future edition of your Guide will be fully updated to further incorporate the applicable provisions of the new standard.) To consider the effect of ASU No , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern, on the auditor s assessment of the entity s ability to continue as a going concern. asbp15sub 1

2 For ASU , Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, which provides an accounting alternative to private companies to forego the separate recognition of certain identifiable intangible assets in a business combination. For ASU No , Income Statement Extraordinary and Unusual Items (Subtopic ): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which removes the concept of extraordinary items from GAAP. Comprehensive, Up to date Disclosure Checklist. The most effective way to ensure you have properly disclosed all of the required information in the financial statements you prepare is to use our comprehensive disclosure checklist. The disclosure checklist for nonpublic entities has been completely updated for the 14 ASUs issued since the last edition of your Guide. General 1. Changed references throughout the Guide, where applicable, due to the issuance of the AICPA revised Code of Professional Conduct. CHAPTER 1 Introduction and Overview CHAPTER 2 Pre engagement Activities 2. Made miscellaneous revisions, where applicable, to existing discussions on the use of internal auditors to reflect the issuance of SAS No. 128, Using the Work of Internal Auditors. 3. Made miscellaneous revisions due to the issuance of ASU , Income Statement Extraordinary and Unusual Items (Subtopic ): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. 4. Changed references from OCBOA to Special Purpose Framework. 5. Where necessary, changed references to the Documentation and Analysis of Group Components at ASB CX 3.5 that was previously numbered ASB CX Added a footnote explaining that the Guide does not address integrated engagements under AT Added a footnote and a discussion about the issuance of the AICPA revised Code of Professional Conduct. 3. Added a note discussing the AICPA s plan to change the reference to its Technical Questions and Answers section in the Technical Practice Aids. 4. Updated the list of professional standards recently issued or soon to be effective. 1. Updated discussions and added a footnote to reflect the issuance of the AICPA revised Code of Professional Conduct. 2. Discussed a new practice aid, ASB CX 1.2, that can be used to document conclusions on compliance with independence requirements applicable to the engagement and the understanding with the client about the performance of nonattest services. Paragraph , Paragraph Appendix 1A ,

3 CHAPTER 3 Risk Assessment and Planning CHAPTER 4 Assessing Risks and Developing the Detailed Audit Plan CHAPTER 5 Substantive 3. Revised Exhibit 2 4 and related discussion on the impact on independence of the performance of nonattest services. 4. Updated the discussion on proposing journal entries and preparing financial statements in connection with the audit. 5. Modified the discussion on the client signing the engagement letter. 6. Updated the engagement letter discussion on collection of fees and expenses relating to client litigation when the auditor is not a party. 7. Modified engagement letter discussions on arbitration and mediation. 1. Added AU C, 610, Using the Work of Internal Auditors, to the list of authoritative literature. 2. Where applicable, modified the exhibit and paragraphs to reflect amendments to AU C 315 and the issuance of SAS No In connection with inquiries of management and others, updated the discussion of the parties that might be interviewed. 4. Expanded the guidance on the engagement team discussion participants to discuss the roles of component auditors, specialists, and internal auditors. 5. Included a discussion about the updated AICPA Risk Assessment Audit Guide and its revisions for the 2013 COSO Framework. 6. Expanded the discussion on the consideration of the internal audit function. 7. Modified the guidance on quantifying planning materiality to discuss AU C In the discussion of materiality and benchmarks, added factors that might be considered. 9. In connection with planning materiality, modified the discussion on deciding whether to extend procedures. 1. Expanded the discussion on assertions for presentation and disclosure. 2. Modified the discussion on identifying risks of material misstatement. 3. Added a discussion regarding the evaluation of significant risks to determine whether the risk is pervasive or limited. 1. In the discussion on management refusing to allow external confirmations, noted that the results of alternative procedures can be included in the category of nonreplies on ASB CX Exhibit Paragraph Paragraph , Paragraph Exhibit 3 1; paragraphs , Paragraph , Paragraph Paragraph Paragraph Paragraph Paragraph Paragraph and

4 CHAPTER 6 Testing Internal Control CHAPTER 7 Sampling in an Audit Engagement CHAPTER 8 Audit Documentation CHAPTER 9 Special Audit Considerations CHAPTER 11 Accounts Receivable and Sales CHAPTER 12 Inventory and Cost of Sales 2. Updated the exhibit on selected sources of basic economic and industry data. 1. Added a footnote discussing the AICPA s plan to change the reference to its Technical Questions and Answers section in the Technical Practice Aids. 1. Updated the exhibit on tests of controls using audit sampling. 2. Made modifications to the exhibit to conform to updates in ASB CX Added a footnote discussing the issuance of ASU Updated the Appendix to reflect audit documentation requirements resulting from SAS No Updated the authoritative standards reference to AU C 610 and included a footnote due to the issuance of SAS No Added a footnote discussing the AICPA s plan to change the reference to its Technical Questions and Answers section in the Technical Practice Aids. Exhibit 5 7 Paragraph Exhibit 7 11 Exhibit 7 16 Paragraph Appendix 8A Paragraph Paragraph Made reference to a new letter at ASB CL Paragraph Provided additional clarifications to the discussions of component materiality. 5. Added a footnote discussing the AICPA s project to clarify the attestation standards and a recent proposed SSAE that would supersede AT , Paragraph Section has been thoroughly updated due to the Section 904 issuance of SAS No Updated exhibit for additional uses of DES in an audit. Exhibit Added a note discussing the issuance of ASU No. Paragraph , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. 1. Added a discussion and footnote on the issuance of ASU No , Revenue from Contracts with Customers (Topic 606). 2. Updated the discussion on the aged accounts receivable trial balance. 3. Added a note discussing the use of online confirmation services. 4. Expanded the discussion on the documentation of the analysis of collectability. 1. Added a footnote on the issuance of a proposed ASU, Inventory (Topic 330): Simplifying the Measurement of Inventory , Paragraph Paragraph Paragraph ,

5 CHAPTER 13 Property CHAPTER 14 Other Assets CHAPTER 15 Liabilities and Equity CHAPTER 16 Income Taxes CHAPTER 17 Income and Expenses CHAPTER 18 Concluding the Audit 1. Included a footnote on the current status of the FASB s leases project. 2. Included a footnote discussing the issuance of ASU No , Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. 1. Added footnotes on expected FASB ASUs in 2015 that would affect other assets. 2. Added a footnote and a discussion for the issuance of ASU No , Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. 3. Added a footnote and a discussion for the issuance of ASU No , Accounting for Certain Receive Variable, Pay Fixed Interest Rate Swaps Simplified Hedge Accounting Approach. 4. Added a footnote and discussion for ASU No , Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. 5. Added a footnote discussing the issuance of ASU No , Business Combinations (Topic 805): Pushdown Accounting. Paragraph Paragraph , , , , Paragraph Added a footnote on the issuance of ASU No Paragraph Included a footnote on the current status of the FASB s leases project. Paragraph Added a footnote for the issuance of ASU No Paragraph Added a discussion on the issuance of ASU No Added footnotes for the issuance of ASU No , Made revisions to exhibit. Exhibit Added a discussion or footnote discussing the issuance of ASU No , , Exhibit Modified the discussion on written representations Added a footnote discussing that financial statement Paragraph preparation is considered to be a nonattest service under the AICPA revised Code of Professional Conduct for engagements covering periods beginning on or after December 15,

6 CONFIRMATION AND CORRESPONDENCE LETTERS (ASB CL) Audit Engagement Letter 4. Added a discussion regarding the guidance in TIS , Management Representations Regarding Prior Periods Presented That were Audited by a Predecessor Auditor. 5. Modified the discussion regarding disclosures for related parties. 6. Modified the discussion on risk factors that may affect whether there is a reasonable possibility that a deficiency (or combination of deficiencies) in internal control will result in a misstatement. 7. Added a new practice issues section on control deficiencies. 8. Modified the discussion on the communication of the planned scope and timing of the audit due to the issuance of SAS No Expanded the discussion on the Engagement Summary Memorandum. 1. Updated the language in the letter regarding the preparation of the tax return and financial statements. Also, updated the letter for management s responsibilities for nonattest services (along with the associated note). Paragraph Paragraph Paragraph Paragraph Paragraph ASB CL Modified the language in the letter regarding fees. ASB CL Updated the note regarding the planned use of the ASB CL 1.1 work of the internal audit function or using internal audit personnel to provide direct assistance due to the issuance of SAS No For the note on the schedules and confirmations to be prepared by the client, added expanded language that can be used regarding client assistance. 5. For the note that discusses signing the engagement letter, added guidance when the auditor plans to use internal auditors to provide direct assistance. ASB CL 1.1 ASB CL 1.1 Engagement Letter 6. Modified the format of the inside address of the letter. ASB CL 1.2 Change Order Form Legal Letters 7. Modified the note referring to the ABA s website. ASB CL 2.1 Management Representation Letters 8. Added items to the practical consideration detailing additional representations that might be obtained. 9. For the practical consideration indicating the periods that representation letters should address, added guidance from TIS , Management Representations Regarding Prior Periods Presented That were Audited by a Predecessor Auditor. ASB CL 3.1, ASB CL 3.2 ASB CL 3.1, ASB CL 3.2 6

7 Internal Control Communications Communication with Those Charged with Governance Cash Confirmations and Letters Receivable Confirmations and Letters Investments and Securities Confirmations and Letters Inventory Confirmations and Letters Other Confirmations and Letters Group and Other Auditor Communications CHECKLISTS AND PRACTICE AIDS (ASB CX) Application of Practice Aids to Engagements Engagement Acceptance and Continuance Form 10. For the practical consideration that addresses when there is substantial doubt about the entity s ability to continue as a going concern, provided guidance due to the issuance of ASU No Amended a practical consideration to discuss the issuance of SSARS No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification. ASB CL 3.1,ASB C L 3.2 ASB CL Modified the inside address format of the letter. ASB CL 4.1, ASB CL 4.2, ASB CL Modified the letter to indicate the name of the engagement partner. 14. Added a practical consideration addressing the requirements of SAS No For the practical consideration on other matters required to be communicated by various auditing standards, noted the issuance of ASU No Modified the name of the letter to Receipt for Cash Observed by Auditor and modified the wording in the letter. ASB CL 5.1 ASB CL 5.1 ASB CL 5.2, ASB CL 5.3 ASB CL Provided additional instructions for the letter. ASB CL 7.1 through Modified the name of the letter to Receipt for Count of Securities Observed by Auditor and modified the wording in the letter. ASB CL Provided additional instructions for the letter. ASB CL Modified the instructions for the letter. ASB CL Added a practical consideration on adding a listing of identified related parties. 22. Add a reference to the new letter, ASB CL 14.9, to one of the practical considerations. 23. Added a new letter, Letter from Component Auditor to Group Auditor on Results of Work and Findings When Responsibility is Assumed. 1. Updated for the new practice aid added to the Guide and a checklist that was renumbered. 2. Added a factor to consider regarding various services that are now considered to be nonattest services. Made reference to a new practice aid at ASB CX Modified a factor to consider regarding the requirements of AU C and how the related procedures can be documented on ASB CX 1.2 ASB CL 12.4 ASB CL 14.4 ASB CL 14.9 ASB CX 0.1 ASB CX 1.1 ASB CX 1.1 7

8 Engagement Independence and Nonattest Services Documentation Form Financial Statement Materiality Worksheet for Planning Purposes Component Materiality Worksheet Understanding the Entity and Identifying Risks Engagement Team Discussion 4. Modified a factor to consider about concerns about management s integrity. 5. Added a factor to consider about situations where a going concern emphasis of matter has occurred or might be a possibility. 6. Added a factor to consider about whether individuals participating in the engagement are not properly licensed. 7. New form in this edition. (Replaces the previous ET Interpretation Documentation Form. ) ASB CX 1.1 ASB CX 1.1 ASB CX 1.1 ASB CX Made minor edits to terminology and wording. ASB CX Provided additional guidance in the instructions and to certain steps. 10. Modified instructions to note that additional documentation or forms may be necessary for identified components. 11. Added a step and practical considerations regarding the understanding of the internal audit function due to the issuance of SAS No Modified the instructions to emphasize that the discussion should include an exchange of ideas or brainstorming. 13. Added a practical consideration noting that the engagement team would not include external specialists and internal auditors. ASB CX 2.2 ASB CX 3.1 ASB CX 3.2 ASB CX 3.2 ASB CX Added an additional discussion item. ASB CX 3.2 Fraud Risk Inquiries Form 15. Provided additional guidance in the instructions. ASB CX Provided additional guidance in the practical considerations ASB CX 3.3 on whom to interview. Audit Inquiries Summary 17. Modified a step on related party transactions. ASB CX 3.4 Form Documentation and Analysis of Group Components 18. Renumbered form. Previously numbered ASB CX ASB CX 3.5 Understanding the Design and Implementation of Internal Control Financial Reporting System Documentation Form IT Environment and General Computer Controls 19. Expanded a practical consideration for the control environment to discuss independent outside directors. ASB CX Added additional minor clarifications. ASB CX

9 Activity and Entity level Control Forms Entity level Control Form for Risk Assessment Entity Risk Factors 21. Made minor edits and revisions to clarify the form and certain control objectives and controls. ASB CX 5 series 22. Moved several controls between principles. ASB CX Added an additional risk factor to consider and modified others. ASB CX 6.1 Fraud Risk Factors 24. Modified certain fraud factors to consider. ASB CX 6.2 Risk Assessment Summary Form Inherent Risk Assessment Form Test of Controls Form Confirmation Summary Form Checklist for Determining Whether a Contract is a Derivative Closing Entry and Audit Adjustment Form Audit Difference Evaluation Form Disclosure Checklist Going Concern Checklist Significant Estimates Identification Checklist Confirmation and Correspondence Control AUDIT PROGRAMS CORE (ASB AP) General Planning 25. Combined the Account Payable and Other Liabilities sections to be consistent with audit programs. 26. Expanded a note to emphasize that audit programs need to be tailored to address the nature, cause, and direction of potential misstatements at the relevant assertion level. 27. Combined the Account Payable and Other Liabilities sections to be consistent with audit programs. 28. Modified and added practical considerations on IT dependent controls and the use of inquiries. ASB CX 7.1 ASB CX 7.1 ASB CX 7.2 ASB CX Made minor formatting changes. ASB CX Added a practical consideration discussing the issuance of ASU No , Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. ASB CX Made formatting changes to the form. ASB CX Added additional qualitative factors in evaluating materiality. 33. Updated the checklist for disclosure requirements of recently issued professional accounting standards. 34. Modified instructions and practical considerations for the issuance of ASU No Added an additional item for the amortization of goodwill if the accounting alternative was elected. ASB CX 12.2 ASB CX 13 ASB CX 16.1 ASB CX Added new confirmation letter to the form. ASB CX Added practical considerations due to the issuance of SAS No Modified or added practical considerations to note that activities such as financial statement preparation, cash to accrual conversions, and reconciliations will be considered nonattest services for periods beginning on or after December 15, ASB AP 1 ASB AP 1, ASB AP 2 9

10 Other General Planning General Auditing and Completion Accounts Receivable and Sales Inventory and Cost of Sales Property Investments and Derivatives Income Taxes Income and Expenses 3. Added a practical consideration discussing the use of the new confirmation letter at ASB CL Added two new program topics as a result of the issuance of SAS No Added a practical consideration discussing the issuance of ASU No Added a practical consideration on the issuance of ASU Added a practical consideration discussing customer rebates and the program steps in the Other Audit section of ASB AP Added a practical consideration discussing PPC s Workpapers for Nonpublic Companies that includes an electronic Interim Receivables Rollforward worksheet. 9. Added a practical consideration discussing a proposed ASU, Inventory (Topic 330): Simplifying the Measurement of Inventory. 10. Added a PC discussing the issuance of ASU No , Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. 11. Added a practical consideration discussing the FASB s proposed ASU and tentative decisions on leases. 12. Modified a step for investments accounted for using the cost, equity, or consolidation methods. 13. Added a practical consideration for the issuance of ASU No Modified a step and added a practical consideration in the Business Combinations topic as a result of the issuance of ASU No Added and modified steps in the Interests in Variable Interest Entities topic due to the issuance of ASU No Modified a practical consideration discussing PPC s Workpapers for Nonpublic Companies. 17. Modified a sub step on the calculation of deferred taxes. 18. Added a practical consideration on the issuance of ASU ASB AP 1, Other General Planning ASB AP 1, Other General Planning ASB AP 2 ASB AP 4, Basic ASB AP 4, Basic ASB AP 4, Other ASB AP 5, Basic ASB AP 7, Basic ASB AP 7, Other ASB AP 8, Extended ASB AP 8, Other ASB AP 8, Other ASB AP 8, Other ASB AP 12, Basic ASB AP 12, Extended ASB AP 14, Basic 10

11 AUDIT PROGRAMS INITIAL AUDIT (ASB IA) Additional Audit for Investments and Derivatives Beginning Balance in Initial Audit INTERIM REVIEW PRACTICE AIDS (ASB IR) Audit Engagement Letter (Including Interim Reviews) Interim Review Program Interim Review Inquiries Checklist Misstatement Evaluation Form Interim Review Disclosure Requirements for Condensed Interim Financial Information of Nonpublic Companies Management Representation Letter Interim Review 19. Added a practical consideration discussing the issuance of ASU No Added practical considerations discussing the use of data extraction software. 1. Modified a step to clarify that it applies to investments accounted for using the cost, equity, or consolidation methods. 1. Revised the engagement letter and related practical considerations consistent with the core letter, adapted as necessary for an interim review. 2. Updated a step and added a practical consideration to reference the new independence compliance and nonattest services documentation form at ASB CX Added a practical consideration to discuss the issuance of ASU No Modified the instructions to note that responses to inquiries would be documented in a separate memo. 5. Added a practical consideration for the issuance of ASU No Modified the qualitative factors section, including the considerations for evaluating materiality. ASB AP 14, Basic ASB AP 14, Extended ASB IA 8 ASB IR 1 ASB IR 2 ASB IR 2 ASB IR 3 ASB IR 3 ASB IR 4 7. Updated the disclosure checklist. ASB IR 5 8. Revised the management representation letter and related practical considerations consistent with the core letter, adapted as necessary for an interim review. ASB IR 6 11