ASB Meeting January 14-17, Auditor Reporting AU-C 800 Series Discussion Memo and Issues

Transcription

1 ASB Meeting January 14-17, 2019 Agenda Item 6 Auditor Reporting AU-C 800 Series Discussion Memo and Issues Objectives for the January 2019 ASB Meeting To discuss drafts of the following AU-C sections, which are marked from the corresponding extant AU-C sections: AU-C section 800, Considerations Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks AU-C section 805, Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement AU-C section 810, Engagements to Report on Summary Financial Statements In addition, the ASB will discuss certain concerns about compliance frameworks raised by the GASB during the liaison meeting in September 2018 and by an ASB member at the October 2018 ASB meeting. Task Force The Auditor Reporting (800 series) Task Force members are: Dan Montgomery (Chair) Frank Crawford Audra Harrington Jan Herringer Susan Jones Richard Miller Jeffrey Rapaglia Rick Reisig Mike Westervelt (TIC) Background As a result of the 2015 issuance by the International Auditing and Assurance Standards Board (IAASB) of new and revised international standards on auditing (ISAs) related to reporting on Prepared by: Judith Sherinsky (December 2018) Page 1 of 5

2 audited financial statements, the IAASB made limited amendments to the ISA 800 series of auditing standards, which includes ISA 800 (Revised), ISA 805 (Revised), Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement, and ISA 810 (Revised), Engagements to Report on Summary Financial Statements (ISA 800 series). Rather than converging with the changes the IAASB made to the ISA 800 series at that time, the ASB concluded that it would reconsider the necessary revisions to the AU-C 800 series after the issuance of its exposure draft on auditor reporting, which occurred in November The ASB s intention is to issue a separate exposure draft in 2019 and align the effective dates of the revised AU-C 800 series with those of the final auditor reporting (AU-C 700) sections. Proposed Revisions to AU-C 800, 805, and 810 Agenda Items 6A, 6B and 6C show the Auditor Reporting Task Force s proposed revisions to AU-C 800, 805 and 810, respectively. In addition to the marked changes, these documents include a number of comments and questions for the ASB s consideration. The Task Force is providing a marked illustrative report for AU-C 800 and 805 for the ASB s reference during the discussion. An illustrative report on summary financial statements from extant AU-C 810 is being provided for reference purposes only, as this will be the first discussion on the proposed revisions to that standard. A complete package of illustrative reports will be provided to the ASB for discussion at the May 2019 meeting, at which time the ASB will be asked to vote to expose proposed revisions to AU-C 800, 805 and 810. Matters for the ASB: The ASB is asked to provide input on the Task Force s proposed revisions to AU-C 800, 805, and 810. ASB members also are asked to consider the comments and questions included in Agenda Items 6A, 6B and 6C and will be asked for its views in connection with the walkthrough of the proposed SASs. Fair Presentation vs. Compliance Frameworks At its January 2018 meeting, the ASB concluded that AU-C 800 should recognize and incorporate the concept of a compliance framework. Extant AU-C section 800 assumes that all special purpose frameworks (cash, tax, regulatory, contractual and other bases) are fair presentation frameworks. The presumption in a fair presentation framework is that in certain circumstances it may be necessary for management to provide disclosures in addition to those required by the applicable financial reporting framework. In contrast, a compliance framework only requires compliance with the requirements of the framework and does not require additional disclosures. 2 The exposure draft was issued on November 28, 2017 and can be accessed at c-ed-auditor-reporting.pdf Agenda Item 6 Page 2 of 5

3 The following is the definition of the term financial reporting framework included in paragraph.14 of AU-C section 200: A set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements; for example, U.S. generally accepted accounting principles, International Financial Reporting Standards (IFRSs) promulgated by the International Accounting Standards Board (IASB), or a special purpose framework. The term fair presentation framework refers to a financial reporting framework that requires compliance with the requirements of the framework and a. acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or b. acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in rare circumstances. The term compliance framework is used to refer to A a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgments in (a) or (b) above is not a fair presentation framework. [Note: the revisions shown to the paragraph above would be needed to make the definition of financial reporting framework in AU-C 200 consistent with the definition in the ISAs.] Previous ASB Discussions Although the ASB supports the introduction of the concept of a compliance framework in AU-C 800, questions and concerns have been raised during the various board discussions about the applicability and acceptability of certain compliance frameworks, whether additional disclosures would be needed when the special purpose financial statements are prepared in accordance with a compliance framework, and the implications for the auditor s report. During the October 2018 ASB discussion, a board member raised the following questions about compliance frameworks: Because there is no history in the U.S. of a compliance framework, what are the criteria for making the determination of whether a framework is a compliance framework? Whose responsibility is it to determine the framework management or the auditor? What if the auditor is engaged to perform an audit of financial statements prepared under a compliance framework that differs from an established framework, but is otherwise required by a regulator (and therefore deemed by management to be an acceptable framework)? Aren t some compliance frameworks essentially GAAP-minus? The ASB also suggested in previous discussions that it would be helpful to identify attributes to assist auditors in determining whether a particular framework is a compliance framework or a Agenda Item 6 Page 3 of 5

4 fair presentation framework. The Task Force discussed various attributes and found that the factors that are relevant to the auditor s determination of the acceptability of the financial reporting framework to be applied in the preparation of the financial statements, as discussed in paragraph.a4 of AU-C 210, also would be helpful in determining whether a framework is a fair presentation or compliance framework. The task force recognizes that additional factors may be needed that are specific to compliance frameworks, but believes that the factors in paragraph.a4 are an appropriate starting point. With respect to the auditor s report, the task force noted that the different wording for the auditor s opinion for financial statements prepared in accordance with a compliance framework also helps to inform users that this is different from a fair presentation (see paragraph.20a in Agenda Item 6A) In addition, the task force believes that it is important for the auditor s report to appropriately identify the special purpose framework used, and to indicate that the framework is not GAAP. Additional caveat wording could be included in the auditor s report if considered necessary to alert users that the framework is not GAAP, or to describe significant differences from GAAP. On balance, the task force believes that the concerns about compliance frameworks are best addressed through 1) requirements and guidance in AU-C 210 regarding the acceptability of the framework used to prepare the financial statements and 2) the wording of the auditor s report, including the health warning that the framework used is a basis of accounting other than GAAP (see paragraph.21 in Agenda Item 6A) and a restriction on use when required or determined to be appropriate by the auditor (see paragraph.22 in Agenda Item 6A). Input From Affected Parties During the liaison meeting with the GASB in September 2018, concerns were expressed that introducing the concept of a compliance framework and eliminating the dual opinion (i.e., fairly presented in accordance with the regulatory framework but adverse to GAAP) would incentivize state or local governments to create regulatory frameworks to achieve a specific financial statement outcome. An example is a state government that establishes a special purpose framework that is the same as GAAP but omits the requirement to record a liability for other postemployment benefits, thereby enabling the governmental entity to avoid a deficiency in revenue over expenditures. Separately, in a meeting with the AICPA State and Local Government Expert Panel, the GASB chairman and lead staff emphasized their concerns on this topic. As noted during the October 2018 ASB meeting, in a letter to Chuck Landes, Scott Woelfle of the Office of the Washington State Auditor, expressed support for the ASB s tentative conclusions to converge with ISA 800 and eliminate the dual opinion for regulatory basis financial statements intended for general use. His office believes that the dual opinion creates confusion for management, legislative bodies, citizens and other report users. In a follow up communication, Mr. Woelfle and others indicate that they would welcome the opportunity to meet with the task force and further discuss situations in which the regulatory basis of accounting is used. He also suggested that getting input from other members of the National Association of State Auditors, Comptrollers, and Treasurers would be beneficial. Agenda Item 6 Page 4 of 5

5 Examples of other affected parties are insurance entities, state insurance regulators, and CPAs who audit and report on the financial statements of insurance entities. In conversations with the staff and chair of the AICPA NAIC 3 Task Force, representatives of CPA firms and insurance entities had a positive reaction to the proposal to move away from the dual opinion to a single compliance-type opinion. The NAIC Task Force is waiting to obtain additional input from insurance regulators until the ASB has decided on the direction it will take with regard to dual opinions. Plan for the January ASB meeting discussion In view of the questions and concerns about compliance frameworks as described above, Mr. Montgomery plans to use a slide presentation to lead a discussion about some of the fundamental aspects of fair presentation vs. compliance frameworks, how the task force has considered these matters (including the questions raised by the board member as noted above), and how some of these matters are addressed in the draft of AU-C 800. This will be done prior to the walkthrough of the proposed changes to AU-C 800. The task force is seeking specific input and direction from ASB members so that the proposed revisions to AU-C 800 appropriately address the concerns that have been raised. The task force also recognizes that the concept of compliance frameworks will need to be explained in the wrap document for the 800 series exposure draft, and that there will be an opportunity to seek input from stakeholders through specific questions. 3 National Association of Insurance Commissioners. Agenda Item 6 Page 5 of 5