The International Federation of Accountants is seeking responses to a proposed international auditing statement that will provide practical assistance to auditors in applying international standards when they audit commercial banks.

Special considerations arise in bank audits because of the nature of the risks associated with bank transactions, the banks’ dependence on computerized systems and the effects of regulations in the varied jurisdictions in which they operate. The exposure draft (ED), The Audit of International Commercial Banks, emphasizes matters that are peculiar to, or of particular importance in, an audit and includes examples of typical internal control and substantive audit procedures for a bank’s lending and treasury operations.

The proposed guidance also illustrates financial ratios commonly used in analyzing a bank’s financial condition and performance; risks and issues in securities operations, private banking and asset management; and warning signs of fraud.

According to Dietz Mertin, chairman of the international auditing practices committee, the ED defines the auditor’s role in bank audits and examines the special reporting relationships between auditors and bank supervisory staff and regulatory authorities.

Comments on the ED, which may be downloaded from www.ifac.org, are due January 31.

Guidance provided to government accountants

In September IFAC issued a study intended to help government financial aid officers and accountants develop and implement cost accounting in a government environment.

Perspectives on Cost Accounting for Governments describes the extent of government uses of, and the impact of accounting standards on values used in, cost accounting and explains how cost concepts can be employed to achieve management objectives.

While in the past cost accounting was viewed as a simple mechanical process for which the accountant was wholly responsible, today it is considered a useful tool for providing information to senior managers for their decision making.

Ian Mackintosh, IFAC public sector committee chairman, points out that the guidance was necessary because “although great similarities exist between the public and private sectors, a number of governmental cost accounting issues have not been dealt with comprehensively in the current literature.”

For more detailed information, go to www.ifac.org.

The new guidance applies to

Derivative instruments as defined in FASB statement no. 133, Accounting for Derivative Instruments and Hedging Activities.

Hedging activities in which the entity designates a derivative or a nonderivative financial instrument as a hedge of exposure for which FASB statement no. 133 permits hedge accounting.

Debt and equity securities as defined in FASB statement no. 115, Accounting for Certain Investments in Debt and Equity Securities.

Judith M. Sherinsky, CPA, a technical manager with the AICPA auditing standards division, said it was issued because of changes in accounting standards related to the SAS. “The issuance of FASB Statement no. 133, as well as the explosion in the number and types of hedging activities and derivative instruments, created the need for revised auditing guidance in this area,” she said.

Sherinsky added that the guidance will help practitioners who, with limited knowledge of derivatives and hedging, may be asked by their clients to audit financial statements containing assertions about such products. Derivatives can be difficult to identify, especially if embedded in a contract or agreement. “If auditors do not have the necessary expertise,” she said, “they may have to develop it, consult a specialist or perhaps decline such engagements.”

Applying the concept of fair value, which the accounting literature increasingly supports as a means of measuring financial instruments, further complicates auditors’ work in this context, said Stephen D. Holton, CPA, a partner of Martin, Dolan & Holton in Glen Allen, Virginia, and chairman of the task force that created SAS no. 92. He explained how the new standard addressed this issue.

“Since management has to identify and properly account for all its derivatives, doing so on the basis of fair value can be complicated. For example, if you have a derivative that is measured by estimating future cash flows and then discounting them back to present value, you have to decide what rate to use, and that is a subjective determination,” he said. “So, in SAS no. 92, we combined SAS no. 81’s fair value guidance with new information on how to audit derivatives and hedging activities.”

The task force devoted a significant part of SAS no. 92 to defining and illustrating two types of risk auditors must be able to assess.

The SAS provides examples of factors that affect inherent risk—the susceptibility of an assertion to a material misstatement, assuming there are no related controls. For example, the complexity of a derivative or security or the reporting entity’s inexperience with it could increase the inherent risk of material misstatements about such products in the entity’s financial statements.

Control risk—the chance that an entity’s internal control will not prevent or detect on a timely basis a material misstatement that could occur in an assertion—receives equal attention in SAS no. 92. Among the SAS’s examples of factors that could affect control risk are monitoring by a control staff not involved in derivatives activity and the review, by senior management, of any divergence from approved derivative strategies.

To assist auditors in implementing SAS no. 92, the task force soon will issue an audit guide (product code 012520) that can be obtained by calling 888-777-7077.

Holton acknowledged that smaller auditing firms probably wouldn’t encounter the most complex derivatives on their engagements. “They are more likely to see interest-rate swaps,” he said, adding that “they will have the information they need if they focus on FASB statement no. 133, on issues discussed by FASB’s derivatives implementation group, on the AICPA audit guide for SAS no. 92 and on the SAS itself.”

SAS no. 92 is effective for audits of financial statements for fiscal years ending on or after June 30, 2001. Early application is permitted.

 

Faced with a turbulent stock market, rising energy prices and other signs of an economy in flux, Americans are increasingly worried about their finances. And though individual investors admit to financial planners’ expertise, few consult one. So says a new survey the AICPA commissioned to better understand how Americans manage their money.

The survey, “Report on America’s Financial Health,” was conducted by Harris Interactive, an Internet-based market research firm, for the AICPA personal financial specialist examination committee in September and October of 2000. It polled 636 Americans ages 18 to over 55 with annual income of more than $75,000.

Almost all respondents (91%) said they manage their finances themselves—doing their own research and obtaining advice from family, friends, the Internet or a broker. CPA/PFS practitioners may see potential market opportunities in this and the survey’s other findings.

For example, the survey revealed that almost three out of every four respondents (71%) have been thinking more about their finances in the last two years. But only 20% thought they were “very prepared” for retirement. Others were uncertain about their financial future; 81% were not sure their investments were earning as much as possible and 57% were not certain they knew how to minimize their taxes through proper planning.

The survey also revealed that even individuals who felt confident about their money management skills may have been off the mark. More than half of those who believed they were maximizing savings and earnings felt this way because they had personally researched their mutual funds, understood how much investment risk they should take, had a short-term savings plan or owned real estate.

But almost 90% of the respondents lost money in the last five years because of quick decisions they made about financial matters without talking to a financial planner.

Why didn’t more of these investors consult one? Most sought professional advice in special situations rather than as a matter of overall strategy. For example, respondents said they would contact a financial planner if they inherited a substantial sum, wanted to plan for retirement, needed estate planning advice, wanted to roll over 401(k) or IRA funds or were confused by changing tax laws.

But when it came to choosing an adviser, respondents said they considered a designation particularly significant, and nearly 40% viewed the CPA/PFS credential as the most important indicator of financial planning competence.

Withdrawal of SAS no. 75, Engagements to Apply Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement. Since 1975 the guidance for performing agreed-upon procedures engagements has resided in two places within the AICPA’s professional literature: the attestation standards and SAS no. 75. The ASB originally issued SAS no. 75 because a written assertion—until recently a condition for engagement performance under the attestation standards—was not necessary in engagements to apply agreed-upon procedures to specified elements, accounts or items of a financial statement.

Since then, the ASB approved issuance of SSAE no. 10, Attestation Standards: Revision and Recodification, which, among other things, removes the requirement for a written assertion for performing attestation engagements including agreed-upon procedures engagements. Therefore, SAS no. 75 is no longer necessary, and the ASB has withdrawn it as well as the related auditing interpretation.

The guidance in SSAE no. 10 relating to agreed-upon procedures engagements is effective when the subject matter or assertion is as of, or for a period ending on or after, June 1, 2001. Earlier application is permitted. The withdrawal of SAS no. 75 is concurrent with the effective date of SSAE no. 10.

Amendment to SAS no. 58, Reports on Audited Financial Statements. Due to the increasing availability on the Internet of audited financial statements, users need to know which jurisdiction’s principles or standards a company observed when it prepared those statements or had them audited.

The amendment to SAS no. 58 therefore specifies that the auditor’s report should indicate which country’s accounting principles and auditing standards were used to prepare the financial statements and audit them.

This amendment is effective for reports that are issued or reissued on or after June 30, 2001. Earlier application is permitted.

Amendment to SAS no. 84, Communications Between Predecessor and Successor Auditors. This SAS did not specifically address situations in which an auditor is engaged to perform a first-year audit but does not complete the audit. The amendment therefore clarifies SAS no. 84 to include within its definition of “predecessor auditor” any auditor who is engaged to perform an audit but does not complete it.

This amendment is effective for audits of financial statements for periods ending on or after June 30, 2001. Earlier application is permitted.

In late November AcSEC issued an exposure draft (ED) of a statement of position (SOP), Accounting for Investors’ Interests in Unconsolidated Real Estate Investments. The proposed SOP would supersede SOP 78-9, Accounting for Investments in Real Estate Ventures and provide guidance on accounting, according to GAAP, for investors’ interests in unconsolidated real estate investments. It focuses on who should apply equity method accounting to unconsolidated real estate investments and how they should apply it. The ED’s equity-method approach uses a balance-sheet-based methodology known as “hypothetical liquidation at book value.”

Since SOP 78-9 has been broadly applied to sectors other than real estate, AcSEC is particularly interested in feedback from practitioners familiar with accounting for investors’ interests in those areas.

The committee specifically requests comments on the following issues addressed in the ED:

When to use the equity method.

How to apply the equity method in several different contexts.

Other matters that are related to equity accounting.

The effective date and transition requirements for the proposed SOP.

If approved, the SOP would be effective for fiscal years beginning after December 15, 2001, with earlier adoption encouraged. Until April 15, 2001, AcSEC will accept comments on the ED, which is available on the Web at www.aicpa.org/members/div/acctstd/edo/reexsum.htm.