T he ASB issued three statements on auditing standards this past winter.

New SASs Address Communications and Adjustments

SAS no. 90, Audit Committee Communications (December 1999).
The ASB issued SAS no. 90 (see Official Releases, page 103) to address concerns about audit committees’ oversight of corporate financial reporting. A “blue ribbon” panel, established by the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE), issued a February 1999 report that articulated these concerns and included recommendations on how to resolve them. The report can be viewed at .

One of the report’s recommendations was that GAAS require an outside auditor to discuss with a company’s audit committee his or her judgments about the quality, not just the acceptability, of the accounting principles applied in the company’s financial reports. Accordingly, SAS no. 90, which applies only to SEC engagements, requires the auditor to discuss these issues with the audit committee. SAS no. 90 amends SAS no. 61, Communication With Audit Committees.

This amendment is effective for financial statement audits for periods ending on or after December 15, 2000. Earlier application is permitted.

Another of the panel’s recommendations was that SAS no. 71, Interim Financial Information, require a reporting company’s outside auditor to discuss certain issues with the audit committee before the company files its form 10-Q and preferably before it publicly announces its financial results. Among the issues worthy of discussion, the panel said, are significant adjustments, management judgments and accounting estimates, significant new accounting policies and disagreements with management.

SAS no. 90 amends SAS no. 71 to provide for such review and discussion. This amendment is effective for reviews of interim financial information for periods ending on or after March 15, 2000. Earlier application is permitted.

SAS no. 89, Audit Adjustments (December 1999).

In a September 1998 address, SEC Chairman Arthur Levitt, Jr., called on regulators and standard setters, among others, to help improve corporate America’s financial reporting. One of the SEC’s concerns was that public companies were abusing materiality guidelines in order to manipulate their reported earnings.

For example, some companies inappropriately classified small amounts as immaterial, based solely on their size. When repeated, such abuses collectively assumed proportions that were significant to investors and other users of financial statements. The SEC argued, therefore, that individual items’ materiality should be evaluated on the basis of their nature as well as their size.

The ASB issued SAS no. 89 (see Official Releases, JofA , Feb.00, page 117) to provide guidance in this respect. It amends three earlier SASs: no. 83, Establishing an Understanding With the Client, no. 85, Management Representations and no. 61, Communication With Audit Committees.

The amendment to SAS no. 83 requires that from now on, in its engagement letter to the auditor, management must acknowledge its responsibility for correcting material misstatements in the financial statements. It also requires management to confirm, in the engagement letter, that any uncorrected misstatements are immaterial to the financial statements.

The amendment to SAS no. 85 requires the addition of an item to the representation letter, in which management again confirms that the effect of any uncorrected misstatements is immaterial. SAS no. 89 further strengthens the representation letter by stipulating that management must append to it a summary of all uncorrected misstatements.

The amendment to SAS no. 61 requires that the auditor inform the audit committee of misstatements management did not correct because it considered them immaterial to the financial statements.

SAS no. 89 is effective for audits of financial statements for periods beginning on or after December 15, 1999. Early adoption is permitted.

SAS no. 88, Audit Adjustments (December 1999).

SAS no. 88 (see Official Releases, JofA , Feb.00, page 115) addresses “housekeeping” issues for two unrelated topics.

Part 1 of SAS no. 88, “Service Organizations,” updates SAS no. 70, Reports on the Processing of Transactions by Service Organizations, with new terminology and theory to align it with changes in SAS no. 55, Consideration of Internal Control in a Financial Statement Audit, that were brought about by SAS no. 78, Consideration of Internal Control in a Financial Statement Audit: An Amendment to Statement on Auditing Standards no. 55.

SAS no. 70 addresses situations in which an outside auditor is auditing an entity that uses a service organization. The auditor must determine whether he or she needs a service auditor’s report to properly perform this type of audit.

The auditor can base his or her decision on the nature and materiality of transactions the service organization performs for the entity and on the degree of interaction between the entity and the service organization. If the entity’s records contain corroborative information about the service organization’s actions and their results, the auditor may be able, without a service auditor’s report, to determine whether that organization’s reports are accurate.

But if the entity’s records contain limited information about the service organization’s actions, the auditor may have to ask a service auditor to evaluate the accuracy of the organization’s reports.

Part 2 of SAS no. 88, “Reporting on Consistency,” amends AU section 420, Consistency of Application of Generally Accepted Accounting Principles (in AICPA Professional Standards ), to specify which changes in a reporting entity are significant enough for an auditor to add a consistency explanatory paragraph to his or her report.

The SAS took effect when it was issued.

ISB Issues Guidance on Mutual Fund Audits

T he Independence Standards Board (ISB) unanimously approved its second standard, which provides guidance on auditor independence and mutual fund clients.

Under the new standard, Certain Independence Implications of Audits of Mutual Funds and Related Entities (see Official Releases, page 104), an audit firm (and certain of its retirement plans), members of the audit engagement team and firm employees in a position to influence an audit are forbidden to make investments in the firm’s mutual fund clients, sister funds or related entities.

The new standard clearly defines the safeguards needed to ensure that partners and audit firm employees who have any responsibility for mutual fund audits are fully independent in reaching their professional judgments, said William T. Allen, ISB chairman.

Though tighter than the existing guidelines on auditor and audit firm independence, the standard is less restrictive in some ways. It permits partners and employees not involved in the audit to invest in a mutual fund client’s sister funds. For the first time, spouses and dependents of non-audit-engagement partners are allowed to invest in mutual fund audit clients through employee benefit plans at their companies.

The standard will be effective for audits of financial statements for periods beginning after June 15, 2000. The ISB has advised auditors that there are provisions of the new standard that conflict with previous guidance by the SEC and the AICPA. One example is the provision on spousal participation in employee benefit plans. According to the standard, auditors are required to comply with the more restrictive provisions of current SEC and AICPA guidance until either entity revises such guidance.

The AICPA has assembled a task force to consider changing its existing guidance on the subject. Scott Bayless, associate chief accountant at the SEC said, “The SEC will consider whether changes to our guidance will be necessary.”


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