A conversation with the ASB.
ver the past several
years the Sarbanes-Oxley Act and other events have
dramatically affected the setting of auditing
standards and the focus of the audit process.
While the act requires auditors of public
companies—the issuers—to follow the Public Company
Accounting Oversight Board’s (PCAOB) auditing
standards, generally accepted auditing standards
(GAAS) issued by the AICPA’s Auditing Standards
Board (ASB) apply to all audits of
non-SEC-registered entities—nonissuers. To explain
how this altered environment and the ASB’s new
role affect auditors, their clients and financial
statement users, the JofA interviewed
John A. Fogarty, ASB chairman, and Harold L. Monk,
vice-chairman, and Chuck Landes, AICPA
vice-president and director of the audit and
attest standards team. (For another perspective on
how GAAS and PCAOB auditing standards can affect
CPA firms, see “ Stay Out of Trouble, ”
JofA , Aug.05, page 67.)
JofA : The ASB achieved
several important things at its October 2005
meeting. What were they?
Chuck Landes : The recently
reorganized ASB approved 10 new auditing
standards, a new attestation standard and an
attestation exposure draft (ED). The auditing
standards include a documentation standard, a
suite of eight risk assessment standards and a
standard that defines professional requirements in
statements on auditing standards and statements on
standards for attestation engagements.
JofA : Would you describe
the reorganization of the ASB?
Landes : Several years ago, the
AICPA’s board of directors and council approved
increasing the ASB’s membership to 19 from 15 to
better represent our constituency, which includes
small and large firms, educators, the state boards
of accountancy, the government community, other
federal and state regulators, private investors
and other users of nonissuer financial statements,
whose support the ASB needs to effectively serve
private business and government entities.
JofA : How will the ASB
fulfill its mission?
John
Fogarty : The ASB is responsible
for developing and communicating comprehensive
performance, reporting and quality control
standards and practice guidance that enable
auditors of nonissuers to provide high-quality,
objective audit and attestation services at a
reasonable cost. The ASB must act in the best
interests of the profession, clients, employers
and the public by improving existing standards and
facilitating the development of new ones.
The board will continue its leadership role in
the development of auditing guidance, such as its
risk assessment standards, while working more
closely than ever with regulators and external
stakeholders. It will do this by
Acting as the profession’s voice on
auditing standards related to audits of nonissuers
and when commenting on the proposed standards of
other auditing standard setters, such as the
International Auditing and Assurance Standards
Board (IAASB).
Serving as the profession’s “think
tank” on the strategic direction of auditing
standards.
Helping rebuild public trust in the
CPA’s audit report.
Commissioning research to
continuously improve the auditing profession.
Addressing the assurance needs of
users of nonissuers’ financial statements.
Promulgating audit, attest and
quality control standards for engagements
involving nonissuers.
Issuing clear authoritative guidance
for auditors of nonissuers.
Working with the AICPA staff to
develop nonauthoritative guidance for
practitioners.
JofA : Now that there are
multiple standard setters, whose standards are
CPAs required to follow?
Harold Monk : The creation of the
PCAOB necessitated changes in the AICPA Code of
Professional Conduct. The code requires members
who perform audits and other professional services
to comply with the standards promulgated by bodies
designated by the AICPA council. In spring 2004,
the council
Amended the ASB’s current designation
to recognize it as a body with the authority to
promulgate auditing, attestation and quality
control standards related to the preparation and
issuance of audit reports for nonissuers.
Designated the PCAOB as a body with
the authority to promulgate auditing standards as
well as attestation, quality control, ethics,
independence and other standards related to the
preparation and issuance of audit reports for
issuers. If a nonissuer requests that a
CPA perform an audit following PCAOB auditing
standards, the auditor must follow both ASB
auditing standards and all applicable PCAOB
auditing standards.
JofA : Has the ASB issued
any guidance on how companies should report under
these new circumstances?
Fogarty : Yes. In June 2004 the
ASB issued two interpretations of Statement on
Auditing Standards (SAS) no. 58, Reports on
Audited Financial Statements (AU section
508 of AICPA Professional Standards ).
Interpretation no. 17, “Clarification in the Audit
Report of the Extent of Testing of Internal
Control Over Financial Reporting in Accordance
With Generally Accepted Auditing Standards,”
provides illustrative language for use in the
auditor’s report to clarify that an audit
performed in accordance with GAAS does not require
the same level of testing and reporting on
internal control over financial reporting as an
audit of an issuer to which section 404(a) of the
Sarbanes-Oxley Act applies. Interpretation no. 18,
“Reference to PCAOB Standards in an Audit Report
on a Nonissuer,” clarifies the applicability of
GAAS and provides illustrative language for a
dual-reference reporting situation in which an
audit has been conducted in accordance with GAAS
as well as with the auditing standards of the
PCAOB. These interpretations are available at
www.aicpa.org/members/div/auditstd/announce/index.htm
. This dual reporting model is similar
to what the ASB adopted when auditing financial
statements in accordance with generally accepted
government auditing standards (GAGAS, or the
Yellow Book) and the international standards on
auditing (ISAs). This conclusion is based on
recognition of SASs as the standards the AICPA
council has designated as appropriate for audits
of nonissuers’ financial statements.
JofA : What issues should
a firm consider if asked to report under both ASB
and PCAOB standards?
Monk : When a nonissuer’s
financial statements have been audited in
accordance with GAAS and PCAOB auditing standards,
users of the auditor’s report may erroneously
believe the entity and the auditor are in
compliance with the entire system of PCAOB and SEC
regulations—that is, quality control, ethics and
independence standards. Such users also may
incorrectly assume that the CPA firm that
performed the engagement is registered with the
PCAOB and subject to its inspection and
enforcement structure. These potential
misconceptions make it absolutely essential that
auditors ensure clients clearly understand PCAOB
and ASB requirements. Firms also should bear in
mind that audits that undergo peer review and are
found not in compliance with all PCAOB auditing
standards may be deemed substandard
engagements—depending upon the severity of the
deficiencies—even if they comply with all AICPA
auditing standards.
JofA : Has the ASB agenda
grown?
Landes : The ASB is working on
more projects than at any time in nearly five
years. Among them are an exposure draft (ED) on
communicating internal control deficiencies noted
during an audit, a companion ED on examining the
effectiveness of internal control over financial
reporting and guidance on auditor reports and
compliance auditing considerations related to
government entities. Other ASB projects address
auditing accounting estimates, auditing related
parties, group audits, auditor communications with
those responsible for governance and revisions to
the AICPA’s quality control standards. More
information on these projects is available in the
AICPA auditing standards staff’s quarterly
newsletter, In Our Opinion (
www.aicpa.org/members/div/auditstd/opinion/index.htm
).
JofA : How does the ASB
intend to monitor the work of other standard
setters?
Fogarty : In its words and
actions, the ASB has been very clear it doesn’t
intend to create gratuitous differences between
its standards and those of the PCAOB. In order to
help coordinate agendas among the ASB, the PCAOB
and the GAO, the chairs of each of these standard
setters and their staffs meet at least three times
a year. The most recent was in December 2005, with
the GAO as host. These meetings provide a valuable
forum for discussing projects, timetables and
goals. In addition to monitoring PCAOB standards
and working closely with the GAO, the ASB is
collaborating with the IAASB to harmonize ASB
standards and ISAs wherever possible.
JofA : Is it important for
U.S. auditors—especially those from smaller
firms—to stay abreast of developments that are
related to ISAs?
Monk : Absolutely. As
international standards in audit and attest
services gain worldwide acceptance in cross-border
operations and financing, U.S. CPAs, including
small firm practitioners, will have to become
familiar with ISAs in order to perform engagements
in accordance with international standards or
equivalent national standards. For many
years the AICPA has been a leader in financial
reporting and assurance. It must continue to
support its members and the accountancy profession
worldwide through its standard-setting process,
educational programs and public relations. It also
must increase members’ understanding of the
international standard-setting process, the body
of international auditing standards and
implementation issues.
JofA : How have
international activities affected the ASB’s work?
Fogarty : In many parts of the
world, as in the United States, auditors from
firms of all sizes use international auditing
standards that serve the public interest and
improve the transparency of cross-border financial
reporting. But creating such guidance requires
cooperation among national and international
standard-setting bodies. To that end, ASB task
force and subcommittee members serve as
representatives to the IAASB. For example,
I’m the AICPA member on the IAASB, and Harold Monk
serves on another international committee, which
focuses on small company auditing issues. Other
ASB members serve on numerous international
projects and subcommittees, and we all review and
comment on proposed international audit standards
and help the IAASB identify emerging national
issues with international implications. To
speed our evaluations and commentary on
international auditing proposals, we’ve aligned
the ASB’s agenda with that of the IAASB, and we’re
matching the board’s standard-setting process and
body of knowledge with their international
counterparts. At the same time, we’re carefully
ensuring the ASB retains its ability to develop
auditing, attestation and quality control
standards that serve U.S. auditors of nonissuers
and inspire public trust.
JofA : Is there anything
else you want to emphasize here to JofA
readers?
Monk : It’s important that
practitioners share with us their thoughts on ASB
exposure drafts. We take each comment letter
seriously and aim to be particularly responsive to
those that seek to improve the quality of our
standards. We also want members—especially
smaller firms—to understand they will not be
affected by changes made to align ASB and
international standards. The ASB will continue to
issue statements on auditing standards (SASs), and
the AICPA will continue to publish the
codification of auditing standards. This guidance
will continue to govern audits of nonissuers.
JofA : How can members
best stay informed about these different standards
and the ASB’s projects and activities?
Landes : The AICPA’s auditing
standards are posted on its Web site (
www.aicpa.org/members/ ) and are updated
each June. In addition the Institute has developed
publications to provide practitioners with
standards applicable to both nonissuers and
issuers. Codification of Statements on
Auditing Standards provides GAAS standards
applicable to audits of nonissuers and identifies
differences between GAAS and PCAOB standards. The
new PCAOB Standards and Related Rules contains
applicable guidance from the PCAOB.
Members also should frequently visit the Web
page of the AICPA audit and attest standards team
(
www.aicpa.org/members/div/auditstd/index.htm
), which contains its quarterly newsletter,
the ASB’s agendas and materials, and the
highlights of ASB meetings.
|
AICPA
RESOURCES
CPE
Annual Accounting
and Auditing Update Workshop
(2005 edition) (text, #
736181JA; DVD, # 187189JA;
VHS, # 187089JA).
Annual Update for
Accountants and Auditors
(2005–2006 edition) (text, #
730024JA).
Auditing Update:
A Review of Recent Activities
(2005 edition) (text, #
732771JA).
Publications
AICPA
Professional Standards
(# 005104JA).
Codification
of Statements on Auditing
Standards (# 057194JA)
provides GAAS standards
applicable to nonissuers.
PCAOB
Standards and Related Rules
(Including Select
SEC-Approved PCAOB Releases
and Staff Guidance) (#
057195JA). These
products can be ordered online
at
www.cpa2biz.com or by
phone at 888-777-7077.
Web sites
The AICPA audit
team’s Web page (
www.aicpa.org/members/div/auditstd/index.htm
) contains its quarterly
newsletter as well as ASB
agendas and materials and
highlights of ASB meetings. It
also provides members, free of
charge, content such as
• Authoritative standards
for auditors of nonissuers,
http://www.aicpa.org/members/div/auditstd/authoritative_AICPA_and_Attest_Standards.htm
. • Recently
issued audit and attest
interpretations,
www.aicpa.org/members/div/auditstd/announce/index.htm
. • Auditing
Standards Board exposure
drafts,
www.aicpa.org/members/div/auditstd/2005_02_28_prof_req.asp.
Members who
audit, or are interested in
auditing, public companies
should visit the AICPA Center
for Public Company Audit Firms
(www.aicpa.org/cpcaf), a
voluntary membership
organization established to
promote high-quality public
company audits.
OTHER RESOURCES
PCAOB auditing
and related attestation,
quality control, ethics and
independence standards and
rules. Available free of
charge at
www.pcaobus.org/standards/index.asp
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