ASB corrects clarified auditing standard AU-C 920

The AICPA Auditing Standards Board (ASB) has made a correction to an auditing section in the AICPA Professional Standards to reinforce the board’s intentions not to change practice and to avoid unintended consequences.

The auditing (AU) sections were redrafted as part of the clarity project to reflect the ASB’s established clarity drafting conventions, and are designed to make the clarified standards easier to read, understand, and apply.

AU Section 634, Letters for Underwriters and Certain Other Requesting Parties, was redrafted and issued as AU-C Section 920, Letters for Underwriters and Certain Other Requesting Parties, in Statement on Auditing Standards No. 122, Clarification and Recodification.

When this redrafting occurred, the ASB did not intend to change or expand AU Section 634 in any significant respect.

The ASB believed that the substance of the last sentence in paragraph .42 of AU Section 634, “In the case of a business combination, the historical financial statements of each constituent part of the combined entity on which the pro forma financial information is based should be audited or reviewed,” had been appropriately captured in paragraph .53 of AU-C Section 920.

But to reinforce the ASB’s intention, the board has added the sentence in paragraph .53 of AU-C section 920. The following text illustrates the changes ( boldface italics denotes new language; deleted text is shown in strikethrough):

.53 The auditor should not provide negative assurance in a comfort letter on pro forma financial information, including negative assurance on

- the application of pro forma adjustments to historical amounts, 

- the compilation of pro forma financial information, or

- whether the pro forma financial information complies as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X³ [text of footnote omitted for purposes of this illustration] unless the auditor has obtained the required knowledge described in paragraph .52 and has performed

a. an audit of the annual financial statements, or

b. a review of the interim financial statements, in accordance with GAAS applicable to reviews of interim financial information,

of the interim financial information of the entity (or, in the case of a business combination, of a significant constituent part of the combined entity) to which the pro forma adjustments were applied. In the case of a business combination, the historical financial statements of each constituent part of the combined entity on which the pro forma financial information is based should be audited or reviewed. If these conditions are not met, the auditor is limited to reporting procedures performed and findings obtained. (Ref: par. .A59)

— Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.