A&A Focus recap: ASB update, technology spotlight, AR-C Section 70, and CECL

The second A&A Focus newscast took place in February, following up the series’ January launch as a monthly live series dedicated to providing practitioners with the latest news in accounting, auditing, assurance, and financial reporting.

The February event, which drew more than 2,300 attendees, featured experts providing insights and tips for auditors across a range of issues. Co-hosts Carl Mayes, CPA, vice president–Audit & Accounting Quality at the AICPA, and Robert Durak, CPA, CGMA, director–A&A Technical Services at the AICPA, covered issues including:

• Proposed changes to the employee retention credit, including the disallowment of additional claims as of Jan. 31, 2024;
• The PCAOB’s release of deficiencies in audits of broker-dealer annual reports in its interim inspection program;
• A review by the International Federation of Accountants (IFAC) highlighting key themes in current sustainability-related education, learning, and development;
• GASB issuance of new guidance for governments that expands risk-related reporting requirements related to certain concentrations and constraints;
• Tougher rules the SEC imposed recently to enhance investor protections relating to SPACs, shell companies, projections, and more.

A&A Focus featured four expert guests: Sara Lord, CPA, chief auditor for RSM US LLP and ASB chair; Sara Watson, CPA, director in the professional standards group in the Charlotte, N.C., office of FORVIS, LLP; Mike Cheng, national practice partner at Frazier & Deeter; and Mike Westervelt, CPA, principal with CLA and chair of the AICPA Accounting and Review Service Committee.

ASB update

Lord provided an update on the early February Auditing Standards Board (ASB) meeting. After noting that the board meetings are public and livestreamed, Lord recounted that the board reviewed comment letters it had received on its attestation standard exposure draft. The board had a robust discussion and reviewed other feedback received on the exposure draft, which was released to make amendments and updates due to the Statement on Quality Management Standards approved in 2023. The board discussed the possibility of additional clarifying changes.

The ASB also had a liaison meeting with representatives from the International Ethics Standards Board for Accountants (IESBA) to discuss the boards’ agendas. Lord noted that the ASB has an ongoing collaboration with IESBA to ensure there is alignment from a standard-setting perspective as well as to provide input and protect the interests of U.S.-based practitioners.

Lord also highlighted the varying work being undertaken by the ASB’s task forces. From sustainability to technology, the ASB has several task forces diving deeper into areas where the board may enhance guidance or provide additional standard setting.

A&A Focus intends to have Lord or another representative of the ASB return after each board meeting to keep participants up to date on the activities underway.

Technology in action

The audience participated in a poll designed to capture the factors that most impede the use of technology in audits. The majority of the participants who perform audits noted that a lack of firm training and infrastructure and overall costs were the largest barriers to adopting technology in their audits.

Mayes inquired why the use of emerging technology should be at the forefront of practitioners’ minds going into 2024. Watson responded that technology that helps to increase audit quality and reduce the potential for human error is always a win. Quality is always top of mind.

Also, technology improves efficiency by allowing practitioners to do an audit in less time with cost and time savings, and it helps practitioners to more effectively utilize their professional staff. Watson stated that utilization of staff is a challenge for a lot of firms today because it is difficult to find enough people to do all the work that needs to get done.

Thirdly, Watson said she believes the ability to use technologies to provide better insights to clients might help the CPA firms recruit new clients in the request-for-proposal process or to retain existing clients that recognize technologies really provide value.

Watson recommended a technology product with generally low barriers to entry, called DataSnipper. Implementation costs and the infrastructure needed are fairly low, she said, training costs are low, and the product is a Microsoft Excel add-in, so it comes with a level of familiarity.

Take, for example, automating the three-way match process, Watson said. With DataSnipper, the matching of invoices, bank statements, and comparing the documents to client subledgers can be automated.

Watson noted that the use of technology can decrease testing time. Also, she has been surprised by the time savings in the review phase of the process, noting that, once configured, the software can present the bank statement with the amount and the date, the invoice with the date and the amount, and then the clients ledger with one click.

Other use cases for software Watson highlighted include help with converting tables and PDFs easily to Excel tables, tests of controls, analytics, and the ability to reconcile trial balance to financial statements.

AR-C Section 70 applicability

Westervelt and Durak discussed AR-C Section 70, Preparation of Financial Statements, and how practitioners can ensure that they are following the guidance when the engagement requires it. Statements on Standards for Accounting and Review Services, available under Preparation, Compilation, and Review Standards, allow accountants to prepare a client’s financial statements without a report. This service is undertaken without providing any assurance.

According to Westervelt, accountants identified some gray areas where practitioners were tripping up and wondering whether they should be in the preparation standards of AR-C Section 70 or not. ARSC wanted to create a tool to help practitioners work through some scenarios and to really identify what they need to consider.

Westervelt noted that it was always fascinating to see how many different scenarios a firm could be in to determine whether AR-C Section 70 applied. He often came back to the bottom line: What were you engaged to do?

The AICPA and ARSC created an interactive decision tree to determine whether AR-C Section 70 applies, if the service being performed required following the guidance provided. Westervelt likened the practice aid to a “choose your own adventure” book where practitioners answer questions that result in following a certain path. For example, he noted that the first question is “Are you in public practice?” If the answer is no, you are clearly not required to follow the AR-C guidance. If the answer is yes, the practitioner would carry on answering the following questions and arrive at a clear answer to whether the guidance applies to the service.

CECL for nonfinancial institutions

In the last segment of the broadcast, Cheng and Durak discussed considerations of FASB’s recently effective Accounting Standards Update 2022-02, Financial Institutions — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, and what practitioners in and serving nonfinancial institutions should know.

Cheng explained the recent history of the guidance, saying the profession has transitioned from an incurred-loss model to the current expected credit loss (CECL) model. CECL asks preparers to estimate what they think they’re going to lose due to credit exposure. Whether the entity is a financial institution or a nonfinancial institution, it will now have to estimate what it believes it is going to lose due to credit exposure and update that every time financial statements are issued.

Cheng provided a common example for nonfinancial institutions. Highlighting accounts receivable, he said an entity makes a sale, has a receivable, and is entitled to collect on that receivable. The entity can lose money if, in the time between the sale and collection, the company or customer to whom the product or service was sold experiences financial difficulties. Cheng noted that this is the most obvious scenario where CECL guidance would be applied.

The concept of a contract asset is less obvious. A contract asset results from FASB ASC Topic 606, Revenue From Contracts With Customers. At a high level, an entity recognizes revenue when it has met its performance obligation or transferred control of that underlying good or service to the customer.

But, for this example, in the contract with the customer, the entity isn’t able to actually collect until some condition occurs. That is considered to be a contract asset when it has earned revenue, but the entity can’t ask for the money until some condition is passed. That scenario also exposes the entity to credit risk.

The next A&A Focus broadcast is March 6 from 1 to 2 p.m. ET. AICPA members can enroll for free, and all participants will receive CPE credit for attending. Those who registered for the Feb. 7 broadcast are automatically registered for future episodes, including March 6, and don’t have to register again.

— Dave Arman, CPA, MBA, is senior manager–Audit Quality at AICPA & CIMA, together as the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.