A&A Focus recap: New fraud exposure draft, building AI trust, and a not-for-profit update

The AICPA A&A Focus webcast on July 2 delivered timely updates across proposed changes to the auditor’s responsibility for fraud in an audit, artificial intelligence (AI) governance, and not-for-profit (NFP) financial reporting. Hosted by Bob Durak, CPA, CMGA, director–A&A Technical Services at the AICPA, and Andrew Merryman, CPA, senior manager–A&A Technical Services, the program featured insights from Heather Funsch, CPA, director of professional standards at Rehmann and an Auditing Standards Board (ASB) member; Cathy Cobey, CPA, EY’s global responsible AI leader; and Pete Ugo, CPA, partner at Crowe and chair of the AICPA’s NFP Expert Panel.

The Auditing Standards Board’s fraud exposure draft

Opening the program, Heather Funsch, CPA, offered an in-depth walk-through of the proposed revisions to the ASB’s extant fraud standard, AU-C Section 240, Consideration of Fraud in a Financial Statement Audit, highlighting both structural and substantive changes. She explained that one of the most noticeable updates is the reordering of key content in the exposure draft. Specifically, the draft places the auditor’s responsibilities ahead of those of management and those charged with governance and before any discussion of inherent limitations. This relocation of responsibilities, Funsch noted, is designed to elevate the visibility and prominence of the auditor’s role in fraud detection and response. She also discussed the enhanced requirement for auditors to obtain an understanding of the entity’s whistleblower or fraud-reporting programs, if they exist. This change reflects the fact that many frauds are uncovered through tips submitted via such channels, and the proposed standard seeks to ensure auditors take those sources seriously when assessing risk.

Funsch went on to describe several more technical but impactful updates. One such revision expands the requirement for retrospective reviews of accounting estimates — now applying to all prior-period estimates, not just estimates identified as significant. Another important update involves the treatment of management override of controls, which the exposure draft explicitly categorizes as a financial statement-level fraud risk. This change mirrors what many auditors already do in practice and aims to drive greater consistency across engagements. Funsch also highlighted new procedures that apply when fraud or suspected fraud is identified. Included in the exposure draft are steps auditors are required to take to understand the circumstances, evaluate management’s response, and assess whether any additional audit procedures are warranted. Also required is an evaluation by the engagement partner, who will determine the effect on the audit, except in clearly inconsequential cases.

Funsch’s discussion also highlighted the introduction of a “stand-back” requirement directing auditors to assess whether their fraud risk procedures appear sufficient in light of the totality of the evidence obtained. She also noted that management’s written representations, which are required by extant AU-C Section 240, are proposed to be expanded to include disclosures of any known or suspected fraud, regardless of materiality.

Throughout the discussion, Funsch repeatedly emphasized that scalability was a core consideration for the ASB and encouraged auditors of all firm sizes to review the exposure draft through that lens. She concluded by urging stakeholders to provide feedback — particularly on topics such as scalability, required procedures for responding to fraud, and the treatment of management override.

During the “Open Forum” portion of the program, Funsch answered a viewer question regarding the definition of the term fraud included in the exposure draft. Funsch noted that although the ASB considers convergence with international auditing standards to be important, the ASB decided to retain the existing U.S.-specific definition of fraud rather than adopt the broader definition found in International Accounting Standard 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements.

Stakeholders are encouraged to download the exposure draft, consider the questions posed by the ASB, and provide comment prior to the Oct. 3, 2025, deadline.

If voted final, the proposed SAS would become effective for audits of financial statements for periods ending on or after Dec. 15, 2028.

CPA Canada & AICPA series on AI

In a pre-recorded segment, Cathy Cobey returned to provide a detailed discussion on the collaborative efforts among CPA Canada, the AICPA, and EY in developing a three-part thought-leadership series aimed at addressing key aspects of AI implementation and to offer an update on AI governance trends and assurance opportunities emerging in response to accelerating adoption of generative and agentic AI. The segment was led by guest host Carrie Kostelec, CPA, senior manager–Assurance & Advisory Innovation–Artificial Intelligence at the AICPA. During the conversation, Cobey discussed the implications of giving AI systems increased autonomy, including the shift from passive tools to active agents capable of initiating actions and decisions. (See also, “Agentic AI Poised to Change the Way CPAs Work.”)

Cobey highlighted that as AI systems become more complex and capable, stakeholders are demanding greater transparency and accountability. In response, organizations and regulators are implementing ways to build trust in those systems, ranging from transparency reports and assessments of quality and risk to independent audits and ISO certifications.

The segment drew insights from the final installment of the white paper series on AI trust. Cobey explained how CPA-led assurance engagements could support this effort. However, she stressed that the assurance ecosystem will likely require new industry-specific frameworks tailored to AI outcomes — not just governance controls.

Cobey encouraged CPAs to take advantage of opportunities related to AI, for example leveraging AI for productivity, guiding responsible AI implementation, and working to enhance system-level trust. She emphasized that the skills CPAs are armed with are well suited to support ethical and transparent AI adoption.

Not-for-profit audit and accounting update

In the final segment of the broadcast, Pete Ugo provided a comprehensive update on the activities of the AICPA’s NFP Expert Panel; recent updates to the AICPA’s Audit and Accounting Guide, Not-for-Profit Entities;and the economic pressures facing the sector.

Ugo began by describing the role of the expert panel, which includes representatives from public accounting, the AICPA, and financial statement preparers. One of the expert panel’s major focuses this year was revising the guide’s content on programmatic investments. Updates were needed to reflect the implementation of FASB’s current expected credit losses (CECL) standard. Ugo explained that while CECL is often associated with banks, it also affects foundations and NFPs that make loans or investments. The revisions help clarify the distinction between credit losses and contribution expenses, especially in cases involving forgivable or conditional loans.

Ugo also touched on broader trends and emerging issues the expert panel has been monitoring. These include a focus on the accounting for and disclosure requirements regarding cryptoassets (especially in light of ASU No. 2023-08, Intangibles — Goodwill and Other — Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets, which became effective for fiscal years beginning after Dec. 15, 2024), consolidation challenges for related entities, and questions around below-market loans, for example, whether the value of interest-rate concessions should be considered contributions. He also noted discussions around conduit debt and the implications of whether an NFP is deemed “public” for accounting standard applicability.

Perhaps most pressing was the economic uncertainty surrounding federal funding. Ugo described widespread concern about frozen or delayed grants, canceled funding, and increased pressure on endowments. These issues raise serious questions about revenue recognition, collectibility assessments, and going concern evaluations. He urged preparers to begin those assessments early and to maintain open dialogue with auditors. Ugo concluded by encouraging NFPs to monitor developments, evaluate program efficiency, and prepare for continued uncertainty in the funding environment.

Ugo returned to the topic of federal funding during the broadcast’s “Open Forum” segment where he addressed a viewer question about how firms might address those funds that have been recently frozen. Ugo noted that it depends on the facts and circumstances of the awards or grants. If a not-for-profit incurred eligible expenses under a signed grant agreement before the freeze went into effect, there may be a basis to recognize revenue. However, activities or expenses incurred after the freeze date would likely not be recorded as revenue. Ugo noted that communication with the granting agency is essential, even though it may be difficult, and expressed that legal review may be needed to assess whether the grantor is still obligated to pay for pre-freeze activity.

Looking ahead

The Aug. 6 webcast will feature the return of Sherry Chesser, CPA, fresh from the AICPA Peer Review Conference, discussing the intersection of peer review and quality management standards. The session will also introduce a new multi-broadcast series on alternative accounting frameworks with Julie Killian, CPA, the former chair of the AICPA’s Financial Reporting Executive Committee, and will seek insights on firm merger-and-acquisition trends any private equity considerations from Allan Koltin, CPA, founder of the Koltin Consulting Group.

AICPA members are encouraged to attend these monthly events and review the accompanying newsletters for more in-depth coverage of these critical topics. Members can access archives of past sessions at the A&A Focus Series webpage.

— Dave Arman, CPA, MBA, is senior manager–Audit Quality at 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.