Magazine article The CPA Journal

The Effect of the Clarified Standards on Auditors' Reports

Magazine article The CPA Journal

The Effect of the Clarified Standards on Auditors' Reports

Article excerpt

Sample Changes in the Format and Content of a Single-Year Report

The new clarified standards for audit reports, issued by the AICPA's Auditing Standards Board (ASB), are effective for audits of financial statements for periods ending on or after December 15, 2012. Some of the changes are simply variations in format, whereas others include a change in content, Explanations and examples using a single-year report are illustrated below, along with references to the new codified standards.

Development of the Clarified Standards

Prior to the Sarbanes-Oxley Act of 2002 (SOX), audit reports of both issuers and nonissuers in the United States were governed by G AAS, issued by the ASB. SOX created the PCAOB and gave it authority over audits of issuers. Following its inception, the PCAOB adopted GAAS (as in effect on April 16, 2003) as interim standards. The PCAOB continues to use these standards, in addition to those it has promulgated, even though the ASB has effectively superseded a majority of them with the issuance of the clarified standards.

In March 2007, the ASB issued a discussion paper, Improving the Clarity of ASB Standards, which proposed revisions to GAAS in order to converge with international standards; in August 2007, after considering the comments that it received, the ASB approved the project. The project's goals were to -

* address concerns over the length and complexity of the existing standards;

* make the standards easier to read, understand, and implement; and

* enhance audit quality.

Each of the new standards contains five sections: introduction, objective, definitions of terms used in the standard, requirements, and application and other explanatory material. Requirements are expressed with the words "must" (which indicates always, exactly as prescribed) or "should" (which indicates always, but on rare occasions not exactly as prescribed). Application and explanatory material - integral parts of a standard that auditors are required to understand - do not contain the words "must" or "should." Some materials use the word "may."

The clarified standards are labeled as "AU-C" in order to prevent confusion with the prior AU standards. (The "C" designation will be dropped in 2014.) The codification changed some of the numbers in the original Statement on Auditing Standards (SAS) 122, Statements on Auditing Standards: Clarification and Recodification. Application and explanatory paragraphs are numbered using an "A" prefix. The requirements are cross-referenced to the application material, and the application material is cross-referenced to the requirements.

The Audit Report

Audit reporting was addressed in the AU section 500-area. In commenting on the fourth reporting standard, regarding the expression of an opinion, AU section 504, "Association with Financial Statements," simply said that "the objective of the fourth reporting standard is to prevent misinterpretation of the degree of responsibility the accountant assumes when his name is associated with financial statements." The 10 former general, fieldwork, and reporting standards have been eliminated because they do not fit into the new clarified standard framework.

Audit reporting is now addressed in AU-C sections 700-799 (collectively titled "Audit Conclusions and Reporting"); the clarified standards no longer use the term "generally accepted accounting principles" but replace it with the term "financial reporting framework" in order to recognize its international application to various accounting frameworks. The main reporting standard is AU-C section 700, "Forming an Opinion and Reporting on Financial Statements," which provides guidance related to an auditor's responsibility to form an opinion on financial statements, as well as the form and content of the audit report containing that opinion. The objective found in the new standard provides more information about the expression of an opinion; according to this standard, the objectives of the auditor are to -

(a) form an opinion on the financial statements based on an evaluation of the audit evidence obtained, including evidence obtained about comparative financial statements or comparative financial information, and (b) express clearly that opinion on the financial statements through a written report that also describes the basis for that opinion (AU-C section 700. …

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