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How the Clarified Auditing Standards Will Affect You

The Clarified Auditing Standards are now in effect. You may have heard that “these aren’t substantive changes,” but this isn’t the case. Some of the changes included in the new standards will affect every auditor. Based on inquiries we’ve received during recent AICPA webinars on the Clarified Auditing Standards, participants have identified four areas of change that may require more attention.

One substantive change is to the auditor’s report. Headings and specific language for each section are now required within the report. Adding headings and the correct language to an auditor’s report, while affecting every audit, is not difficult to do. The challenge is making sure that it gets done. If a staff person takes last year’s report and changes only the dates, and the firm issues that report without headings and revised wording, then the firm has issued a deficient report. While it may require a little extra work, these headings provide auditors a clear understanding of what additional information is needed and where to place it in a report.

Another very substantive change is in the area of group audits. The key point here is to realize when AU-C section 600, Special Considerations--Audits of Group Financial Statements (including the Work of Component Auditors) applies. It applies not only when other auditors perform part of the audit, but whenever the financial statements include financial information of components, such as equity investees, subsidiaries or other business entities and activities that are included in the group financial statements.

How about new clients you picked up this year? What are you planning to do with those opening balances? In the past when you took on a new client, you may have reviewed the workpapers of the predecessor auditor, determined whether or not to rely on those opening balances, and moved onto the audit of the current year. AU-C 510 (Opening Balances—Initial Audit Engagements, Including Reaudit Engagements) now clarifies that the successor auditor is responsible for opening balances and that while the predecessor auditor’s workpapers may be used by the successor auditor to help in the risk assessment process, the nature, timing, and extent of audit work performed and the conclusions reached are solely the responsibility of the successor auditor.   The successor auditor is required to perform other auditing procedures on the opening balances sufficient to respond to the risks of material misstatement.  Depending on your firm’s old audit methodology, you may need to perform additional procedures on opening balances.

Another area of change practitioners are inquiring about comes from modifications to engagement letters. In the past, you may have had a multiyear letter.  Now when the auditor uses a multiyear engagement letter, the  new standard  requires, at a minimum, that the auditor remind the client  about the existing engagement letter each year and document that reminder.  A new letter is not required each year, unless the terms of the audit engagement change. Additionally, if your firm has an existing multiyear engagement letter in place prior to Dec. 15, 2012 (the effective date of the clarified standards), you may need to redraft the letter or add an addendum to include the appropriate required matters. The AICPA has developed The Engagement Letter: Best Practices and Examples to assist auditors with preparing this essential communication.

For further explanation of the Clarified Standards, visit AICPA’s Clarity Project website and join the The Clarified Auditing Standards....Talk to the Experts webcast to be held 2 to 4 p.m. ET on Feb. 7.

Michael Ramos, Director of CPE and Training, American Institute of CPAs. Mike sets the strategic direction and manages operations of the professional development business unit at the AICPA. He combines his understanding of technical audit and accounting issues with his communication skills and experience to advance AICPA CPE offerings. He is the author of many books and training courses on SOX 404, internal control and other auditing matters.

Edit: This post was modified Jan. 7 to clarify information.

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