AU 390: Consideration of Omitted Procedures After the Report Date

AU-C 585: Consideration of Omitted Procedures After the Report Release Date

AU EFFECTIVE DATE AND APPLICABILITY

Original Pronouncement Statement on Auditing Standards (SAS) 46.
Effective Date This standard is now effective.
Applicability Circumstances when:
  • Subsequent to the date of the auditor’s report on audited financial statements, the auditor concludes that one or more auditing procedures considered necessary at the time of the audit in the circumstances then existing were omitted from the audit, but
  • There is no indication that the financial statements are not fairly presented in conformity with generally accepted accounting principles (GAAP) or, if applicable, another comprehensive basis of accounting.
NOTE: This section does not apply in the following circumstances:
1. An engagement in which an auditor’s work is at issue in a threatened or pending legal proceeding (see “Definitions of Terms” sections) or regulatory investigation.
2. An engagement in which an auditor subsequent to the date of his or her report on audited financial statements becomes aware that facts regarding those financial statements may have existed at that date and might have affected the financial statements or the audit report had he or she then been aware of them (see Section 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report).

AU-C EFFECTIVE DATE AND SUMMARY OF CHANGES

SAS No. 122, Codification of Auditing Standards and Procedures, is effective for audits of financial statements with periods ending on or after December 15, 2012.

AU-C 585 does not change extant requirements in any significant respect.

AU DEFINITIONS OF TERMS

Omitted procedure. An auditing procedure that was not applied in the audit of financial statements and that subsequent to the date of the auditor’s report on those financial statements was considered to be necessary at the time of the audit in the circumstances then existing.

Present ability to support previously expressed opinion. The professional judgment of the auditor that (1) based on auditing procedures applied in a previous audit of financial statements and the facts and circumstances existing at the time of that audit, or (2) based on additional information or analysis since that audit, the auditor’s report on those financial statements still is appropriate.

Threatened legal proceeding. Circumstances in which a potential claimant has indicated to the auditor an awareness of, and present intention to assert, a possible claim.

AU-C DEFINITIONS OF TERMS

Source: AU-C 585.05

Omitted procedure. An auditing procedure that the auditor considered necessary in the circumstances existing at the time of the audit of the financial statements but which was not performed.

OBJECTIVES OF AU SECTION 390

General

The issuance of Section 390 is an indirect result of the development of peer review and quality control standards (see Statement on Quality Control Standards [SQCS] 2, System of Quality Control for a CPA Firm’s Accounting and Auditing Practice). An auditor is not required to carry out retrospective review of his or her work once a report has been issued on audited financial statements. Audit documentation is reviewed, however, in connection with peer reviews and in-house inspections. These reviews may reveal the omission of necessary auditing procedures. This section provides guidance to the auditor on considerations and procedures to be applied when omitted auditing procedures are discovered after the audit report has been issued.

Background

The initial stimulus for the section resulted from peer reviews of members of the American Institute of Certified Public Accountants (AICPA) Division for Firms and the oversight program on peer reviews of the Public Oversight Board (POB). In 1980, the POB informed the AICPA of its concern when reviewers concluded that an audit had not been conducted in accordance with generally accepted auditing standards (GAAS). At the time, auditors had no guidance on appropriate procedures in these circumstances. The POB recommended that the proper standard-setting body issue guidance on procedures a firm should apply when it becomes aware of an audit that may not have been made in accordance with GAAS. This section is the response to the POB recommendation.

Professional Disagreements

This section does not apply to professional disagreements about whether an auditing procedure is necessary in a specific engagement under circumstances existing at the time of the audit. For example, a peer reviewer may suggest that an auditing procedure was necessary (e.g., confirming additional receivables), and the auditor may disagree.

The alleged omitted auditing procedure might be one that professionals could reasonably disagree about (e.g., judgments about materiality). In these circumstances, every effort should be made to convince the reviewer that the auditor’s judgment was appropriate.

No Substitute for Omitted Procedures

The omitted procedure may be one for which there is no alternative (e.g., making or observing some inventory counts), or the omission may be the failure to apply any auditing procedures to obtain evidential matter for a significant audit objective (e.g., accepting management representations and not testing percentage of completion on a material construction contract). In these circumstances, the auditor cannot maintain that these are matters about which reasonable professionals might disagree.

Distinction from Section 561

Section 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report, provides guidance when the auditor becomes aware, subsequent to the date of the report on the audited financial statements, that facts may have existed at that date which might have affected the financial statements or the audit report had the auditor been aware of those facts. The “facts” usually relate to the financial statements and whether those financial statements are presented fairly in all material respects in conformity with generally accepted accounting principles.

Section 561 applies to facts that indicate possible misstatement of financial statements. On the other hand, Section 390 applies to the possible omission of auditing procedures. The application of Section 561 is initiated by a possible GAAP failure; the application of Section 390 is initiated by a possible GAAS failure. However, when omitted auditing procedures are applied, the auditor may become aware that facts may have existed at the date of the auditor’s report and might have affected the report had the auditor been aware of those facts (see “Fundamental Requirements”). In that situation, Section 561 is applicable.

OBJECTIVES OF AU-C SECTION 585

AU-C Section 585 states that:

. . . the objectives of the auditor are to

a. assess the effect of omitted procedures of which the auditor becomes aware on the auditor’s present ability to support the previously expressed opinion on the financial statements, and
b. respond appropriately.

(AU-C 585.04)

FUNDAMENTAL REQUIREMENTS

Importance of Omitted Procedures

If the auditor decides that a situation involving an omitted procedure exists, he or she should determine if the omitted procedure currently affects his or her ability to support the previously expressed opinion (see “Techniques for Application”).

NOTE: In these circumstances, the auditor would be well advised to consult with his or her attorney.

Applying Omitted Procedures

The auditor should promptly attempt to apply the omitted procedure or alternative procedures that would provide a satisfactory basis for the original opinion on the financial statements if he or she:

1. Decides that the omitted procedure impairs his or her present ability to support the previously expressed opinion, and
2. Believes that there are persons relying currently, or likely to rely, on the financial statements and the related auditor’s report.

Inability to Apply Omitted Procedures

If the auditor is not able to apply the omitted procedure or appropriate alternative procedures, the auditor should consult his or her attorney to determine the proper action concerning the auditor’s responsibilities to:

1. The client
2. Regulatory authorities having jurisdiction over the client
3. Persons relying, or likely to rely, on the auditor’s report
NOTE: This section does not require the auditor to notify the client of the omitted auditing procedures.

Subsequent Discovery of Facts Existing at Date of Auditor’s Report

When the auditor subsequently applies the omitted procedure or alternative procedures, he or she may become aware of facts regarding the financial statements that existed at the date of the auditor’s report and would have affected the report had the auditor been aware of them. In these circumstances, the auditor should:

1. Advise the client to disclose the newly discovered facts and their impact on the financial statements to persons who are known to be relying currently, or who are likely to rely, on the financial statements and the related auditor’s report
2. Take whatever steps he or she believes necessary to be satisfied that the client has made the specified disclosures

The auditor also would be well advised to consult with his or her attorney.

If the client refuses to make the disclosures requested, the auditor should follow the guidance in Section 561 under “Fundamental Requirements.”

INTERPRETATIONS

There are no interpretations for this section.

TECHNIQUES FOR APPLICATION

General

The objective of the auditor’s assessment of the importance of the omitted procedure is to determine if it is:

1. Necessary to apply the omitted procedure
2. Necessary to apply alternative procedures
3. Appropriate not to apply either the omitted procedure or alternative procedures

Urgency of Resolution

Whenever the auditor becomes aware of an omitted procedure, he or she should act promptly. In these circumstances, a client has issued what it represented to be audited financial statements that may not have been audited properly. The client may be able to wait a short period of time (to be determined by the client, the auditor, and their lawyers) for the matter to be resolved; however, it cannot wait too long before notifying interested parties. The urgency of resolution may differ for public versus nonpublic companies.

Public Companies

Public companies file audited financial statements with the SEC. If the auditor becomes aware of an omitted procedure concerning these financial statements, he or she should consider the client’s possible obligation for timely disclosure of significant events. Form 8-K must be filed within four business days after occurrence of most significant events.

Nonpublic Companies

Nonpublic companies may submit audited financial statements to banks, bonding companies, credit agencies, and others. If these financial statements were not audited properly and are misleading, the client should notify immediately anyone relying on them. Although there is no specified time period within which to notify interested parties, the client probably will consider its reputation and its exposure to lawsuits in determining when to notify them. It would therefore be prudent for the auditor to complete all procedures before a significant period of time has elapsed.

Determining Importance of Omitted Procedures

To determine the importance of the omitted procedure to the auditor’s present ability to support the previously expressed opinion, he or she should:

1. Review documentation of the audit
2. Discuss circumstances with audit personnel and others
3. Review documentation of the subsequent audit

Review Audit Documentation

The auditor should review relevant audit documentation to determine if:

1. Other procedures were applied that compensated for the one omitted or made the one omitted less important. For example, the review of subsequent cash collected and the related customer remittance advices might compensate for inadequate confirmation of receivables or make the failure to obtain enough receivable confirmations less important than usual.
2. A lower level of control risk was justified so that the omitted procedure was not necessary. The auditor should review audit documentations on:
a. The documentation of the understanding of internal control
b. Tests of controls

Discussions with Audit Personnel

The auditor should discuss the audit with audit personnel to determine if:

1. The omitted procedure or a related procedure was discussed
2. The omitted procedure was performed but not documented
3. The omitted procedure affected an item considered not material

The auditor should determine if the alleged omitted procedure was performed, and if not, why not.

Review Subsequent Period Audit Documentation

The auditor should review audit documentation for the subsequent period to determine if procedures applied provide audit evidence to support the previously expressed opinion. For example:

1. Costing of subsequent period sales may provide audit evidence about existence of prior period inventory.
2. A review of subsequent period changes in receivables may provide audit evidence about existence of prior period receivables.
3. A review of subsequent period liabilities may provide evidence that a contingency did not exist at the end of the prior period.

AU ILLUSTRATION

Illustration 1. Applying the Omitted Procedure
If the auditor concludes that the omitted procedure should be performed, he or she should apply it promptly. In these circumstances, the auditor would have to discuss the matter with the client. Following are possible omitted procedures and suggested methods of correcting the omission.
Possible Omitted Procedure Remedy
1. Failure to obtain management representation letter. Obtain letter retroactive to date of auditor’s report.
2. Failure to obtain a sufficient number of confirmations of receivables. Confirm retroactive to balance sheet date.
If control risk is assessed at less than the maximum, confirm currently, and work back to balance sheet date.
3. Failure to observe a sufficient quantity of inventory. If control risk is assessed at less than the maximum, observe count of specific styles or components, and work back to year-end.
If control risk is assessed at the maximum, the entire inventory may have to be taken currently before the auditor can work back to year-end.
4. Failure to make inquiry of client’s lawyer. Make inquiry retroactive to date of auditor’s report.
5. Failure to obtain sufficient evidence about the value of investments in nonpublic investees. Review recent audited financial statements, if available.
If recent audited financial statements are not available, review recent unaudited financial statements, and apply selected audit procedures.
Consult with investee’s accountant.
6. Failure to apply procedures for identifying related-party transactions. Apply procedures for current and prior period (see Section 334, Related Parties).
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