PREFACE

The AICPA’s Clarity Project

Background

Following the creation of the Public Company Accounting Oversight Board (PCAOB), the AICPA’s Auditing Standards Board (ASB) reassessed its mission. The ASB developed a plan to converge US generally accepted auditing standards (GAAS) with the International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB). Thus, the ASB’s Clarity Project began work to:

• Redraft the auditing standards for clarity—to make the standards easier to read, understand, and apply
• Converge US standards with the ISAs

The ASB is close to completing its project, and the new clarified standards are generally effective for audits of financial statements with periods ending on or after December 15, 2012. For legal and practice inspection purposes, the ASB decided early adoption was not appropriate. However, auditors may implement aspects of the new standards as long as they also comply with the current standards.

While clarity and convergence, not change, were the goals of the Clarity Project, the Project did create some changes that will require auditors to make changes in practice. This book arranges information according to the sections of the AICPA’s auditing standards codification. In this edition of Wiley GAAS, because some readers will use it for audits that fall under the extant standards, we will use a dual guidance approach. The extant standards and the extant codification arrangement remain. However, each section of the book provides cross references to the new codification section, and where the clarified standards have resulted in changes, those changes are highlighted.

Wiley GAAS provides additional tools to guide you in this transitional year:

• A map of existing codification sections to the clarified codification sections
• Summary of changes to practice included at the beginning of each section

Format of the Clarified Standards

To align with the IAS format and to provide clarity for auditors, each of the clarity standards presents requirements in this format:

• Introduction—explains the purpose and scope of the standard
• Objectives—defines the context in which the requirements are set
• Definitions—explains, where relevant, specific terms
• Requirements—what the auditor must do to meet the objectives of the standard
• Application and Other Explanatory Matters—provide further guidance for carrying out the requirements of the standard

Where relevant, the standards may include guidance relevant to audits of smaller, less complex entities and governmental entities.

Clarified Standards Issued to Date

Statement on Auditing Standards (SAS) No. 122 contains the vast majority of the clarified guidance. SAS Nos. 117–121 were issued in advance of SAS No. 122 due to pressing practice needs. Others were delayed for varying reasons. The ASB has issued the following clarified standards:

• SAS No. 117, Compliance Audits, is effective for compliance audits for periods ending on or after December 15, 2010.
• SAS No. 118, Other Information in Documents Containing Audited Financial Statements, is effective for audits of financial statements for periods beginning on or after December 15, 2010.
• SAS No. 119, Supplementary Information in Relation to the Financial Statements as a Whole, is effective for audits of financial statements for periods beginning on or after December 15, 2010.
• SAS No. 120, Required Supplementary Information, is effective for audits of financial information for periods beginning on or after December 15, 2010.
• SAS No. 121, Revised Applicability of Statement on Auditing Standards No. 100, Interim Financial Information.
• SAS No. 122, Codification of Auditing Standards and Procedures. When the AICPA recodified auditing standards in 1972, it reissued all standards as SAS No. 1. This did not happen with the Clarity Project.
• SAS No. 123, Omnibus Statement on Auditing Standards—2011, is effective for audits of financial statements for periods ending on or after December 15, 2012. This statement conformed SAS Nos. 117–118 to the clarity standards and made other changes necessitated by the clarity project.
• SAS No. 124, Financial Statements Prepared in Accordance with a Financial Reporting Framework Generally Accepted in Another Country, effective for audits of financial statements for periods ending on or after December 15, 2012.
• SAS No. 125, Alert That Restricts the Use of the Auditor’s Written Communication.
• SAS No. 126, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, is effective for audits of financial statements for periods ending on or after December 15, 2012. The ASB delayed issuance of clarified going concern guidance because of the Financial Accounting Standards Board (FASB) going concern project. Recently, however, FASB divided the project into two separate and distinct phases. As a result, FASB projects to issue an Exposure Draft that addresses Phase 1, “The Liquidation Basis of Accounting,” in the second quarter of 2012, and to reissue an Exposure Draft that addresses Phase II, “Going Concern,” in the fourth quarter of 2012. Therefore, the ASB went ahead and released a clarified version of SAS No. 59.
• Open project—as of August 2012, the ASB has one topic remaining to be clarified: AU Section 322, The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements.

The AICPA has categorized the clarified standards into four groups based on the type of change:

• Substantive Changes—expected to affect audit methodology and engagements
• Primarily Clarifying Changes—intended to explicitly state what may have been implicit in the extant standards, which over time resulted in diversity in practice. These changes may affect timing and responsibilities of the auditor.
• Primarily Formatting Changes—changes that do not expand the extant sections in any significant way and may not require adjustments to current practice
• Standards Not Yet Issued in the Clarity Project—as mentioned previously, there is only one standard not yet issued

Areas Substantially Unchanged by the Clarity Standards

The broad areas that have not been changed substantially by the clarified standards are:

• Audit documentation
• Auditor’s communication with those charged with governance
• Risk assessment standards
• External confirmations
• Analytical procedures
• Audit sampling
• Auditing accounting estimates
• Written representations
• Subsequent events
• Consideration of omitted procedures after the report release date

Areas Substantially Changed by the Clarity Standards

Substantive changes are likely to change audit methodology and engagements. The areas that have been changed substantially by the clarified standards are:

• Illegal acts by clients
• Communicating internal control related matters identified in an audit
• Related parties
• Adherence to generally accepted accounting principles (GAAP)
• The auditor’s report
• Dating of an independent auditor’s report
• Part of an audit performed by other independent auditors (group audits)

Organization

The extant codification is arranged by the ten general, fieldwork, and reporting standards. These standards are superseded in the clarified standards. In their place, each clarified standard has objectives. These objectives provide a link to the overall objective of the auditor. If the auditor fulfills the objectives and the ethical requirements, then the auditor will have fulfilled the requirements stated in the ten standards.

The codification based on the clarified standards generally follows the ISA categories. These are the broad categories of the clarified codification:

Resources

Wiley GAAS contains robust tools to help auditors prepare for and implement the clarified standards. Each chapter begins with the status of the code section and a summary of the changes in the clarified standards. The clarified objectives, definitions, exhibits and illustrations are integrated in the chapter and clearly identified. Extant standard references are preceded by “AU” and clarified standard references are preceded by “AU-C.”

The AICPA mapping of the extant standards to the clarified standards, ASB Clarity Project: Extant AU Sections Mapped to the Clarified AU-C Sections, is included as Appendix A.

The AICPA has dedicated a page on its site with links to additional resources that may be helpful in implementing the changes:

http://www.aicpa.org/InterestAreas/FRC/AuditAttest/Pages/ImprovingClarityASBStandards.aspx