New Auditing Standards May Result In Possible Changes in Your Audit Engagement
As you plan for your next financial statement audit, changes in auditing standards may impact your engagement. Statements on Auditing Standards (SAS) Nos. 122–125 (referred to as the clarified auditing standards) introduce some changes that go into effect for financial statement audits for periods ending on or after December 15, 2012. In most cases, that means they’ll be effective for the year ending December 31, 2012, or later. We will be contacting our audit clients soon to discuss the changes that may specifically impact them, but we’ve provided the following summary you can review to begin familiarizing yourself with the changes. Some of the changes will affect all audit engagements, but others only apply in certain circumstances. Our goal is ensure a smooth transition to the new audit requirements.
Some changes may affect all audit engagements:
Before the audit begins, we will review the terms of the engagement and issue an engagement letter. You will note that management’s responsibilities will be spelled out more clearly in the engagement letter as a result of the new standards, but management responsibilities are unchanged.
Our audit team may ask you more questions regarding your legal and regulatory framework, and review correspondence with licensing or regulatory agencies. These procedures will allow us to better understand the environment in which you operate and to better assess risk.
All confirmations are now required to be in writing. Previously (in some circumstances) we may have relied on verbal confirmations; however, that is no longer an option. We may need your help to get cooperation from vendors, customers, and so on if they are not responding to our confirmation requests quickly.
Our communications to you regarding internal control deficiencies will now include a description of the potential effect of significant deficiencies or material weaknesses that we identify through our audit procedures. We won’t quantify the potential effect; we’ll just give a description. We will also inform you of other deficiencies that we believe are sufficiently important but that don’t rise to the level of significant deficiencies or material weaknesses. The expanded reporting is intended to enhance your ability to address internal control issues and reduce the potential risk of material misstatement or fraud.
The audit report has changed, with headings to distinguish each section and a more complete description of management responsibilities. In some circumstances, new paragraphs may be included in the audit report to address special situations. We will let you know if any special report paragraphs may apply to your engagement.
Additional changes may not affect all audit engagements:
We may ask you more questions to ensure our understanding of any special circumstances in your engagement, such as if you report using an accounting method other than U.S. generally accepted accounting principles (GAAP), issue a single financial statement, or issue summary financial statements.
If you use a service organization, such as an outside payroll processor or cloud computing provider, expect us to ask you whether the service organization has reported any fraud, noncompliance with laws and regulations, or uncorrected misstatements that could affect your organization. We may have to adjust our audit procedures accordingly.
If you use a service organization, and we rely on the service auditor’s report as audit evidence, we will be required to evaluate the report in more depth. We may have to perform additional audit procedures, depending on our evaluation.
If your engagement includes a disclosure of segment or division information, expect us to discuss with you the methods used to determine the information presented. We may be required to perform audit procedures that may not have been performed previously.
Some changes that may only apply in unusual circumstances, some of which are listed subsequently:
If you have engaged us to perform an audit for the first time, we will discuss with you the procedures required in an initial audit (or reaudit.)
If you use a financial reporting framework other than GAAP, we may perform additional procedures regarding related-party transactions.
If there are material changes in financial statement classifications from previously issued financial statements, expect us to perform additional procedures to evaluate the changes and possibly highlight them in the auditor’s report.
Some of the benefits of the clarified auditing standards include enhanced communication between your team and ours, improved audit quality, and increased confidence in the audited financial statements.