Statements of Position

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The Auditing Standards Board (ASB) is considering the issuance of a Statement on Standards for Attestation Engagements (SSAE) to provide guidance to practitioners who may be engaged to examine or review management's discussion and analysis (MD&A) prepared pursuant to the published rules and regulations of the Securities and Exchange Commission (SEC). The ASB has observed the following since a proposed SSAE was first issued for exposure in 1987, and subsequently deferred: 1. Possible changes may occur in the existing financial reporting model as a result of the Comprehensive Model for Business Reporting proposed by the AICPA Special Committee on Financial Reporting. Such model is more forward-looking than the current financial reporting model; management's discussion and analysis that public registrants are currently required to prepare addresses certain elements proposed by the model. 2. During the research performed by the AICPA Special Committee on Financial Reporting, some users expressed a desire for more auditor involvement in financial information that they receive. 3. Existing guidance does not address a number of issues practitioners should consider in applying the Attestation Standards to an engagement to examine or review MD&A (including whether the practitioner needs to have audited or reviewed the financial statements to which the MD&A relates; internal control considerations; application of materiality considerations in the performance of an examination and in forming an opinion on, or providing the basis for reporting on a review of, the MD&A presentation; and the nature of specific procedures that should be performed), whether a review level of service is appropriate for MD&A, or whether it is appropriate to accept an engagement with respect to a presentation similar to MD&A in a non-SEC environment. Accordingly, the ASB believes that the profession should be proactive rather than reactive to changes in the business environment and be appropriately positioned to provide such service if requested. The ASB also believes that the proposed Standard would provide a framework that may be useful in providing assurance services in the future as companies experiment with new forms of financial presentations, such as the Comprehensive Model for Business Reporting. An examination or a review of MD&A would provide a higher level of assurance as to reasonableness to both the users and the preparers of the MD&A than is provided today in the context of an audit of financial statements. Existing standards included in Statement on Auditing Standards (SAS) No. 8, Other Information in Documents Containing Audited Financial Statements (AICPA, Professional Standards, vol. 1, AU sec. 550), only require the auditor to read the MD&A and consider whether the MD&A, or the manner of its presentation, is materially inconsistent with information, or the manner of its presentation, appearing in the financial statements. A comparison of the procedures under SAS No. 8 versus an examination or review of MD&A appears in the Table at the end of this Summary. An examination of MD&A would provide both the users and the preparers with an independent opinion regarding whether the presentation includes the required elements of Item 303 of Regulation S-K and the related published SEC rules and regulations, whether the historical financial information included in the MD&A is accurately derived from the entity's financial statements, and whether the underlying information and assumptions of the entity provide a reasonable basis for the disclosures contained therein. A review of MD&A would provide users and preparers with negative assurance concerning such matters. In addition to the assurance that is obtained from an examination or a review level of service, management would also benefit by improving the MD&A through an independent view of the content. Improvements to the MD&A presentation improve the quality of information available to users. Audit committees might benefit through the additional discussions with the auditors and review of the draft MD&A presentation that would result from an examination or review engagement. This proposed Statement provides guidance to assist the practitioner in the following: 1. Accepting an engagement; 2. Planning the engagement; 3. Considering internal control applicable to the preparation of MD&A; 4. Obtaining sufficient evidence for an examination; 5. Applying analytical procedures and inquiries for a review; 6. Considering events subsequent to the balance-sheet date; 7. Reporting. Fundamental to accepting an engagement to examine MD&A under this proposed Statement is the requirement for the practitioner to have audited the financial statements for at least the latest period subject to his or her examination of MD&A. Similarly, in order to accept an engagement to review MD&A, the practitioner is required to have performed either an audit of the annual financial statements or a review of interim financial statements for at least the latest period to which the MD&A presentation relates. If there is a predecessor practitioner who examined or reviewed the MD&A for a prior period(s), the successor practitioner may refer to the reports of the predecessor practitioner for the earlier period(s) if the predecessor practitioner's permission is obtained. Otherwise, the successor practitioner is required to apply the appropriate procedures relating to information concerning prior years included in the current MD&A presentation in order to examine or review such prese d36 ntation. If the practitioner is requested by entities to provide this service, the proposed Statement would be applied to engagements by public companies that are required to follow Item 303 of Regulation S-K and nonpublic entities that choose to prepare MD&A using the published SEC rules and regulations. Although an engagement to perform an examination or review of an MD&A presentation may be performed under SSAE No. 1, Attestation Standards, this proposed Statement expands on the guidance in such standard by providing specific guidance with respect to engagement acceptance, performance issues, and reporting matters for an MD&A presentation. SAS No. 8, which requires the auditor to read the MD&A and consider whether the MD&A or its presentation is materially inconsistent with information, or the manner of its presentation, appearing in the financial statements, would continue to apply to situations in which the auditor is not engaged to examine or review the MD&A presentation. This proposed SSAE would require amending various paragraphs of SAS No. 72, Letters for Underwriters and Certain Other Requesting Parties (AICPA, Professional Standards, vol. 1, AU sec. 634), to permit accountants to examine or review and report separately on an Item 303 MD&A presentation. Accordingly, the proposed amendments to SAS No. 72 are included as an appendix to this proposed SSAE. Commentators to this proposed Statement should be aware that practitioners performing an engagement to examine or review MD&A under this proposed Statement must be independent pursuant to rule 101 of the Code of Professional Conduct (AICPA, Professional Standards, vol. 2, ET sec. 101) because of the required condition that the practitioner has to have audited or reviewed historical financial statements for at least the latest period to which the MD&A presentation applies.

ISBN

ed97-03-07ct

Publication Date

1997

Relational Format

Book

Keywords

Attest function (Auditing) -- Standards -- United States

Disciplines

Accounting | Taxation

Comments

Originally published by: American Institute of Certified Public Accountants; Copyright and permission to reprint held by: American Institute of Certified Public Accountants; Exposure draft (American Institute of Certified Public Accountants), 1997, Mar. 7

Proposed statement on standards for attestation engagements : management's discussion and analysis ;Management's discussion and analysis

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