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This proposed Statement on Auditing Standards (SAS) amends various SASs and consists of the following three parts: Part 1, Audit Adjustments; Part 2, Reporting on Consistency; and Part 3, Service Organizations. Part 1 AUDIT ADJUSTMENTS: The amendments in part 1 of this proposed SAS are being issued to establish audit requirements that would encourage audit clients to record financial statement adjustments proposed by auditors in audits of financial statements. The Auditing Standards Board (ASB) believes such requirements would improve the financial statement reporting process. Part 1 of this proposed SAS would amend three SASs to establish audit requirements that clarify management's responsibility for the disposition of financial statement misstatements brought to its attention. The amendments would: 1. Add an item to the list of matters in AU section 310.06 that generally are addressed in the understanding with the client (the engagement letter) (see SAS No. 1, Codification of Auditing Standards and Procedures, as amended by SAS No. 83, Establishing an Understanding With the Client, AICPA, Professional Standards, vol. 1, AU sec. 310, "Appointment of the Independent Auditor"). It would indicate that management is responsible for adjusting the financial statements to correct material misstatements and for affirming to the auditor in the representation letter that the effects of any uncorrected misstatements brought to its attention by the auditor are not material, both individually and in the aggregate, to the financial statements taken as a whole. 2. Require the auditor to obtain, in the management representation letter, management's acknowledgement that it has considered the financial statement misstatements brought to its attention by the auditor and has concluded that any uncorrected misstatements are not material, both individually and in the aggregate, to the financial statements taken as a whole. It also would require that a summary of the uncorrected misstatements be included in the representation letter or in an attachment thereto. 3. Require the auditor to inform the audit committee, as defined in SAS No. 61, Communication With Audit Committees (AICPA, Professional Standards, vol. 1, AU sec. 380), about uncorrected misstatements brought to management's attention by the auditor that were determined by management to be immaterial, both individually and in the aggregate, to the financial statements taken as a whole. The amendments in part 1 of this proposed SAS would amend: 1. SAS No. 1 as amended by SAS No. 83 (AU sec. 310); 2. SAS No. 85, Management Representations (AICPA, Professional Standards, vol. 1, AU sec. 333); 3. SAS No. 61. Part 2 REPORTING ON CONSISTENCY: The amendments in part 2 of this proposed SAS are being issued to clarify which changes in the reporting entity require a consistency explanatory paragraph in the auditor's report. Part 2 of this proposed SAS amends SAS No. 1, Codification of Auditing Standards and Procedures (AICPA, Professional Standards, vol. 1, AU sec. 420, "Consistency of Application of Generally Accepted Accounting Principles"), to: 1. Conform the list of changes in AU sec. 420.07 that constitute a change in the reporting entity to the guidance in paragraph 12 of Accounting Principles Board Opinion No. 20, Accounting Changes. 2. Clarify that the auditor need not add a consistency explanatory paragraph to the auditor's report when a change in the reporting entity results from a transaction or event. 3. Eliminate the requirement to add a consistency explanatory paragraph to the auditor's report when a pooling of interests is not accounted for retroactively in comparative financial statements. (However, in these circumstances the auditor would still be required to express a qualified or adverse opinion because of the departure from generally accepted accounting principles.) 4. Eliminate the requirement to qualify the auditor's report and consider adding a consistency explanatory paragraph to the report if single year financial statements that report a pooling of interests do not disclose combined information for the prior year. The amendments in part 2 of this proposed SAS would amend SAS No. 1, AU section 420. Part 3 SERVICE ORGANIZATIONS: The amendments in part 3 of this proposed SAS are being issued to help auditors determine the kind of information about a service organization they need when auditing the financial statements of an entity that uses a service organization to process transactions. Part 3 of this proposed SAS amends SAS No. 70, Reports on the Processing of Transactions by Service Organizations (AICPA, Professional Standards, vol. 1, AU sec. 324) to: 1. Clarify the applicability of SAS No. 70 by replacing existing language with the language and concepts in SAS No. 55, Consideration of Internal Control in a Financial Statement Audit, as amended by SAS No. 78 (AICPA, Professional Standards, vol. 1, AU sec. 319), to state that the SAS is applicable when an entity obtains services from another organization that are part of the entity's "information system." 2. Provide guidance to help auditors determine whether services are part of the information system. 3. Revise and clarify the factors a user auditor should 806 consider in determining the significance of a service organization's controls to a user organization's controls. 4. Clarify the guidance on determining whether information about a service organization's controls is necessary to plan the audit. 5. Clarify that information about a service organization's controls may be obtained from a variety of sources. 6. Change the title of SAS No. 70 from Reports on the Processing of Transactions by Service Organizations to Service Organizations. The amendments in part 3 of this proposed SAS would amend SAS No. 70.

ISBN

ed99-04-22t

Publication Date

1999

Relational Format

Book

Keywords

Auditors' reports -- Standards -- United States; Financial statements -- 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), 1999, Apr. 22

Proposed statement on auditing standards : audit adjustments, reporting on consistency, and service organizations (Omnibus statement on auditing standards, 1999);Audit adjustments, reporting on consistency, and service organizations (Omnibus statement on auditing standards, 1999)

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