AICPA Update 2019 Update on Standards for Audits,

AICPA Update 2019 Update on Standards for Audits,

AICPA Update 2019 Update on Standards for Audits, Reviews, Compilations, and Preparation Engagements Rich Cunningham, Auditor of State Mike Howard, Julian & Grube Session will cover: Primarily SAS 134, 135, 137 Coming up soon [October 2019 ASB Meeting]: Attestation standards, materiality Exposure drafts: Auditing Estimates; Audit Evidence; Auditor ReportingAU-C 800/805 Other standard-setting project - Risk

Assessments Recently issued auditing standards Auditor Reporting AU-C 700 Series (SAS 134) Omnibus SAS 2019 (SAS 135) The Auditors Responsibilities Relating to Other Information Included in Annual Reports - AU-C section 720 (SAS 137 ) [Note: SAS 136 is relevant to ERISA plan audits] Auditor reporting and disclosures SAS 134 Goals: Enhancing the communicative value and relevance of the auditors report

Auditing Standards Board activity is relevant to all US professional audits Convergence with IAASBs auditor reporting standards The International Auditing and Assurance Standards Board is an independent standard-setting body that serves the public interest by setting high-quality international standards for auditing, assurance, and other related areas, and by facilitating their adoption and implementation. In doing so, the IAASB enhances the quality and consistency of practice throughout the world and strengthens public confidence in the global auditing and assurance profession. Auditor Reporting AU-C 700 Series SAS No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements

New section AU-C 701, Communicating Key Audit Matters in the Independent Auditors Report Supersedes AU-C 700, Forming an Opinion and Reporting on Financial Statements AU-C 705, Modifications to the Opinion in the Independent Auditors Report AU-C 706, Emphasis-of-Matter Paragraphs and OtherMatter Paragraphs in the Independent Auditors Report Auditor Reporting AU-C 700 Series contd SAS No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the

Audit of Financial Statements Issued May 2019 Effective for audits of financial statements for periods ending on or after December 15, 2020. Early adoption not permitted. Ohio counties, cities, etc.: 12/31/2020 Ohio schools: 6/30/2021 Section 700, Forming an Opinion and Reporting on Financial Statements Changes form and content for all auditors reports under GAAS Consistent with the IAASBs revised auditors report Consistent with the PCAOBs revised auditor reporting

model as to positioning of the Opinion and Basis for Opinion sections. Significance to us: these revised auditing standards apply to more than audits of governmental entities Significant Changes to the Auditors Report Opinion section first Basis for Opinion section second and includes a statement that the auditor is required to be independent of the entity and to

meet the auditors other ethical responsibilities, in accordance with the relevant ethical requirements relating to the audit Significant Changes to the Report Auditors Basis for Opinion section second and includes a new section: Key Audit Matters [KAM] section (New AU-C section 701) Not Mandatory: only include if engaged to include (agreed in terms of engagement that

report will include KAMs - If included, requirements apply) What keeps the auditor up at night Selected from matters communicated with TCWG Those charged with governance Significant Changes to the The term those charged with governance is defined in Auditors Report paragraph .06 of AU-C section 260, as the person(s) or organization(s) with responsibility for overseeing the

strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting and disclosure process. In a government environment, examples: those charged with governance or management, or both (depending on the facts and circumstances), include governing boards, city councils, audit committees, mayors, governors, legislators, university or college presidents, certain other officials elected to a constitutional office, and chancellors. Significant Changes to the Auditors Report contd Expanded descriptions of the responsibilities of:

management relating to going concern evaluation, when required by the applicable financial reporting framework GASB might have a project coming about going concern the auditor, including relating to professional judgment and professional skepticism going concern communications with those charged with governance Auditor Reporting SAS No. 134 Going Concern (AU-C 570) AU-C 700 requires reporting in accordance with AU-C 570 when applicable; AU-C 570 amended If substantial doubt exists, include a

separate section headed Substantial Doubt About the Entitys Ability to Continue as a Going Concern Replaces required EOM [Emphasis of a Matter] but wording is similar Section 705, Modifications to the Opinion in the Independent Auditors Report Changes to conform to new section 700 Modifications: qualified, disclaimer, adverse No change regarding: when a modification is required determining the type of modification to

the auditors report Section 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditors Principal changes Report clarify the relationship between EOM paragraphs and KAMs in the auditors report When section 701 applies, cant substitute an EOM paragraph for a description of individual KAMs in Key Audit Matters section EOM requires an appropriate heading

If report includes KAM section, EOM heading is required to include the term Emphasis of Matter Amendments Addressing Auditing Disclosures Amendments to various other sections to focus auditor attention on disclosures throughout the audit process Strengthened requirements in AU-C section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, AU-C section 330, Performing Audit Procedures in Response to Assessed Risks, and AU-C section 700. Enhanced application material in these and several other AUC sections to assist auditors in addressing the practical challenges arising from the evolving nature of disclosures.

Effective for audits of financial statements for periods ending on or after December 15, 2020. Interlude: Consideration of Going Concern Governments rarely, if ever, go out of business Recent governments with noted financial difficulties: City of Detroit, Puerto Rico AICPA SLG indicates: 15.29 There may be circumstances in which a governmental entity has disclosed certain condition(s) or event(s) in the financial statements (such as fund balance or net position deficits, violations of debt

covenants, or default on bonds) that are indicators of substantial doubt of the government's ability to continue as a going concern, but collectively the indicator(s) do not meet the criteria for a going concern under GASB Statement No. 56, as amended. However, these indicator(s) could significantly curtail the government's ability to continue providing public services at the current level. Various Amendments Some of the more significant amendments relate to: AU-C 570 (Going Concern) Specifies heading and wording for new section replacing EOM paragraph when substantial doubt remains AU-C 260 (Communication with Those

Charged with Governance) auditor required to communicate with TCWG about the significant risks identified by the auditor Other Related Projects Amendments have been or will be proposed to align the following sections with SAS 134: AU-C section 800 (Special purpose frameworks) OCBOA i.e. cash-basis, modified cash basis, regulatory basis AU-C section 805 (Single financial statements & specific elements, accounts or items) AU-C section 810 (Summary financial statements) AU-C section 930 (Interim financial information)

AU-C section 935 (Compliance audits) AU-C section 940 (Integrated audits) What should you be doing now? Its not too early to start thinking about how this standard will affect what you [i.e. the auditors] do Review and update firm methodologies and guidance this takes time! Consider the impact of amendments to various AU-C sections, including AU-C 210, Terms of Engagement. For example, update engagement letters to reflect new report wording and heightened focus on disclosures Consider the training needs for engagement teams Start educating identified users (e.g. your client,

their lenders) about new form and content of the auditors report. Illustrative Auditors Report --SAS has commercial version; SLG [and probably AoS] will come up with a governmental version-- Illustrative Report Independent Auditors Report [Appropriate Addressee] Report on the Audit of the Financial Statements Opinion

We have audited the financial statements of ABC Company, which comprise the balance sheets as of December 31, 20X1 and 20X0, and the related statements of income, changes in stockholders equity, and cash flows for the years then ended, and the related notes to the financial statements. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1 and 20X0, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Illustrative Report Basis for Opinion We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in

the Auditors Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of ABC Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Illustrative Report Key Audit Matters [Not Mandatory Included if agreed to in terms of engagement] Key audit matters are those matters that were communicated with those charged with governance and, in our professional judgment, were of most significance in our audit of the financial

statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. [Description of each key audit matter in accordance with AU-C 701.] Illustrative Report Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material

misstatement, whether due to fraud or error. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about ABC Companys ability to continue as a going concern for [insert the time period set by the applicable financial reporting framework]. Illustrative Report Auditors Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not absolute assurance and therefore is not a guarantee that an audit conducted

in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users made on the basis of these financial statements. In performing an audit in accordance with GAAS, we: Exercise professional judgment and maintain professional skepticism throughout the audit. Illustrative Report - -

- - Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of ABC Companys internal control. Accordingly, no such opinion is expressed.

Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about ABC Companys ability to continue as a going concern for a reasonable period of time. Illustrative Report We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.

Report on Other Legal and Regulatory Requirements [The form and content of this section of the auditors report would vary depending on the nature of the auditors other reporting responsibilities.] [Signature of the auditors firm] [City and state where the auditors report is issued] [Date of the auditors report] Materiality The illustrative report uses the current definition of materiality AICPA ASB has proposed a revised definition [discussed later] SAS 135, Omnibus Statement on Auditing

Standards 2019 Omnibus: Merriam Webster defines omnibus as: 1: a usually automotive public vehicle designed to carry a large number of passengers: took a seat on the omnibus; 2: a book containing reprints of a number of works (as of a single author or on a single subject): The omnibus contained all of the author's short stories. Hm Oxford Dictionaries is more helpful: - ADJECTIVE - comprising several items: Congress passed an omnibus anticrime package " SAS 135, Omnibus Statement on Auditing

Standards 2019 Amendments to various AU-C sections Amendments intended to enhance audit quality by heightening the auditors focus on related parties and relationships and transactions with related parties Significant unusual transactions ASB considered PCAOB Pronouncements Effective for audits of financial statements for periods ending on or after December 15, 2020. 12/31/2020 6/30/2021 SAS 135, Omnibus Statement on Auditing Standards 2019 1

(Amendments to Statement on Auditing Standards (SAS)No. 122, Statements on Auditing Standards: Clarification and Recodification, as amended, section 210, Terms of Engagement; section 240, Consideration of Fraud in a Financial Statement Audit; section 260, The Auditors Communication With Those Charged With Governance;

section 265, Communicating Internal Control Deficiencies Identified in an Audit; section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement; section 330, Performing Audit Procedures in Responses to Assessed Risks and Evaluating the Audit Evidence Obtained;

SAS 135, Omnibus Statement on Auditing Standards 2019 2 section 510, Opening BalancesInitial Audit Engagements, Including Reaudit Engagements; section 550, Related Parties; section 560, Subsequent Events and Subsequently Discovered Facts; Section 580, Written Representations;

section 600, Special ConsiderationsAudits of Group Financial Statements (Including the Work of Component Auditors), and section 930, Interim Financial Information [AICPA, Professional Standards]; SAS No. 130, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements [AICPA, Professional Standards, AU-C sec. 940]) 36 pages worth of these changes selected excerpts follow SAS 135, Omnibus Statement on Auditing

Standards 2019 Amendment to SAS No. 122, Section 260 .12 The auditor should communicate with those charged with governance: b. Significant unusual transactions, if any. f. Matters that are difficult or contentious for which the auditor consulted outside the engagement team and that are, in the auditors professional judgment, significant and relevant to those charged with governance regarding their responsibility to oversee the financial reporting process. SAS 135, Omnibus Statement on Auditing Standards 2019

Amendment to SAS No. 122, Section 260 .13 The auditor should communicate with those charged with governance: c. that uncorrected misstatements or matters underlying those uncorrected misstatements could potentially cause future-period financial statements to be materially misstated, even if the auditor has concluded that the uncorrected misstatements are immaterial to the financial statements under audit. SAS 135, Omnibus Statement on Auditing Standards 2019 Amendment to SAS No. 122, Section 260 Forms of Communication

17. If, as part of its communication to those charged with governance, management communicated some or all of the matters the auditor is required to communicate, and as a result, the auditor did not communicate these matters at the same level of detail as management, the auditor should communicate any omitted or inadequately described matters to those charged with governance. The auditor does not need to communicate them at the same level of detail as management, as long as the auditor a) participated in managements discussion with those charged with governance, and b) affirmatively confirmed to those charged with governance that management has adequately communicated these matters. SAS 135, Omnibus Statement on Auditing Standards 2019 Amendment to SAS No. 122, Section 260 - Documentation

21. If, as part of its communication to those charged with governance, management communicated some or all of the matters the auditor is required to communicate, and as a result, the auditor did not communicate these matters at the same level of detail as management, the auditor should include a copy or summary of managements communications provided to those charged with governance in the audit documentation. SAS 135, Omnibus Statement on Auditing Standards 2019 Amendment to SAS No. 122, Section 260 Significant Unusual Transactions (Ref. par. .12b) .A30 The communication of significant unusual transactions may include: the auditors views on the policies and

practices management used to account for significant unusual transactions; and the auditor's understanding of the business purpose for significant unusual transactions. SAS 135, Omnibus Statement on Auditing Standards 2019 Amendment to SAS No. 122, AU-C Section 550 [Related Parties][selected changes] .14 The auditor should inquire of management and others within the entity regarding the following: a. The identity of the entitys related parties, including changes from the prior period (Ref: par. .A9.A1415) b. The nature of the relationships (including ownership structure) between the entity and these related parties

c. The business purpose of entering into a transaction with a related party versus an unrelated party d. Whether the entity entered into, modified, or terminated any transactions with these related parties during the period and, if so, the type and business purpose of the transactions SAS 135, Omnibus Statement on Auditing Standards 2019 Amendment to SAS No. 122, AU-C Section 550 [Related Parties][selected changes] .15 The auditor should inquire of management and others within the entity and perform other risk assessment procedures considered appropriate to obtain an understanding of the controls, if any, that management has established to c. authorize and approve significant unusual transactions, and

arrangements outside the normal course of business. Inquiries should include asking about any related party transactions a. that have not been authorized and approved in accordance with the entitys established policies or procedures regarding the authorization and approval of transactions with related parties. b. for which exceptions to the entity's established policies or procedures were granted and the reasons for granting those exceptions SAS 135, Omnibus Statement on Auditing Standards 2019 Amendment to SAS No. 122, AU-C Section 550 [selected changes] . 2122. The auditor should evaluate whether the entity has properly identified its related party relationships and transactions. Evaluating whether an entity has properly identified its related party relationships

and transactions involves more than assessing the process used by the entity. The evaluation should include procedures to test the accuracy and completeness of the related party relationships and transactions identified by the entity, taking into account the information gathered during the audit. SAS 135, Omnibus Statement on Auditing Standards 2019 Amendment to SAS No. 122, AU-C Section 210 .A32 The communication with the predecessor auditor may be either written or oral. Matters subject to the auditors inquiry of the predecessor auditor may include the following: The predecessor auditor's understanding of the nature of the entitys relationships and transactions with related parties and significant unusual transactions

SAS 135, Omnibus Statement on Auditing Standards 2019 Amendment to SAS No. 122, AU-C Section 240 [Fraud] New definition added: Significant unusual transactions. Significant transactions that are outside the normal course of business for the entity or that otherwise appear to be unusual due to their timing, size, or nature. SAS 135, Omnibus Statement on Auditing Standards 2019 Amendment to SAS No. 122, AU-C Section 240 [Fraud]

Auditor to evaluate whether significant unusual transactions might be fraud; procedures required:) Reading the underlying documentation and evaluating whether the terms and other information about the transaction are consistent with explanations from inquiries and other audit evidence about the business purpose (or the lack thereof) of the transaction Determining whether the transaction has been authorized and approved in accordance with the entitys established policies and procedures Evaluating whether significant unusual transactions that the auditor has identified have been properly accounted for and disclosed in the financial statements SAS 135, Omnibus Statement on Auditing

Standards 2019 Amendment to SAS No. 122, AU-C Section 240 [Fraud] Unusual transaction fraud indicators 1: Transactions involve previously unidentified related parties or relationships or transactions with related parties previously undisclosed to the auditor. Transactions involve other parties that do not have the substance or the financial strength to support the transaction without assistance from the entity under audit or any related party of the entity. Transactions lack commercial or economic substance or are part of a larger series of connected, linked, or otherwise interdependent arrangements that lack commercial or economic substance individually or in the aggregate (for example, a transaction is entered into shortly prior to period end and is unwound shortly after period end).

SAS 135, Omnibus Statement on Auditing Standards 2019 Amendment to SAS No. 122, AU-C Section 240 [Fraud] Unusual transaction fraud indicators 2: Transactions occur with a party that falls outside the definition of a related party (as defined by the applicable financial reporting framework), with either party able to negotiate terms that may not be available for other, more clearly independent parties on an arm's-length basis. Transactions exist to enable the entity to achieve certain financial targets. SAS 137 The Auditors Responsibilities

Relating to Other Information Included in Annual Reports What typically is included in governmental general purpose annual financial reports? [Note to our private-sector friends: need to look at your private-entity, including private NFPs, annual reports] Basic Financial Statements: [i.e., Statements of Net Position, Activities Statements, Cash Flows Statements, [sometimes] Budgetary Statements, Notes to the Financial Statements, MD&A, Other RSI, e.g., pension and OPEB information, modified approach infrastructure info] Additional CAFR Materials: Introductory Section [table of contents, letter of transmittal, list of officials, etc.], combining fund statements, Statistical section,

[sometimes] budgetary schedules Additional audit and single audit materials [reports on compliance and controls, federal awards schedule] Question: which of these are other information? SAS 137 The Auditors Responsibilities Relating to Other Information Included in Annual Reports There is RSI; SI; and OI Basic financial statements, RSI, and SI are not OI These are not OI: Basic Financial Statements: [Statements of Net Position, Activities Statements, Cash Flows Statements, [sometimes] Budgetary Statements, Notes to the Financial Statements, MD&A, Other RSI] budgetary schedules [RSI], combining fund statements [SI], federal awards

schedule [SI] These are OI: Introductory Section, Statistical section, anything else added to the annual general-purpose financial reports SAS 137 The Auditors Responsibilities Relating to Other Information Included in Annual Reports Supersedes AU-C section 720, Other Information in Documents Containing Audited Financial Statements Issued July, 2019 Effective date: audits of financial statements for periods ending on or after December 15,

2020 [Early implementation is not permitted] 12/31/2020 6/30/2021 SAS 137 The Auditors Responsibilities Relating to Other Information Included in Annual Reports Clarifies the auditor is required to apply procedures only to other information included in annual reports (or similar documents). Revises work effort to require the accountant to remain alert for information that is misleading, including because it omits or obscures information necessary for a proper understanding of a matter

disclosed in the other information Requires a separate section be included in the auditors report addressing OI SAS 137 The Auditors Responsibilities Relating to Other Information Included in Annual Reports SI [Usually] and RSI: Auditor is engaged to and reports on the information in relation to the audited financial statements taken as a whole OI [Usually]: Auditor is not engaged to (and declines) to report on the information, unless its materially inconsistent with the rest of the financial statements [report means

opinion] SAS 137 The Auditors Responsibilities Relating to Other Information Included in Annual Reports Why: other information that is materially inconsistent with the financial statements or the auditors knowledge obtained in the audit may indicate 1. a material misstatement of the financial statements or 2. a material misstatement of the other information exists, either of which may undermine the credibility of the financial statements and the auditors report thereon. SAS 137 The Auditors Responsibilities

Relating to Other Information Included in Reports Annual read the OI consider whether a material inconsistency exists between the OI and the financial statements or the other information otherwise appears to be materially misstated If the auditor concludes [document that!] an uncorrected material misstatement of the OI exists, report an uncorrected material misstatement of the OI and a description of it in the auditors report SAS 137 The Auditors Responsibilities Relating to Other Information Included in Reports

Annual Material to what? The f/s AND The OI SAS 137 sets out possible procedures for OI Not an audit; dont have to hunt for it [use common auditor sense] SAS 137 The Auditors Responsibilities Relating to Other Information Included in Annual Reports Auditors Reporting

Responsibility for OI 1: separate section in the auditors report on the financial statements with the heading Other Information or other appropriate heading A statement that management is responsible for the other information An identification of other information and a statement that the other information does not include the financial statements and the auditors report thereon A statement that the auditors opinion on the financial statements does not cover the other information and that the auditor does not express an opinion or any form of assurance thereon SAS 137 The Auditors Responsibilities

Relating to Other Information Included in Annual Reports Auditors Reporting Responsibility for OI 2: A statement that, in connection with the audit of the financial statements, the auditor is responsible to read the other information and consider whether a material inconsistency exists between the other information and the financial statements or the other information otherwise appears to be materially misstated A statement that, if, based on the work performed, the auditor concludes that an uncorrected material misstatement of the other information exists, the auditor is

required to describe it in the auditors report SAS 137 The Auditors Responsibilities Relating to Other Information Included in Annual Reports Auditors Reporting Responsibility for OI 3: If the auditor has concluded that an uncorrected material misstatement of the other information exists, a statement that the auditor has concluded that an uncorrected material misstatement of the other information exists and a description of it in the auditors report

SAS 137 The Auditors Responsibilities Relating to Other Information Included in Annual Reports Example report, OI is the Introductory section [transmittal letter et al], Statistical section: Pre-SAS 137 language example: The introductory section and statistical section have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and, accordingly, we do not express an opinion or provide any assurance on them

SAS 137 The Auditors Responsibilities Relating to Other Information Included in Annual Reports SAS 137 version example [maybe; AAG SLG and AoS probably will supply real language to be used]: Management is responsible for the introductory and statistical sections included in the annual report. This other information does not include the financial statements and our auditors report thereon. Our opinion on the financial statements does not cover this other information, and we do not express an opinion or any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and consider whether a material inconsistency exists between the other information and the financial statements, or the other information otherwise appears to be materially misstated. If, based on the work performed, we conclude that an uncorrected material

misstatement of the other information exists, we are required to describe it in our report. Forensic Accounting Standards SSFS 1 [Statement on Standards for Forensic Services] Litigation and investigation Investigation: concerns of wrongdoing Litigation: actual or potential legal or regulatory proceeding [e.g., expert witness] Not limited to actual formal litigation No opinion on occurrence of fraud No contingent fees Effective new engagements 1/1/2020 and + Recently issued SSARSs (standards

for reviews, compilations, and preparation engagements) SSARS No. 24, Omnibus Statement on Standards for Accounting and Review Services - 2018 Review of Financial Statements Requirements revised by SSARS No. 24 Effective for reviews of financial statements for periods ending on or after June 15, 2019 Review is a technical term: something less than an audit Will be re-named as limited assurance engagement If you do reviews, obtain

Recent exposure drafts Obtaining ASB Update Information https ://www.aicpa.org/search.html?searchPath= %5C%2Fcontent%5C%2F%28dam%5C%2F%2 9%3Faicpa%5C%2Fresearch%5C%2Fstandard s%5C%2Fauditattest%5C%2Fasb%5C%2F.% 2A&topic=Standards e Obtaining ASB Update Information

e Materiality Proposed SAS and proposed SSAE, both titled Amendments to the Description of the Concept of Materiality ED issued August 2019 Amendments intended to eliminate inconsistencies between the AICPA Professional Standards and the definition of materiality used by the U.S. judicial system and other U.S. standard setters and regulators. Prompted by recent FASB amendment of its description of materiality to be more consistent with others in the US

Misstatements, including omissions, are considered to be material if they there is substantial likelihood that, individually or in the aggregate, could reasonably be expected to they would influence the economic decisions of users judgment of a reasonable user made based on the basis of the financial statements. Proposed SSAE Revisions to SSAE 18

Proposed Revisions to AT-C 215, Agreed-Upon Procedures Engagements Not require an assertion Not require that the procedures be known at the beginning of the engagement Provides flexibility for procedures to be developed over the course of the engagement, by or with the assistance of, the practitioner Engaging party would be required to acknowledge that the procedures are appropriate for the intended purpose of the engagement prior to the issuance of the report. Would permit general-use report unless certain conditions exist Exposure Draft,

Revisions to Statement on Standards for Attestation Engagements No. 18: Clarification and Recodification, issued July 11, 2018. The comment period ended October 11, 2018. Still proposed as of 10/20/19 Proposed SSAE Revisions to SSAE 18 Examination and Review Engagements Measurement or evaluation of the subject matter against the criteria

Allows practitioner to, and does not require that responsible party, measure or evaluate subject matter against criteria Obtaining a written assertion from responsible party no longer required Instead, required to request written representation about whether measurement or evaluation occurred and if so, about the results AT-C 320 would still require obtaining a written assertion Reviews (proposal to rename as Limited Assurance) More explicit description of the procedures that may be performed Report to include an informative summary of the work performed as basis for conclusion Allow adverse conclusion Estimates

Project to converge with ISA [International Standards on Auditing] 540 (Revised), Auditing Accounting Estimates and Related Disclosures ISA 540 issued October 2018; effective for audits of periods beginning after December 15, 2019 ASB and AICPA provided input into IAASB project, which included consideration of PCAOB project

Revisions to address evolving audit risks due to a more complex business environment and more complex accounting estimates ASB issued exposure draft of proposed SAS August 22, 2019 Proposed SAS effective date: audits of financial statements for periods ending on or after December 15, 2022. Cities and Counties:12/31/22 School districts and Community Schools: 6/30/23 Estimates The Auditing Standards Board has issued Proposed Statement on Auditing

Standards (SAS), Auditing Accounting Estimates and Related Disclosures, to supersede SAS No. 122 section 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, and amend various other AU-C sections in AICPA Professional Standards . The proposed SAS is one piece of a larger project to enhance audit quality (see the AICPA's Enhancing Audit Quality Initiative) and is intended to enable auditors to appropriately address the increasingly complex scenarios that arise today from new accounting standards that include estimates and related disclosures, and to enhance the auditor's focus on factors driving estimation uncertainty and potential management bias. The ASB also believes the proposed changes will drive auditors to exercise professional skepticism, thereby improving audit quality. The comment period ends November 22. Estimates Why? The project to enhance the auditing standards

relating to auditing accounting estimates is intended to enable auditors to appropriately address the increasingly complex scenarios that arise from accounting standards that include estimates and related disclosures and to enhance the auditors focus on factors driving estimation uncertainty and potential management bias. Inspection findings globally have highlighted accounting estimates as a key area where enhancing standards was needed to improve audit performance Estimates Key Aspects

Laying the groundwork. Scalability. Separate assessment of inherent risk and control risk. Enhanced risk assessment. Responses to the assessed risks of material misstatement. Reference to relevant requirement in other AU-C sections. Exercise of professional skepticism Evaluation of the estimates. Overall evaluation based on audit procedures performed. Estimates So, whats an estimate? Accounting estimate. A monetary amount for which the measurement, in accordance

with the requirements of the applicable financial reporting framework, is subject to estimation uncertainty. Estimates Examples [AAG SLG] investments with no market-established fair value or with permanent impairments derivative transactions

uncollectible taxes receivable the useful lives of capital assets that are depreciated obligations for compensated absences claims and judgments

termination benefits landfill closure and postclosure care costs pension benefits, postemployment benefits other than pensions pollution remediation obligations.

Audit Evidence Addressing evolving nature of audit services Emerging tools and techniques, including data analytics Professional skepticism External information sources ASB taking the lead; IAASB is closely monitoring.

Timeline: ED May 2019 Final SAS 1st quarter 2020 Effective date June 2021 Audit Evidence Revising an objective currently focused on the design and performance of audit procedures. Developing a framework for evaluating audit evidence based on appropriateness (relevance and reliability), and sufficiency (persuasiveness) Shift focus from quantity to persuasiveness

The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence Audit Evidence Emerging technology issues Auditors, Preparers Data analytics, Blockchain Professional skepticism

Expanding sources of information Accuracy, completeness, relevance, and reliability The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence Audit Evidence NEW MAIN THEME As a basis for concluding whether sufficient

appropriate audit evidence has been obtained, the objective of the auditor is to evaluate information to which audit procedures have been applied to determine whether such information is appropriate audit evidence. As a basis for concluding whether sufficient appropriate audit evidence has been obtained, the auditor should evaluate the appropriateness of the audit evidence in the context of the following: a) the source from which it was obtained and b) whether such information corroborates or contradicts the assertions in the financial statements

Audit evidence should be considered notwithstanding the source from which it is obtained or the method used to obtain the information. Audit Procedures Test of Controls Risk Assessment

Procedures Substantive Audit Procedures Audit Evidence The auditor may perform one or more procedures using different audit tools or techniques, including audit data analytics, visualization, or artificial intelligence in meeting objectives of the

audit procedures. In some instances, the auditor may achieve the objective of more than one type of audit procedure (for example, as both a risk assessment and further audit procedure) and may accomplish the objectives of both types of procedures simultaneously, including achieving such objectives through the use of automated tools or techniques.

AMENDMENTS TO AU-C SECTIONS 800, 805, AND 810 TO INCORPORATE AUDITOR REPORTING CHANGES FROM SAS NO. 134 Amends the following sections of Statement on Auditing Standards (SAS) No. 122, Statements on Auditing Standards: Clarification and Recodification: Section 800, Special Considerations Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks, as amended (AICPA, Professional Standards, AU-C sec. 800) Section 805, Special Considerations Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement, as amended (AICPA, Professional Standards, AU-C sec. 805) Section 810, Engagements to Report on Summary Financial Statements (AICPA, Professional Standards, AU-C sec. 810) August 28, 2019 Current IAASB Projects that ASB is Monitoring

Why should we care? Because ASB monitors IAASB projects and tries to conform US auditing standards where relevant ASB monitors the PCAOB too, same reason Current IAASB Projects that ASB is Monitoring Quality Control Risk Assessment Group Audits Professional Skepticism

Audits of Less Complex Entities Risk Assessment Risk Assessment: Major issues being debated are: Modernization for evolving business environment, e.g., Data Analytics Address in more depth Professional Skepticism Clarifications regarding Understanding the Entity and its Environment to focus more on the applicable financial reporting framework Clarifications regarding the work effort to gain an understanding of internal control and identifying controls relevant to the audit Enhanced guidance on IT considerations Amend definition of significant risks

Clarifications over the assessment of the risks material misstatement and including a stand back requirement Helpful Information and Resources Authoritative standards for non-issuers (SASs, SSARSs, SSAEs, SQCSs) as of June 1 are available at http://www.aicpa.org/RESEARCH/STANDARDS/Pages /default.aspx AICPA Accounting and Auditing Technical Hotline (877) 242-7212 - [email protected] http://www.aicpa.org/Research/TechnicalHotline/Pa ges/TechnicalHotline.aspx Questions? Financial

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