Accountants Should Prepare Now for New Auditing Standards

generally-accepting-auditing-standards

A modification of America’s generally accepted auditing standards, or GAAS, will soon have a significant impact on audit and attestation engagements undertaken by Certified Public Accountants. Although the goal of the “clarified standards” is to make GAAS easier to read, understand and apply, the new modified standards establish a higher “standard of care.” A failure to meet these modified standards could increase a practitioner’s exposure to legal liability.

The modifications to the standards, which were issued by the Auditing Standards Board, represent a key component of a seven-year undertaking known as “The Clarity Project” and are effective for audits of financial statements for periods ending on or after December 15, 2012.

Consequently, publicly-held and privately-owned companies and the CPA firms that advise them should start planning now, especially as the revisions cover a wide range of topics, from the way an engagement letter is written to the documentation an auditor is required to maintain.

Some of the modifications require auditors to engage in stepped-up planning discussions with clients, while some affect interim testing and additional fieldwork, and others require changes to the presentation audit report itself.

One of the key objectives of the modifications is to make the audit report and its purpose more understandable to investors and management. For example, the introduction paragraph will no longer reference management’s responsibility or the auditor’s responsibility.

Instead, a new section will be required, bearing the heading “Management’s Responsibility for the Financial Statements.” It will focus on management’s responsibility for the preparation and fair presentation of the financial statements and will lay out management’s responsibility for the design, implementation and maintenance of internal controls.

Another section of the report will essentially replace the “scope” paragraph, and carry the heading, “Auditor’s Responsibility.” This section will feature a statement related to the auditor’s responsibility to express an opinion on the financial statements based on the audit. It will also include a statement that the audit was conducted in accordance with generally accepted auditing standards in the United States or, if applicable, the standards of another country.

The auditor’s opinion paragraph will also be modified, with a requirement for it to be preceded by a heading titled “Opinion.” This paragraph is intended to distinguish the opinion from the report. Further, if anything but an unqualified opinion is issued, the paragraph detailing the reason for the opinion will now contain a separate heading reading “Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or “Basis for Disclaimer of Opinion.” In a departure from international standards, an explanation-of-matter paragraph for an unqualified opinion will continue to be required whenever there is an inconsistency.

Many of the significant changes can be found in the Statement of Auditing Standards, or SAS, Nos. 122 through 126. Some of the highlights include:

  • SAS 122, Statements on Auditing Standards: Clarification and Recodification, focuses on the principles underlying an audit conducted in accordance with GAAS, and supersedes many, but not all of the existing Statement of Auditing Standards through No. 121
  • SAS No. 123 (Omnibus Statement on Auditing Standards–2011) amends the overall objectives and the conduct of an audit
  • SAS No. 124 deals with financial statements prepared in accordance with a financial reporting framework generally accepted in another country
  • SAS No. 125 establishes a requirement to include an alert that restricts the use of the auditor’s written communication under certain circumstances
  • SAS No. 126 addresses the auditor’s responsibilities with respect to evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern.

Gaining an understanding of the new standards, explaining them to clients and implementing them will likely mean additional time and increased expenses for accounting firms. As with other regulatory burdens, smaller firms are likely to be proportionately affected to a greater degree since they typically have a narrower base of business over which to spread the additional costs.

The Auditing Standards Board, however, did make some distinction between audits of large publicly-held companies and the privately-held ones, often done by smaller CPA firms, so the additional costs those firms have to bear may not be unreasonably burdensome.

As previously noted, the new guidance will likely set up a higher “standard of care” in the industry, which may have a significant impact on lawsuits and other matters involving allegations of accounting malpractice. If it is determined that an auditor did not comply with the new guidance, then it may imply the audit firm did not meet the established standard of care in the engagement.

With that in mind, accounting firms that develop their own audit methodologies should already be preparing for the changes. Even firms utilizing commercially developed audit methodologies may wish to consult with their legal and other advisers to ensure they understand the underlying standards and requirements.

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nancy-reimerAbout the Author

Nancy M. Reimer is a shareholder in the Boston office of national law firm LeClairRyan. She devotes the majority of her practice to the defense of professional malpractice claims against accountants, attorneys, financial advisors, securities brokers and other professionals, as well as breach of fiduciary duty claims and claims against directors and officers of corporations. She also counsels clients in prevention techniques for avoiding litigation and other risk exposures. She can be contacted at: nancy.reimer@leclairryan.com.

About the Author

Nancy M. Reimer

Nancy M. Reimer is a shareholder in the Boston office of national law firm LeClairRyan. She devotes the majority of her practice to the defense of professional malpractice claims against accountants, attorneys, financial advisors, securities brokers and other professionals, as well as breach of fiduciary duty claims and claims against directors and officers of corporations. She also counsels clients in prevention techniques for avoiding litigation and other risk exposures. She can be contacted at: nancy.reimer@leclairryan.com. Nancy M. Reimer is a shareholder in the Boston office of national law firm LeClairRyan. She devotes the majority of her practice to the defense of professional malpractice claims against accountants, attorneys, financial advisors, securities brokers and other professionals, as well as breach of fiduciary duty claims and claims against directors and officers of corporations. She also counsels clients in prevention techniques for avoiding litigation and other risk exposures. She can be contacted at: nancy.reimer@leclairryan.com.