The Auditing Standards Board (ASB) issued Statement on Auditing Standards No. 127 in January 2013 to amend the auditing technical literature in two areas.
SAS No. 127, Omnibus Statement on Auditing Standards – 2013, amends:
1. AU-C Section 600, Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)
2. AU-C Section 800, Special Considerations and Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
The amended guidance for both the audits of group financial statements and the audits of financial statements prepared using special purpose frameworks is effective on or after Dec. 15, 2012.
Group Audit Amendments
As originally developed, the guidance in AU-C Section 600 precluded auditors from referencing the audits of component auditors in their group audit reports unless component financial statements were prepared using the same financial reporting framework as that used in the group financial statements.
One of the SAS No. 127 amendments permits making reference to the audit of component auditors in audit reports on the group financial statements when the group financial statements and the component financial statements are prepared using different financial reporting frameworks, as long as certain conditions are satisfied.
In these circumstances, SAS No. 127 adds a requirement to AU-C Section 600 for group audit reports to include disclosure that group auditors are taking responsibility for evaluating the appropriateness of adjustments to convert the financial statements of the components to the financial reporting framework used in the group financial statements.
Using the original guidance, group auditors were precluded from referencing the work of component auditors in group audit reports unless component auditors performed their audits to meet relevant requirements of U.S. generally accepted auditing standards (U.S. GAAS).
The SAS No. 127 amendments in this area clarify the AU-C Section 600 requirements. In addition, there is new guidance regarding how group auditors should determine whether U.S. GAAS requirements have been satisfied by component auditors.
When group auditors refer to component auditors and the determination has been made that component auditors performed additional audit procedures to satisfy relevant requirements in U.S. GAAS, group auditor reports now are required to indicate the set of auditing standards used by component auditors. Also, group audit reports need to indicate that additional audit procedures were performed by component auditors to meet the relevant requirements in U.S. GAAS.
SAS No. 127 also clarifies a matter that has resulted in some confusion in practice. The amendments provide that the group engagement team is required to determine component materiality of those components for which the group engagement team will assume responsibility for the work of component auditors who perform audits or reviews on component financial statements.
Special Purpose Framework Amendments
AU-C Section 800 introduces a new term to the auditing literature related to circumstances under which the financial statements of reporting entities are prepared using special purpose frameworks. Before being amended by SAS No. 127, special purpose frameworks included the cash basis of accounting, including modifications to the cash basis, the tax basis of accounting, a regulatory basis of accounting and a contractual basis of accounting.
As amended by SAS No. 127, special purpose frameworks now also include an other basis of accounting that incorporates a definite set of logical, reasonable criteria that will be applied to all material items appearing in the financial statements prepared using the other basis of accounting.
The reason for the addition is that, at the time AU-C Section 800 originally was developed, the ASB was unaware of any “other” special purpose frameworks that would be available for use in preparing the financial statements.
With that said, the American Institute of CPAs now has the proposed Financial Reporting Framework for Small and Medium-sized Entities (FRF-SMEs). The plan is to have that framework finalized for use during the second quarter of 2013.
So, to have the auditing literature available to provide requirements and guidance associated with auditing financial statements prepared using the forthcoming FRF-SMEs, the ASB amended the guidance in AU-C Section 800 to include guidance so that this other basis of accounting would be covered from an audit perspective.