Change in the air for auditing standards


Don’t be surprised if your auditor does some things differently when auditing your financial statements this year.

The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants issued “clarified and converged” standards in Statement on Auditing Standards No. 122 in 2011. This statement requires auditors to follow new standards for audit of financial statements for periods ending on or after Dec. 15, 2012.


The standards the ASB issued as a result of its Clarity and Convergence Project, initiated in 2004, are to be used by auditors as the auditing standards for nonpublic companies, not-for-profit entities and employee benefit plans. These standards are also contained within the auditing standards, or “Yellow Book” standards, issued by the Government Accountability Office.

The project had two clear objectives:

  • To make the existing standards easier to understand and apply. This objective represented the “clarity” portion of the project.
  • To converge the standards with International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board. The ASB project was designed and conducted to reflect the international board’s project, completed in March 2009, to “clarify” the ISAs. The ASB used the international standards as the basis for the “clarified and converged” standards issued.

The project and its outcome are similar to the Financial Accounting Standards Board (FASB) project that resulted in the FASB Accounting Standards Codification. In the FASB project, all accounting standards generally accepted in the United States were codified into one set of standards.

While the ASB accomplished its objective of making the standards more understandable and convergent with the ISAs, some conflict still exists with those international standards. The ASB has also acknowledged conflicts with the Public Company Accounting Oversight Board standards. These differences are unavoidable because of legal, regulatory and other considerations.

What are the changes?

One of the primary objectives of the project was to make the standards easier to understand. Another objective was to eliminate redundancies and differentiate practical guidance from the requirements.

To accomplish these objectives, the ASB applied the following organization to the existing standards and will use the same organization in new standards:

  • Statement of objective
  • Definitions, where needed
  • Requirements
  • Application and explanatory material

The objectives, definitions and requirements will use the conventional numbering and lettering system currently used in the standards in those paragraph prefixes. The application and explanatory material will have paragraphs using an “A” as a prefix. One of the most efficient parts of the new organization is the cross-referencing of all “A” prefix paragraphs to an objective, a definition or a requirement paragraph.

The ASB asserts that the requirements in the existing standards have not been significantly changed as a result of the clarity and convergence project.

How will the changes affect your audit?

  • Auditors are updating their current audit methodology and work programs.
  • The wording for the overall objectives of the auditor is different than the current 10 standards organized as the general, fieldwork and reporting standards.
  • The use of “generally accepted accounting principles” will now become the “applicable financial reporting framework.”
  • Auditors have a few additional requirements when auditing special purpose frameworks. “Special purpose frameworks” are currently referred to as “other comprehensive basis of accounting” (OCBOA). The term is the most significant change. For those using OCBOA, they will still be allowed to do so. The auditor’s report will still communicate the use of a reporting framework that is not generally accepted.
  • There are a few additional requirements for the audit of single financial statements, specific elements accounts or items of a financial statement.
  • There are a few additional requirements when the auditor restricts the use of the auditor’s report.
  • There are more explicit requirements for auditors related to the detection of illegal acts.
  • There are more explicit requirements for auditors as to noncompliance with laws and regulations.
  • There are a few additional requirements for auditors related to opening balances on initial audit engagements.
  • The engagement letter to you from your auditor will refer to the “terms of engagement.” Your representation letter has a few required changes and additions to it. You will not be making new or additional representations with respect to the audit unless events and/or activities during your audit period are significant and different from prior periods.
  • Your auditor’s communication to those charged with governance and communicating internal control matters will have slight wording changes and additions.
  • The materiality determination and evaluation of any misstatements identified have been separated into two sections.
  • The use of external confirmations has changes and still retains the presumptive mandatory requirement of using external confirmations for accounts receivable. It is worth a comment – the ISAs do not have the presumptive mandatory requirement of using external confirmations related to the audit procedures to be applied to accounts receivable.
  • The accounting requirements currently in the standards for subsequent events have been removed. The requirements for auditor’s consideration of “going concern” are still in the auditing requirements. The FASB has added this topic to its agenda.
  • Perhaps the most significant difference will be the wording, appearance and format of the audit report. But it’s important to emphasize that the changes do not change any of the communication previously made by your auditor, including the auditor’s and your responsibilities.

Sample Independent Auditor’s Report

Entity name:

We have audited the accompanying financial statements of ABC Company and its subsidiaries, which comprise the balance sheets/financial position as of December 31, 20X1 and 20X0, and the related statements of income/activities, changes in stockholders’ equity/net assets, and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the financial statements 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 the entity’s internal controls. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.


In our opinion, the consolidated financial statements referred to above 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/activities and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Our firm signature:

Our city and state:

Date of our auditor’s report: