Spring05_Newsletter

8/7/2019 Spring05_Newsletter

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Welcome to the Spring 2005Arens/Elder/Beasley Auditing Newsletter

highlighting recent events affecting theauditing profession. In addition to providinga brief overview of key issues, thisnewsletter shows how each event relatesto specific chapter material in Auditing and Assurance Services: An Integrated

Approach (10th Edition, Prentice Hall,Inc.). We hope this newsletter will prove tobe a valuable resource for you. Feel free toforward this on to interested colleagues.

Don’t forget to visit our accompanying Companion Website (www.prenhall.com/arens) whereyou can find other useful information.

This Spring 2005 Newsletter includes coverage of the following:• PCAOB Issues Proposed Ethics and Independence Rules

• SEC Defers Section 404 Reporting for Non-Accelerated Filers and Hosts Roundtable onImplementation of Internal Control Reporting Provisions of the Sarbanes-Oxley Act

• COSO Launches Project to Develop Internal Control Guidance for Small, Public Companies• ASB Issues Exposure Draft to Clarify Professional Responsibilities

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AICPA Antifraud Programs and Controls Task Force Issues Audit Committee Guidance for Assessing the Risk of Fraud from Management Override of Internal Control• ARSC Issues Exposure Drafts of Proposed SSARS

Note: PowerPoint ® slides are provided so that you can conveniently incorporate any or all of these topics in your classroom.

PCAOB Issues Proposed Ethics and Independence Rules - The PCAOB issuedproposed rules to strengthen the independence of registered public accounting firms thataudit and review the financial statements of public companies. The proposed rules wouldtreat an accounting firm as not independent if:

the firm provides any service or product to an audit client for a contingent fee or acommission, or receives from an audit client, directly or indirectly, a contingent feeor commission, or

the firm or an affiliate provided assistance in planning, or provided tax advice on,certain types of potentially abusive tax transactions to an audit client or providedany tax services to certain senior officers of an audit client.

The proposed rules would also require accounting firms to provide certain information to theaudit committee of an audit client in connection with seeking pre-approval to provide non-prohibited tax services to the audit client. More information on the proposed rules is



available at the PCAOB’s website (www.pcaobus.org/Standards/index.asp). Relevanttextbook chapter - 4.

SEC Defers Section 404 Reporting for Non-Accelerated Filers and Hosts Roundtableon Implementation of Internal Control Reporting Provisions of the Sarbanes-OxleyAct - In March 2005, the SEC deferred the filing deadline for initial management reports oninternal control required under Section 404 for non-accelerated filers by one year. As aresult, non-accelerated filers, which are companies with a market capitalization under $75million, must include management and auditor reports on internal control over financialreporting in their Form 10-K for the first fiscal year ending on or after July 15, 2006. Sincethe SEC’s adoption of rules implementing Section 404 in June 2003, public companies andaccounting firms have invested vast amounts of time and large sums of money to preparefor the necessary internal control reporting. To obtain feedback about experiences of registrants and auditors during this first-time reporting, the SEC hosted a roundtable on April13, 2005 to discuss issues surrounding the implementation of 404 reporting. Moreinformation on the roundtable and related documents are available at the SEC website(www.sec.gov/spotlight/soxcomp.htm). Relevant textbook chapters - 3 and 10.

COSO Launches Project to Provide Internal Control Guidance for Small PublicCompanies – At the request of the SEC, the Committee of Sponsoring Organizations of theTreadway Commission (COSO) has launched a project to develop implementation guidanceto assist small, public companies in applying the COSO Internal Control – Integrated Framework . Virtually all public companies are referring to COSO’s internal controlframework when evaluating the operating effectiveness of internal control. Many smallpublic companies are seeking more detailed interpretative guidance to help them apply theframework in a smaller company setting. While COSO is committed to developing anexposure draft of this guidance by July 2005, COSO is emphasizing that the guidance willnot change the Internal Control – Integrated Framework . Rather the guidance will provideillustrations of how the framework can be applied in small public companies. Moreinformation about this project is available at COSO’s website (www.coso.org). Relevanttextbook chapter - 10.

ASB Issues Exposure Draft to Clarify Professional Responsibilities - The AuditingStandards Board has issued an exposure draft entitled Defining Professional Requirementsin Statements on Auditing Standards that establishes and defines terminology to describevarying degrees of responsibility imposed on an auditor or practitioner by professionalstandards. The ASB issued this guidance to be consistent with similar guidance issuedearlier by the PCAOB and the International Auditing and Assurance Standards Board(IAASB). The proposed statement defines the following two categories of professionalstandards requirements:

Requirements relate to situations where the auditor or practitioner is required to

comply with the provisions within the standards (i.e., departure fromrequirements is not allowed). A “requirement” is indicated by the words must or is required in professional standards.

Presumptive requirements relate to situations where the auditor or practitioner isrequired to comply with the provisions within the standards unless the auditor or practitioner can justify departure. To depart from a presumptive requirement anauditor must (1) perform alternative procedures that achieve the objectives of thepresumptive requirement and (2) document the reason for the departure and how



alternative procedures achieved the objectives of the presumptive requirement.The word should indicates a presumptive requirement.

The complete text of the proposed standard is available at the AICPA’s website(www.aicpa.org/members/div/auditstd/drafts.htm). Relevant textbook chapter - 6.

AICPA Antifraud Programs and Controls Task Force Issues Audit Committee

Guidance For Assessing the Risk of Fraud from Management Override of InternalControl - The AICPA’s Antifraud Programs and Controls Task Force has issued guidancefor audit committees to assist committee members in addressing the risk of fraud arisingfrom management override of internal control over financial reporting. The guidancesuggests that audit committees can deal with this ever-present risk of management overrideby:

Maintaining an appropriate level of skepticism. Strengthening the audit committee’s understanding of the business. Brainstorming to identify fraud risks. Using the code of conduct to assess the financial reporting culture.

Cultivating a vigorous whistleblower program.

Developing an information and feedback network that includes communication withinternal auditors, independent auditors, compensation committee, and keyemployees outside the financial reporting areas of responsibility.

The task force’s complete document is available from the Audit Committee EffectivenessCenter at the AICPA’s website (www.aicpa.org/audcommctr/homepage.htm). Relevanttextbook chapter - 11.

ARSC Issues Exposure Drafts of Proposed Statements on Standards for Accountingand Review Services (SSARS) - The Accounting and Review Services Committee (ARSC)has issued exposure drafts of three proposed SSARS. Here is a brief synopsis of each.

Compilation of Financial Statement Elements, Accounts, or Items of a Financial

Statement and Pro Forma Financial Information, amends SSARS No. 1 to enablean accountant to compile or review elements, accounts, or items of a financialstatement, and pro forma financial Information. The proposal would expand theapplicability of SSARS, which currently are applicable only to financialstatements.

Restricting the Use of an Accountant’s Compilation or Review Report , providesguidance on restricting the use of reports issued pursuant to SSARS. Theexposure draft defines the terms general use and restricted use, describescircumstances in which the use of an accountant’s report should be restricted,and specifies language to be used in accountants’ reports that are restricted asto use.

Omnibus Statement on Standards for Accounting and Review Services - 2005 ,amends existing SSARS as follows:- SSARS No. 1: to require the communication to management of

circumstances that come to the accountant’s attention that lead him/her tobelieve fraud may exist and provide guidance regarding matters that shouldcause the accountant to consider obtaining an updated representation letter from management.



- SSARS No. 2: to enable a successor accountant to compile or review arestatement adjustment when prior period financial statements have beenchanged.

The complete text of each of the exposure drafts is available at the AICPA’s website(www.aicpa.org/members/div/auditstd/drafts.asp) Relevant textbook chapter - 25.

Please share this newsletter with interested colleagues. If you have questions or suggestionsabout how to improve future newsletters, please send them to Professor Greg Jenkins [email protected].

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