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Need to know the important issues affecting all entities in all industries from the current unstable economic environment? This Audit Risk Alert focuses on emerging practice issues and current accounting and auditing developments.
Auditing in this challenging economic environment requires continually evaluating the importance of long-standing auditing standards directed at areas such as auditing fair value measurements, auditing accounting estimates, using the work of a specialist, going concern, and fraud. The current economic woes are stress testing the standards applicable to those areas and the critical thinking required to successfully apply them during all engagements.
The targeted discussions of recent economic, technical, and professional developments that may affect your audits will invigorate the audit team's brainstorming sessions required under AU sections 314 and 316 within the GAAS standards. Auditors, financial statement preparers, and management will find these same discussions helpful in identifying the significant risks that may result in the material misstatement of financial statements.
New accounting and auditing pronouncements and exposure drafts that are particularly significant to this alert and covered in just the right amount of detail include:
This alert also includes information on emerging issues such as:
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The State of the Economy
.03 The current recession, which officially began in December 2007, is the longest recession since the end of World War II. At this point, what is not certain is when the recession will end and when things will return to "normal." Further, there is no clear idea of what the new normal will be; what is known is that the United States cannot repeat the same actions that led to this economic crisis.
.04 For the past few years, U.S. consumers have been living above their means and spending more than they earn. This lifestyle and the economic growth it spurred—because household spending accounts for 70 percent of the economy—were unsustainable. Consumers' personal savings rate was negative 0.5 percent in 2005, the first time a negative savings rate occurred for an entire year since the Great Depression of 1932-1933, when the personal savings rates were negative 0.9 percent and negative 1.5 percent, respectively. Back then, Americans dipped into savings to cover basic living expenses. In 2005, the booming housing market created what some economists called a "wealth effect." Americans felt confident enough to spend all of their disposable income and dip into their savings because housing prices were rising at impressive rates. By May 2009, the savings rate in the United States rose to its highest point in more than 15 years, at 6.2 percent. By June 2009, however, it had declined to 4.6 percent. The high savings rate is in response to a rising unemployment rate (9.4 percent in July 2009) and the $1.33 trillion, or 2.6 percent, loss Americans experienced in their net worth in the first quarter of 2009 from the fourth quarter of 2008.
.05 The loss of net worth is slowing. However, in the fourth quarter of 2008, Americans' net worth dropped 8.6 percent—that was more than three times as high as the decline in the first quarter of 2009. This exhibits why many economists, including Federal Reserve Chairman Ben Bernanke, are saying the recession will probably end in 2009. Although many economic statistics are still in negative territory, the degree to which they are negative is improving.
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