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This Audit and Accounting Guide provides the latest information on accounting and auditing issues affecting the broker-dealer industry. Updated with conforming changes as of May 1, 2008, it includes guidance in planning and performing audits under the risk assessment standards (SAS Nos. 104-111). This edition of the guide has also been conformed to reflect the Defining Professional Requirements standard (SAS No. 102). Furthermore, it provides additional guidance on the auditor's responsibilities as set forth in SAS Nos. 112-114, including identifying and reporting internal control deficiencies, understanding the link between the auditor's consideration of fraud and the auditor's assessment of risk, dating of the management representation letter, and the auditor's communications with those charged with governance.
The guide summarizes applicable requirements and practices, and delivers "how-to" advice for handling audit and accounting issues common to the broker-dealer industry. It includes accounting requirements for broker-dealers and a discussion of the relevant financial statement considerations for the broker-dealer industry. Included in the guide is a glossary with common terms utilized by broker-dealers. The guide covers the following new accounting pronouncements:
For a topical listing of subject matter by chapter, click on the Table of Contents tab.
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Notice to Readers
This AICPA Audit and Accounting Guide has been prepared by the AICPA Stockbrokerage and Investment Banking Committee to assist preparers of financial statements in preparing financial statements in conformity with generally accepted accounting principles (GAAP) and to assist auditors in auditing and reporting on such financial statements in accordance with generally accepted auditing standards.
Descriptions of accounting principles and financial reporting practices in Audit and Accounting Guides are approved by the affirmative vote of at least two-thirds of the members of the Accounting Standards Executive Committee, which is the senior technical body of the AICPA authorized to speak for the AICPA in the areas of financial accounting and reporting. Statements on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles (AICPA, Professional Standards, vol. 1, AU sec. 411), identifies AICPA Audit and Accounting Guides that have been cleared by the Financial Accounting Standards Board (FASB) as sources of accounting principles in category b of the hierarchy of GAAP that it establishes. This Audit and Accounting Guide has been cleared by FASB.
AICPA members should consider the accounting principles described in this Audit and Accounting Guide if the accounting treatment of a transaction or event is not specified by a pronouncement covered by Rule 203, Accounting Principles (AICPA, Professional Standards, vol. 2, ET sec. 203), of the AICPA Code of Professional Conduct. AICPA members should be prepared to justify departures from the accounting guidance in this guide, as discussed in paragraph 7 of SAS No. 69.*
Auditing guidance included in an AICPA Audit and Accounting Guide is interpretive pursuant to AU section 150, Generally Accepted Auditing Standards (AICPA, Professional Standards, vol. 1). Interpretive publications are recommendations on the application of SASs in specific circumstances, including engagements for entities in specialized industries. An interpretive publication is issued under the authority of the Auditing Standards Board (ASB) after all ASB members have been provided an opportunity to consider and comment on whether the proposed interpretive publication is consistent with the SASs. The members of the ASB have found this guide to be consistent with existing SASs.
The auditor should be aware of and consider interpretive publications applicable to his or her audit. If an auditor does not apply the auditing guidance included in an applicable interpretive publication, the auditor should be prepared to explain how he or she complied with the SAS provisions addressed by such auditing guidance.
This AICPA Audit and Accounting Guide, which also contains attestation guidance, is an interpretive publication pursuant to AT section 50, SSAE Hierarchy (AICPA, Professional Standards, vol. 1). Interpretive publications include recommendations on the application of Statements on Standards for Attestation Engagements (SSAEs) in specific circumstances, including engagements for entities in specialized industries. Interpretive publications are issued under the authority of the AICPA ASB. The members of the ASB have found this guide to be consistent with the existing SSAEs.
A practitioner should be aware of and consider interpretive publications applicable to his or her attestation engagement. If the practitioner does not apply the guidance included in an applicable AICPA Audit and Accounting Guide, the practitioner should be prepared to explain how he or she complied with the SSAE provisions addressed by such guidance.
* In May 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). FASB concluded that the GAAP hierarchy should reside in the accounting literature established by FASB rather than in the auditing literature established by the AICPA (for non-Securities and Exchange Commission [SEC] registrants) or the Public Company Accounting Oversight Board (PCAOB) (for SEC registrants).
FASB Statement No. 162 carries forward the GAAP hierarchy as set forth in the AICPA's Statements on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles (AICPA, Professional Standards, vol. 1, AU sec. 411), subject to certain modifications that FASB does not expect to result in changes to current practice. The modifications include, among other changes, the expansion of category (a) accounting principles to include, with one exception, all sources of accounting principles that are issued after being subject to FASB's due process (including, but not limited to, FASB Staff Positions and FASB Statement No. 133 Implementation Issues, which are currently not addressed in SAS No. 69). Although certain consensus positions of the FASB Emerging Issues Task Force (EITF) have been issued after being subjected to FASB's due process, FASB decided to carry forward the categorization of EITF consensuses as presented in SAS No. 69, which is category (c).
FASB Statement No. 162 does not carry forward the exception permitted in Rule 203, Accounting Principles (AICPA, Professional Standards, vol. 2, ET sec. 203), of the AICPA's Code of Professional Conduct, that allows departures from the GAAP hierarchy if the member can demonstrate that, due to unusual circumstances, the financial statements would otherwise have been misleading. Therefore, as stated in FASB Statement No. 162, an entity cannot represent that its financial statements are presented in accordance with GAAP if its selection of accounting principles departs from the GAAP hierarchy set forth in FASB Statement No. 162, and that departure has a material effect on its financial statements.
FASB Statement No. 162 is effective 60 days following the approval by the SEC of the conforming amendments included in PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements (AICPA, PCAOB Standards and Related Rules, Rules of the Board, "Standards"), and conforming amendments adopted by the PCAOB on January 29, 2008. Among other significant provisions, the conforming amendments remove the GAAP hierarchy from the PCAOB's interim auditing standards. The SEC approved such amendments on September 16, 2008, therefore the effective date of FASB Statement No. 162 is November 15, 2008.
In response to FASB's release of the exposure draft of FASB Statement No. 162 in April 2005, the AICPA issued an exposure draft of a proposed SAS, Amendment to Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, for Nongovernmental Entities, in May 2005, which deletes the GAAP hierarchy for nongovernmental entities from SAS No. 69. The effective dates of the AICPA, FASB, and PCAOB standards are set to coincide. For more information please visit the FASB Web site at www.fasb.org.
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