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Clarifying the Auditing Standards

Significant changes and planning steps related to the Clarity Project of the Auditing Standards Board (ASB).

May 17, 2010
Sponsored by PPC Self-Study CPE Courses

The Auditing Standards Board’s (ASB) “Clarity Project” is going to do more than just reformat and reorganize existing U.S. audit standards, it will converge them with the International Standards on Auditing (ISAs). Small firm practitioners will need to understand and implement these revised standards as businesses of all sizes become more global in their operations.

What Is the Clarity Project?

The Clarity Project is a multi-year effort undertaken by the ASB to reformat and redraft all of the existing U.S. auditing standards for nonpublic companies while converging them with International Standards on Auditing. The goal is to make U.S. audit standards easier to use.

What Is the Effective Date?

All but six of the clarified AU sections are expected to apply to audits of financial statements for periods beginning on or after December 15, 2010. This date is tentative and can be changed by the ASB if needed, but early application is prohibited. Therefore, similar to the Financial Accounting Standards Board (FASB) Codification project, you can expect an entirely new body of authoritative U.S. auditing literature for nonpublic companies beginning in 2011.

What’s Changing?

The reformatting and redrafting of the auditing standards are being done with the following guidelines in mind:

  • Establish objectives for each of the standards and define the auditor’s obligation related to the objectives.
  • Make structural and drafting improvements to the standards so they’re easier to read, understand and apply.
  • Include, in the explanatory material, special considerations related to audits of both governmental and small entities.
  • Converge with the ISAs or clearly establish reasons for not doing so.

In many cases, the reformatting and redrafting won’t change existing practice. However, in instances where the existing U.S. standard differs significantly from its international counterpart, major changes may be needed to bring the two into agreement.

Significant Changes

Based on clarified standards that have been exposed by the ASB to date, here are the areas where significant changes to U.S. standards are expected:

  • Auditor’s Reports. Expect major changes in the language of the auditor’s report, including special reports and reports on supplementary information.
  • Subsequent Events. Expect accounting guidance to be moved from the auditing standards, resulting in changes in auditor responsibility.
  • Initial Audits. Expect some additional requirements related to opening balances.
  • Illegal Acts. Expect additional requirements related to detecting noncompliance with laws and regulations that could have a material effect on the financial statements.
  • Service Organizations. Expect changes in the user auditor’s responsibilities, as well as reporting changes when using the work of a service auditor.

In addition, possibly the most significant changes from a training standpoint will relate to the following:

  • Terminology. You’ll see major changes in the terminology used in the auditing standards as a result of international convergence.
  • Geography. Some existing AU sections will be merged, others will be split apart and some will find their way to new locations in bits and pieces. When all is said and done, it may take time and training to become familiar with the new layout.

Planning for Implementation

You need to plan now for the coming changes. Consider doing the following:

  • Read current awareness materials from the AICPA and PPC to help you stay informed as the project progresses.
  • Read the project exposure drafts as they are issued; don’t wait until 2011.
  • Consider the need for training in 2010 to be sure that your staff is ready when the effective date arrives.

Planning ahead will ensure a smooth transition to the revised standards.

— From the CPE & Training Solutions eNewsletter from the Tax & Accounting business of Thomson Reuters, December 2009. To view current and past issues of the eNewsletter, click here.

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