Kansas State University Accounting and Technology Conference · the Audit of the Financial Statements • Applicable for audits of financial statements for periods commencing on or

Kansas State University

Accounting and Technology

Conference

Auditing Update

October 3, 2019

Lynn E Turner

What Results in a Failed Audit

• Auditor fails to understand the business and its operations

o Lack of timely audit partner involvement

o Inexperienced staff – current “pyramid model”

o Results in failure to identify risks, frauds and errors

• Failure to properly assess management culture due to desire to retain audit and fees

• Failure to comply with all applicable professional standards

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What Results in a Failed Audit

• Identify issues too late in audit creating arguments and conflicts

o Results in rationalization of incorrect accounting

• Failure to obtain sufficient appropriate evidence, especially with estimates

o Professional standards require “persuasive evidence”

oOver reliance on management rep letters

• Lack of independent perspective – who pays the auditor is elephant in the room

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An Auditor’s Obligation

By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to the investing public. This “public watchdog” function demands that the accountant maintain total independence from the client at all times, and requires complete fidelity to the public trust.

United States v. Arthur Young & Co. 465 U.S. 805 (1984)

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Auditors Obligation

FDIC vs PWC 2017

“While there are numerous auditing standards that are implicated in this case…the overarching standard that governed the PWC audits is that: ‘[t]he auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether caused by error or fraud.’ AU § 110.02 (emphasis added); AU § 316. PCAOB Auditing Standard No. 2 states that ‘[a]lthough not absolute assurance, reasonable assurance is nevertheless a high level of assurance.’ ”

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Audits Require Cooperation

Colonial Bank email reads:

“We have auditors here again (all week) and so we must be on our very best behavior. All auditor rules apply—Only answer questions asked (if asked), do not offer extra information of any kind, especially personal opinions. If unsure of answers, see supervisor.”

Ex. D9 (emphases in original); see also Ex. D135 (email sent by Ms. Shultz on July 6, 2007) (“Remember, we only give [the auditors] what they ask for. We don’t offer any extra information.”). Other Colonial employees testified that employees were discouraged from cooperating openly and honestly with PWC.

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Auditing Standards Setters

SEC/ Congress

PCAOB IAASB ASB

PIOB IFAC AICPA

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Auditing Standard Setters Focus

• Audit Quality

• Audit Quality

• Audit Quality

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Auditing Standard Setter Projects

• Quality Control Standards

• Audit Evidence

• Professional Skepticism

• Revised Audit Reports Implementation

• Risk Assessment

• Ethical Standards

• NOCLAR

• Materiality

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International Forum of Independent

Audit Regulators

• Public Company Accounting Oversight Board

(USA)

• Financial Reporting Council (UK)

• Australian Securities & Investments Commission

• Dutch Authority for the Financial Markets

• Financial Services Agency (Japan)

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IFIAR Objectives

IFIAR’s strategic objectives (Strategic Objectives), as outlined in the Strategic Plan are to:

1. Achieve significantly improved audit quality on a global basis

2. Enhance capabilities for independent audit oversight

3. Grow the membership

To achieve these Strategic Objectives, IFIAR will implement the following four core strategies:

1. Facilitate collaboration and knowledge sharing between Members

2. Develop strategic relationships with investors and other key stakeholders, including standard setters, and maintain effective communications with global network firms

3. Implement sustained targeted outreach to Members and prospective Members

4. Establish an effective and efficient Board, Working Group, Task Force and Secretariat structure which enables coordinated high impact initiatives to achieve the strategic objectives

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IFIAR Survey Findings

The Survey Report noted that overall, 37% of the listed public interest entities (PIEs) audits inspected had at least one finding, down from a high point of 47% in 2014, but demonstrates significant improvement is still required. This compares to a figure of 40% in the 2017 report (2016: 42%).

In the 2017 Report, IFIAR reported on the firms’ progress at the half-way point, towards achieving the targeted 25% reduction in Global Audit Quality Working Group (GAQWG) jurisdiction inspected audits with at least one finding, set by the GAQWG in 2015. This target is for the firms to reduce the number of inspected audits with at least one finding from 39% to 29%. The 2017 data indicates that 30% of GAQWG jurisdiction inspected audits had at least one finding.

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Financial Reporting Council

• Changing to Audit, Reporting and Governance

Authority due to perceptions it was not a strong

enough regulator

• Consideration to breaking up Big 4 in UK

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FRC - The Auditor’s Responsibilities for

the Audit of the Financial Statements

• Applicable for audits of financial statements for periods commencing on or after 17 June 2016

• The auditor’s objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes the auditor’s opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing (UK) (ISAs (UK)) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

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FRC 2018/19 Inspection Results

• The FRC set a target for the firms that at least

90% of FTSE 350 audits should be assessed as

requiring no more than limited improvements by

the end of the 2018/19 inspection cycle.

Regrettably, no firm inspected this year achieved the target.

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FRC Inspection Findings

We had concerns on two audits where adjustments were made by management to the financial statements for errors above the audit materiality level set by the auditors. These included errors impacting on prior periods. The adjustments were recorded in the current year’s financial statements.

We noted the following matters:

• In both cases, the audit team concerned obtained insufficient evidence to support the conclusion that the prior period error did not have a material impact on the current or prior year’s financial statements, including the segmental disclosures. In these cases, the audit teams consulted the firm’s technical specialists but the evidence of these consultations was inadequate. The audit team should have challenged management further on the accounting treatment and the appropriateness of the disclosures in the annual reports

• On one of these audits, we identified weaknesses in audit work to quantify a potential prior year adjustment.

• The audit team’s reporting to the Audit Committee on these matters was not sufficiently clear on the basis for the auditor’s conclusions.

• We also had concerns with the sufficiency of the auditor’s reporting on these matters in the key observations section of the auditor’s report.

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FRC Inspection Findings

• BHS Ltd, British Retailer that collapsed in 2016

• October 1, 2019 FRC strengthened Going

Concern Auditor Standards, ISA UK 570

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Financial Reporting Council

• FRC – Audit Transparency Reports Not Visible Enough and Ineffective –September 26, 2019

• Transparency reporting by accountancy firms performing audits is currently ineffective with a lack of awareness amongst investors and Audit Committee Chairs that the reports even exist and many being used as a marketing exercise, according to a review from the Financial Reporting Council (FRC)

• While mandatory Transparency Reports broadly contain the required information, for those aware of the reports, there is a view they are too long and overly positive to be useful. The FRC is concerned that many firms treat the reports wrongly as a marketing tool which damages their perception among stakeholders and limits their usefulness.

• Other Findings Include:o 84% of Audit Committee Chairs were not even aware of Transparency Reports

o 15% of Reports were not found on firms’ website

o 5 of 33 firms reviewed had not even prepared a report

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Auditor Independence

• Responsibility of BOTH the independent auditor AND the management of the company

• Companies MUST have adequate controls to assess the independence of the auditors

o Processes and procedures to ensure compliance with independence standards

• Auditors MUST have adequate controls to ensure compliance and MUST REPORT ALL RELEVANT INFORMATION to the audit committee.

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• PWC and Audit Partner

• PwC violated the SEC’s auditor independence rules by performing prohibited non-audit services during audit engagements

• PwC’s actions deprived numerous issuers’ audit committees of information necessary to assess PwC’s independence.

• The violations occurred due to breakdowns in PwC’s independence-related quality controls

• For SECOND time, PWC required to undertake review of its quality control system

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• PwC violated PCAOB Rule 3525, which requires an auditor to describe in writing to the audit committee the scope of the work, discuss with the audit committee the potential effects of the work on independence, and document the substance of the independence discussion. PwC failed to comply with the requirements of Rule 3525 and, on several engagements, PwC mischaracterized non-audit services as audit work, even though the services involved financial software systems that were planned to be implemented in a subsequent audit period and providing feedback to management on those systems—areas outside the realm of audit work.

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• Marcum and Marcum Bernstein & Pinchuk

o Racked up multiple auditor independence violations

from 2012 to 2015

o Two senior partners made public statements

advocating investment in companies that were also

audit clients

o PCAOB sanctioned an annually inspected firm’s

head of independence for “substantially contributing

to the firm’s independence violations”

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• Deloitte Touch Tohmatsu

o Involved DTT CEO and Reputation/Risk Officer

o Prohibited bank Accounts at Bank audited

o Communicated improper information to audit

committee

oDeloitte Japan failed to have proper Quality Control

System

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• Indemnification Agreements Prohibited

o PWC in Colonial Bank court case

o SEC vs Elliot R. Berman

oAICPA standard

• “Practicing as an accountant”

oWorking on parts of an SEC filing is practicing as an

accountant subject to the Rule 102 standards

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Public Company Accounting

Oversight Board

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PCAOB Inspection Selection

• A PCAOB inspection examines in depth o certain aspects of a limited number of audits performed by the

audit firm and

o certain elements of the firm's system of quality control over its audit processes.

• Areas of inspection focus are most often selected on a risk-weighted basis – One would expect an audit firm would put its best people on the most risky auditso Some are random.

o Areas of focus involve audit work on the most difficult or inherently uncertain areas of financial statements.

• A PCAOB inspection report – regardless of whether it identifies a deficiency – does not mean the firm's unreviewed audit work was, or was not, deficient.

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PCAOB Inspection Reports

Most Recent Report Publication Dates

Firm Name Financial Statement Year

Inspection Year

Date of Inspection Report

Number of Audits Inspected

KPMG ~2015 2016 1/15/2019 51

KPMG ~2016 2017 1/24/2019 52

Deloitte ~2015 2016 11/28/2017 55

Deloitte ~2016 2017 12/20/2018 55

PwC ~2015 2016 12/19/2017 56

PwC ~2016 2017 2/28/2019 55

EY ~2015 2016 12/19/2017 55

EY ~2016 2017 Not Published Not Published

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PCAOB Part II Quality Controls

Reports - KPMGFirm Name General

Financial Statement Year

Date of Original Inspection

End of Remediation

Date of Release of Part II Report

KPMG ~2014 10/15/2015 10/15/2016 1/25/2019

KPMG ~2015 11/9/2016 11/9/2017 1/25/2019

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Section 104(g)(2) of the Sarbanes Oxley Act of 2002 (S)X) states that no portion of Part II of a PCAOB Inspection Report, "...addressing criticisms or potential defects in the quality control systems of the firm...shall be made public if those criticisms or defects are addressed by the firm...not later than 12 months after the date of the inspection report." As this slide demonstrates, the PCAOB has given firms an extended period after the 12 month remediation period before informing the public of the audit deficiencies.

PCAOB Inspection ResultsBig Four – Summary of All

Inspection Year: 2012 2013 2014 2015 2016 2017

Total Audits

Inspected208 219 219 217 217 162*

Deficient Audits

Identified76 85 76 61 64 50*

Deficiency Rate 36.5% 38.8% 34.7% 28.1% 29.5% 30.9%

“Inspection Year” is when the PCAOB primarily performs its inspection procedures. Typically the PCAOB completes its

inspection work in year one and issues the Reports on Inspection the following year. In the table above, Reports on

Inspection for Inspection Year 2017 were typically issued in 2018.

*As of September 30, 2019, the 2017 Inspection Report for Ernst & Young United States was not available.

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KPMG 2014 Inspection Part II Inspection Report –

Most Frequently Identified Audit Issues

Issue Part I.A Audits with Issue

Failure to sufficiently test the design and/or operating effectiveness of controls that the Firm selected for Testing

22 Audits

Failure to identify and test any controls that addressed the risks related to a particular account or assertion

12 Audits

Failure to perform sufficient testing related to an account or significant portion of an account or to address an identified risk

10 Audits

Failure to sufficiently test significant assumptions or data that the issuer used in developing an estimate

9 Audits

Failure to sufficiently test controls over, or sufficiently test, the accuracy and completeness of issuer-produced data or reports

6 Audits

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52 total audits inspected as part of the 2014 KPMG Inspection Report covering financial statement year 2013.

PCAOB Projects

Strategic priorities for 2018-2022:

• Effective Oversight. We will drive continuous improvement in the quality of audit services and more clearly communicate our assessment of the quality we observe.

• Innovation. We will be more innovative in our oversight activities—particularly with respect to our approach to inspections and standard setting—and at the same time prepare for significant market-driven changes in the audit profession.

• Improved Engagement. We will engage more often and more directly with a broader array of investors, as well as with audit committees, preparers, and our other stakeholders to promote robust and timely dialogue regarding the quality of audit services.

• Process and Culture Optimization. We will optimize our operations and enhance the culture of our organization.

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PCAOB Project

Quality Control Standards

• Concept Release Seeking Comments on

Revisions to the PCAOB (AICPA) Quality

Control Standards

• Remarks of Duane Desparte – University of

Illinois, Sept 2019.

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PCAOB Revised Report

• A CAM is defined as any matter arising from the

audit of the financial statements that was

communicated or required to be communicated

to the audit committee and that:

o Relates to accounts or disclosures that are material to

the financial statements; and

o Involved especially challenging, subjective, or

complex auditor judgment.

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When communicating CAMs in the auditor’s report, the following introductory language is required to be included: Critical Audit Matters

“The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) Which audit period is covered by CAMs. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.”

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In describing how the CAM was addressed in the audit, the auditor may describe any, or a combination, of the following:

• The auditor’s response or approach that was most relevant to the matter

• A brief overview of the audit procedures performed

• An indication of the outcome of the audit procedures

• Key observations with respect to the matter

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If the auditor determines that there are no CAMs, the following language is required:

• “Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.”

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PCAOB Revised Audit Report

• All provisions other than those related to critical

audit matters will take effect for audits for fiscal

years ending on or after December 15, 2017; and,

• Provisions related to critical audit matters will take

effect for audits for fiscal years ending on or after

June 30, 2019, for large accelerated filers; and for

fiscal years ending on or after December 15, 2020,

for all other companies to which the requirements

apply.

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PCAOB Revisions to Audit

Report• Auditor tenure — The auditor's report will include a

statement disclosing the year in which the auditor began serving consecutively as the company's auditor;

• Independence — The auditor's report also will include a statement that the auditor is required to be independent;

• Enhancements to basic elements — Certain standardized language in the auditor's report has been changed, including adding the phrase, "whether due to error or fraud," when describing the auditor's responsibility under PCAOB standards to obtain reasonable assurance about whether the financial statements are free of material misstatements;

• Standardized form of the auditor's report — The opinion will appear in the first section of the auditor's report. Section titles have been added to guide the reader; and,

• Addressees — The auditor's report will be addressed to the company's shareholders and board of directors or equivalents (additional addressees also are permitted).

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Comparison of US and International

Audit Reports

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fPDF

https://conferences.k-state.edu/accounting-technology/files/2019/10/Audit-Opinions-PG-and-Cineworld.pdf

PCAOB Revised Standard for Auditing

Estimates including Fair Value

(1) Replace AS 2501, Auditing Accounting Estimates; and retitle the standard as Auditing Accounting Estimates, Including Fair Value Measurements;

(2) Rescind AS 2502, Auditing Fair Value Measurements and Disclosures; and AS 2503, Auditing Derivative Instruments, Hedging Activities, and Investments in Securities;

(3) Revise AS 1015, Due Professional Care in the Performance of Work AS 1105, Audit Evidence; AS 1205, Part of the Audit Performed by Other Independent Auditors; AS 2110, Identifying and Assessing Risks of Material Misstatement; AS 2301, The Auditor's Responses to the Risks of Material Misstatement; AS 2401, Consideration of Fraud in a Financial Statement Audit; and AS 2805, Management Representations;

(4) Rescind AI 16, Auditing Accounting Estimates: Auditing Interpretations of AS 2501; and Make additional conforming amendments.

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PCAOB Revised Standard for Auditing

Estimates including Fair Value

• Provides direction to prompt auditors to devote greater attention to addressing potential management bias in accounting estimates, as part of applying professional skepticism.

• Extend certain key requirements in the fair value standard to other accounting estimates in significant accounts and disclosures to reflect a more uniform approach to substantive testing

• Further integrate requirements with the risk assessment standards to focus auditors on estimates with greater risk of material misstatement. The new standard and related amendments incorporate specific requirements relating to accounting estimates into AS 2110 and AS 2301 to inform the necessary procedures for auditing accounting estimates.

• Extends certain key requirements in the fair value standard to other accounting estimates in significant accounts and disclosures to reflect a more uniform approach to substantive testing.

• Make other updates to the requirements for auditing accounting estimates, including Establish more specific requirements for developing an independent expectation that vary depending on the source of data, assumptions, or methods used by the auditor and build on AS 2810 to provide a requirement when developing an independent expectation as a range.

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AICPA

Auditing Standards Board Update

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Auditor Reporting – AU-C 700 Series

• SAS No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statementso New section

AU-C 701, Communicating Key Audit Matters in the Independent Auditor’s Report

o Supersedes

AU-C 700, Forming an Opinion and Reporting on Financial Statements

AU-C 705, Modifications to the Opinion in the Independent Auditor’s Report

AU-C 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report

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Auditor Reporting – AU-C 700 Series

cont’d

• SAS No. 134, Auditor Reporting and Amendments,

Including Amendments Addressing Disclosures in the

Audit of Financial Statements

• Issued May 2019

• Effective for audits of financial statements for

periods ending on or after December 15, 2020.

Early adoption not permitted.

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Section 700, Forming an Opinion and Reporting on Financial Statements

• Changes form and content for all auditor’s

reports under GAAS

o Consistent with the IAASB’s revised auditor’s report

o Consistent with the PCAOB’s revised auditor

reporting model as to positioning of the Opinion

and Basis for Opinion sections.

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Significant Changes to the Auditor’s

Report

• Opinion section first

• “Basis for Opinion” section second and includes a statement that

the auditor is required to be independent of the entity and to meet the auditor’s other ethical responsibilities, in accordance with the relevant ethical requirements relating to the audit

o Key Audit Matters section (New AU-C section 701) Not Mandatory: only include if engaged to include (agreed in

terms of engagement that report will include KAMs)

If included, requirements apply

“What keeps the auditor up at night”

Selected from matters communicated with TCWG

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Significant Changes to the Auditor’s

Report cont’d

• Expanded descriptions of the responsibilities of

omanagement relating to going concern evaluation,

when required by the applicable financial reporting

framework

o the auditor, including relating to

professional judgment and professional skepticism

going concern

communications with those charged with governance

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Auditor Reporting – SAS No. 134

• Going Concern (AU-C 570)

oAU-C 700 requires reporting in accordance with

AU-C 570 when applicable; AU-C 570 amended

o If substantial doubt exists, include a separate section

headed “Substantial Doubt About the Entity’s

Ability to Continue as a Going Concern”

Replaces required EOM but wording is similar

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What should you be doing now?

• It’s not too early to start thinking about how this standard will affect what you do o Review and update firm methodologies and guidance –

this takes time!

o Consider the impact of amendments to various AU-C sections, including AU-C 210, Terms of Engagement. For example, update engagement letters to reflect new report wording and heightened focus on disclosures

o Consider the training needs for engagement teams

o Start educating identified users (e.g. your client, their lenders) about new form and content of the auditor’s report.

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SAS 135, Omnibus Statement on Auditing Standards – 2019• Proposed amendments to AU-C 260, Communication

with TCWG, and AU-C 550, Related Parties, as well as various other sections

• Amendments intended to enhance audit quality by heightening the auditor’s focus on o related parties and relationships and transactions with

related parties

o Significant unusual transactions

• ASB considered PCAOB AS 16, AS 17 and AS 18

• Effective for audits of financial statements for periods ending on or after December 15, 2020.

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Auditor Reporting – EBP ERISA

audits• Five month comment period;

extensive ASB deliberations

• Final standard approved at July 2018 meeting, subject to revisions to conform to SAS 134

• ASB approved revisions in May 2019 and final SAS to be issued in Summer 2019

• Effective for audits of financial statements for periods ending on or after December 15, 2020. Early adoption is not permitted.

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audits

• New AU-C section 703 (AU-C 700 would no

longer apply for ERISA plans)

• Requirements to enhance audit quality and

revised auditor’s report on ERISA plan financial

statements and provide better insight into

responsibilities of management and the auditor

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Major changes

• ERISA limited scope audit now referred to as

an ERISA section 103(a)(3)(C) audit

• Electing to exclude certain investments no

longer considered a scope limitation

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audits

• SAS includes:

o Form and content of unmodified opinion (consistent with SAS 134)

o Procedures and new form of opinion for ERISA section 103(a)(3)(C) audit

Precondition that auditor inquire as to how management determined the entity preparing and certifying the investment information is a qualified institution

Emphasizes that the auditor is required to determine which information is certified and which is not certified; information not certified is required to be audited

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audits

• Changes to the ERISA section 103(a)(3)(C) report:

• New section “Nature of ERISA section

103(a)(3)(C) audit”

• Expanded management and auditor responsibilities

sections

• A two-part opinion addressing

o the information not covered by the certification, and

o the procedures required by the SAS that were performed

on the certified information

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Illustrative Auditor’s Report

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Illustrative Report

Independent Auditor’s Report

[Appropriate Addressee]

Report on the Audit of the Financial Statements

Opinion

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

In our opinion, the accompanying financial statements 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 and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

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Illustrative Report

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of ABC Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Illustrative Report

Key Audit Matters

[Not Mandatory – Included if agreed to in terms of engagement]

Key audit matters are those matters that were communicated with those charged with governance and, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

[Description of each key audit matter in accordance with AU-C 701.]

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Illustrative Report

Responsibilities of Management for the Financial Statements

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

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about ABC Company’s ability to continue as a going concern for [insert the time period set by the applicable financial reporting framework].

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Illustrative Report

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users made on the basis of these financial statements.

In performing an audit in accordance with GAAS, we:

• Exercise professional judgment and maintain professional skepticism throughout the audit.

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Illustrative Report

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

• Obtain an understanding of internal control relevant to the audit 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 ABC Company’s internal control. Accordingly, no such opinion is expressed.

• Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.

• Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about ABC Company’s ability to continue as a going concern for a reasonable period of time.

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Illustrative Report

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.

Report on Other Legal and Regulatory Requirements

[The form and content of this section of the auditor’s report would vary depending on the nature of the auditor’s other reporting responsibilities.]

[Signature of the auditor’s firm]

[City and state where the auditor’s report is issued]

[Date of the auditor’s report]

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Recent exposure drafts

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Other Information

• Proposed SAS The Auditor’s Responsibilities Relating to

Other Information Included in Annual Reports

• Will supersede AU-C section 720, Other Information

in Documents Containing Audited Financial Statements

• Is expected to be voted final at ASB May 2019

meeting

• Effective date would be for audits of financial

statements for periods ending on or after December

15, 2020

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Other Information cont’d

• Clarifies the auditor is required to apply procedures only to other information included in annual reports (or similar documents).

• Revises work effort to require the accountant to remain alert for information that is misleading, including because it omits or obscures information necessary for a proper understanding of a matter disclosed in the other information

• Requires a separate section be included in the auditor’s report addressing OI

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Other standard-setting projects

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Audit Evidence

Addressing evolving nature of audit servicesAddressing evolving nature of audit services

Emerging tools and techniques, including data analytics

Emerging tools and techniques, including data analytics

Professional skepticismProfessional skepticism

External information sourcesExternal information sources

• ASB taking

the lead;

IAASB is

closely

monitoring.

Timeline:

• ED May 2019

• Final SAS 1st

quarter 2020

• Effective date

June 2021

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Audit Evidence

• Revising an objective currently focused on the design and performance of audit procedures.

• Developing a framework for evaluating audit evidence based on

o appropriateness (relevance and reliability), and

o sufficiency (persuasiveness)

Shift focus from quantity to persuasiveness

“The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence…”

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Audit Evidence – NEW MAIN

THEME As a basis for concluding whether sufficient appropriate audit evidence has been obtained, the objective of the auditor is to evaluate information to which audit procedures have been applied to determine whether such information is appropriate audit evidence.

Audit evidence should be considered notwithstanding the source from which it is obtained or the method used to obtain the information.

As a basis for concluding whether sufficient appropriate audit evidence has been obtained, the

auditor should evaluate the appropriateness of the audit evidence in the context of the following:

a) the source from which it was obtained and

b) whether such information corroborates or contradicts the assertions in the financial

statements

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Audit Procedures

Audit Evidence

Substantive Audit

Procedures

Substantive Audit

Procedures

Test of ControlsTest of

Controls

Risk Assessment Procedures

Risk Assessment Procedures

“The auditor may perform one or more procedures using different audit tools or techniques, including audit data analytics, visualization, or artificial intelligence in meeting objectives of the audit procedures.”

“In some instances, the auditor may achieve the objective of more than one type of audit procedure (for example, as both a risk assessment and further audit procedure) and may accomplish the objectives of both types of procedures simultaneously, including achieving such objectives through the use of automated tools or techniques.”

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Materiality

• Proposed SAS and proposed SSAE, both titled Amendments to the Description of the Concept of Materiality

• ED expected to be issued June 2019

o Amendments intended to eliminate inconsistencies between the AICPA Professional Standards and the definition of materiality used by the U.S. judicial system and other U.S. standard setters and regulators.

• Prompted by recent FASB amendment of its description of materiality to be more consistent with others in the US

Misstatements, including omissions, are considered to be material if theythere is substantial likelihood that,individually or in the aggregate, could reasonably be expected tothey would influence theeconomic decisions ofusers judgment of a reasonable user made based on the basis of the financial statements.

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Questions???

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