A Whole Lotta Shakin’ Goin’ On

Are you bewildered by the pace of change in professional standards?

Here are a few recent posts that will lessen your load:

Accounting

Private Company Council Summary

AICPA’s OCBOA Project

Speaking the Truth: Pension Liabilities (GASB)

Auditing

The New Clarity Project Engagement Letter

The Clarity Project – Sample Auditor’s Report

The Clarity Project – Changes to Auditor’s Report

Yellow Book Revisions

Yellow Book: Preparation of Financial Statements – Threat to Independence?

Internal Auditing: Proposed AICPA Independence Revisions

Compilations

Proposed Compilation Report

Compilation and Independence Standards May Change Significantly

Your Suggestions

Are there other issues you’d like for me to address?

The Clarity Project – New Engagement Letter

AU-C Section 210 of the new Clarified Auditing Standards will affect your engagement letter language. This is a standard audit engagement letter (from AU-C Section 210) and does not address issues such as Yellow Book or Single Audits.

As always, each audit will be unique and you will need to craft your particular engagement letter to meet the needs of the engagement.

The elements required in SAS No. 108 (the pre-Clarified Auditing Standards engagement letter guidance) are essentially unchanged.

 There are two new requirements (bolded in the sample letter below):

  1. Identification of the financial reporting framework and
  2. A reference to the form of report expected to be issued accompanied by a   statement that the actual report might have to be different. 

Many engagement letters, by audit firm practice, already refer to a reporting framework, so this requirement may not change anything.

Remember the Clarified Auditing Standards are applicable for your December 31, 2012 year-end audits, so if you are now preparing for those upcoming engagements, you will need to use the new engagement letter language.

Here’s the sample engagement letter:

To the appropriate representative of those charged with governance of ABC Company:

[The objective and scope of the audit]

You have requested that we audit the financial statements of ABC Company, which comprise the balance sheet as of December 31, 20XX, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements. We are pleased to confirm our acceptance and our understanding of this audit engagement by means of this letter. Our audit will be conducted with the objective of our expressing an opinion on the financial statements.

[The responsibilities of the auditor]

We will conduct our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

Because of the inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk that some material misstatements may not be detected exists, even though the audit is properly planned and performed in accordance with GAAS.

In making our risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements 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 the entity’s internal control. However, we will communicate to you in writing concerning any significant deficiencies or material weaknesses in internal control relevant to the audit of the financial statements that we have identified during the audit.

[The responsibilities of management and identification of the applicable financial reporting framework]

Our audit will be conducted on the basis that [management and, when appropriate, those charged with governance] acknowledge and understand that they have responsibility:

a.    for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America;

b.    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; and

c.    to provide us with

i.    access to all information of which [management] is aware that is relevant to the preparation and fair presentation of the financial statements such as records, documentation, and other matters;

ii.    additional information that we may request from [management] for the purpose of the audit; and

iii.    unrestricted access to persons within the entity from whom we determine it necessary to obtain audit evidence.

As part of our audit process, we will request from [management and, when appropriate, those charged with governance], written confirmation concerning representations made to us in connection with the audit.

[Other relevant information]

[Insert other information, such as fee arrangements, billings, and other specific terms, as appropriate.]

[Reporting]

[Insert appropriate reference to the expected form and content of the auditor’s report. Example follows:]

We will issue a written report upon completion of our audit of ABC Company‘s financial statements. Our report will be addressed to the board of directors of ABC CompanyWe cannot provide assurance that an unmodified opinion will be expressed. Circumstances may arise in which it is necessary for us to modify our opinion, add an emphasis-of-matter or other-matter paragraph(s), or withdraw from the engagement.

We also will issue a written report on [Insert appropriate reference to other auditor’s reports expected to be issued.] upon completion of our audit.

Please sign and return the attached copy of this letter to indicate your acknowledgment of, and agreement with, the arrangements for our audit of the financial statements including our respective responsibilities.

XYZ & Co.

Acknowledged and agreed on behalf of ABC Company by

___________________________

[Signed]

[Name and Title]

[Date]

If you have an existing multiple year engagement letter and you’re wondering whether you should issue a new engagement letter for the Clarity Standards, click here.

Audit Opinion Will Also Change

As I previously posted, the language in the opinion will also change.