How Recent Statements of Auditing Standards Will Affect Your Upcoming Audit

From May 2019 to April 2020, the AICPA Auditing Standards Board (ASB) issued seven Statements of Auditing Standards (SAS), all effective for audits of financial statements for periods ending on or after December 15, 2020. Due the effects of the COVID-19 pandemic, the effective date of these standards were delayed by one year, now effective for audits of financial statements for periods ending on or after December 15, 2021. The new standards significantly change the independent auditors’ report, introduce and/or clarify new concepts, amend multiple other AU-C Sections and will likely be hard for clients to miss during the upcoming audit season.

• SAS 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements. In addition to the change in the structure of the independent auditors’ report (see below) and the requirement to audit disclosures, the concept of “key audit matters” was introduced. Key audit matters are those matters, that in the auditors’ professional judgment, are of most significance in the audit of the financial statements of the current period. The key audit matters are selected from matters communicated with those charged with governance. The new SAS also moved any going concern language to a section separate from the Emphasis-of-Matter paragraph.

• SAS 135, Omnibus Statement on Auditing Standards, Addressing Related Parties, Fraud Considerations and Communication with Governance. This SAS increases the auditors’ focus on related parties, requiring the identification of related parties that appear to lack a business purpose and if management included a disclosure in the financial statements that a transaction was with a related party that it was conducted as an arm’s-length transaction. The SAS also revises the definition of “significant unusual transactions” and provides new audit procedures for the area. There are also new required inquiries related to subsequent events.
• SAS 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. An excellent article by Alicia Schmidt, Doug Bertossi and Jenna Hamilton titled “Changes Coming to Your ERISA Employee Benefit Plan Audit” covers this new standard in great detail.
• SAS 137, The Auditors’ Responsibilities Relating to Other Information Included in Annual Reports. A new definition of an annual report is covered here. The new SAS also clarifies the auditors’ objectives, having read the other information included in annual reports, including determining whether a material inconsistency exists, remaining alert for indications of material misstatement of facts, responding appropriately, reporting appropriately and outlining what auditors are and are not responsible for.
• SAS 138, Amendments to the Description of the Concept of Materiality. The updated definition contained in this SAS aligns materiality concepts discussed in the AICPA Professional Standards with the description of materiality used by the U.S. judicial system, the auditing standards of the Public Company Accounting Oversight Board (PCAOB), the U.S. Securities and Exchange Commission (SEC), and the Financial Accounting Standards Board (FASB). Materiality is now defined as misstatements, including omissions, that are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
• SAS 139, Special Purpose Frameworks. This new SAS includes:
  • Amendments to AU-C Section 800 (Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks)
  • AU-C Section 805 (Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement)
  • AU-C Section 810 (Engagements to Report on Summary Financial Statements).
• SAS 140, Various Amendments in order to incorporate reporting changes that were noted in SAS 134 and 137:
  • AU-C Section 725 (Supplementary Information in Relation to the Financial Statements as a Whole)
  • AU-C Section 730 (Required Supplementary Information)
  • AU-C Section 930 (Interim Financial Information)
  • AU-C Section 935 (Compliance Audits),
  • AU-C Section 940 (An Audit of Internal Control Over Financial Reporting that is Integrated With an Audit of Financial Statements)

Major thanks to Heidi Hoffman, Teresa Stopka and our entire National Assurance Technical Group for their help with this post.

Source: AICPA.org