Clarified Auditing Standards Require New Thinking and Procedures for Credit Unions
After nearly a decade of drafting, redrafting, and public input, clarified auditing standards from the AICPA’s Audit Standards Board are now in effect for audit periods ending after December 15, 2012. In spite of what you may have heard, these are substantive changes that will affect every credit union audit. Four areas of change are particularly important.
Headings and language in the opinion report
One substantive change is in the format of the auditor’s opinion report. Each paragraph section of the report is now required to have headings and specific language. Paragraph sections identify: management’s responsibilities, the auditor’s responsibility, and the auditor’s opinion. This requirement means that an auditor can not simply change the dates of last year’s report and present it again. Without new headings and revised clarity wording the report would be considered deficient.
Procedures for new clients
Another significant change involves an auditor’s procedures for new clients. The auditor must now do more concerning opening balances.
In the past, when most auditors would take on a new client, they may have reviewed the workpapers of the previous auditor, determined whether or not to rely on those opening balances, and then moved on to the audit of the current year. AU-C 510 (Opening Balances — Initial Audit Engagements, Including Reaudit Engagements) identifies another area that may require additional work before those opening balances are accepted.
Just reviewing the previous auditor’s workpapers is no longer sufficient evidence of an appropriate audit. The auditor must now do enough substantive audit work to place reliance upon the opening balance, noting that opening balances do not contain misstatements. That work might consist of assessing the previous auditor’s knowledge and reputation in the industry, and gathering audit evidence indicating that opening balances were assessed for material misstatements and that accounting policies reflected in opening balances have been consistently applied.
Modifications to engagement letters
A third significant change is in modifications to engagement letters. In the past, you may have had a multiyear letter, but new standards require a renewed engagement letter for each year or, at a minimum, a rider to the existing engagement letter. Both management and the audit committee must now sign the audit engagement letter. Management must specifically acknowledge responsibility for three audit pre-conditions:
- The preparation and presentation of financial statements in accordance with Generally Accepted Accounting Principles
- The design, implementation, and maintenance of internal controls
- A willingness to respond to the auditor’s requests for access and information
New audit concepts
The fourth change involves defining new audit concepts, such as component audit and group audit, when dealing with audits of consolidated financial statements. The auditor must now identify significant audit components either due to size and/or risk, and make determinations of material error or misstatement at both the component and group audit level. Under certain conditions, the group auditor may now make reference to a component auditor’s work in the group audit opinion.
While this may not directly affect the client, in a group audit, fees may increase if the involvement of another auditor increases.
What does this change mean for credit unions?
The new clarity standards provide a few incidental benefits for financial institutions by helping to better indentify the roles and responsibilities of all parties in an audit. The roles of the auditor, the audit committee, and management are different and distinct. Those differences are now more evident in the areas of: client acceptance and continuance, annual engagement letter communication, and acknowledgement of key audit preconditions. Reformatting the auditor’s opinion report is designed to improve the understanding of the report and the responsibilities and assurances it expresses.
The new standards may mean that the auditor and the client will have to perform additional work in certain situations, such as when the there is a change in auditors, or certain audits involving more complex consolidated reporting. Credit unions may now be required to sign two letters in the engagement letter process since the National Credit Union Administration audit regulations only permit the supervisory committee to sign audit engagement letters. A separate acknowledgement letter must be signed by management to comply with the new standards.
Credit unions should follow the guidance provided by their audit engagement team and study the clarity standards materials provided by the team. Most of the changes are self-evident, but be sure to ask questions to fully understand the new standards.