The Clarified Auditing Standards

McNair, McLemore, Middlebrooks & Co., LLC

Why Change?
Convergence with International Auditing Standards
Easier to read and apply

Effective for periods ending December 31, 2012

What are the big changes?

New opinion

New engagement letter

New representation letter

New requirements for group audits

Auditor required to inspect correspondence with licensing or regulatory authorities

Requires communication - in writing or orally - to management only, of management letter comments

No real change here the auditor still determines whether a control weakness (other than a significant deficiency or a material weakness) should be communicated

Communicate potential effect of significant deficiencies or material weaknesses

Potential effect does not need to be quantified

Attorneys Letter
Existing standards require an attorneys letter when client has consulted with an attorney with regard to litigation

Attorneys Letter
Now a principles-based decision to send the letter Send letter only if auditor assesses a risk of material misstatement (due to litigation) or when audit procedures indicate that material litigation exists

Must document your basis for not sending the attorneys letter

Auditing Opening Balances

Strengthens existing standards by requiring more than just reviewing the predecessor auditors work papers Must obtain sufficient evidence that opening balances do not contain misstatements that could materially affect current period financial statements
Must determine whether accounting policies have been consistently applied

Performance Materiality
Establishes an additional level of materiality termed performance materiality

Provides for the effects of individually immaterial uncorrected and undetected misstatements

Performance Materiality
Concept - to reduce overall materiality

for an estimate of potential misstatements based on: Prior experience and

Current period expectations

Performance Materiality
Performance materiality runs to:

Classes of transactions Account balances

Disclosures

Service Organizations
User auditor is required to inquire of

management about whether the service organization has reported to the company any: Fraud Noncompliance with laws and regulations

Uncorrected misstatements

What Did Not Change?

Audit documentation

Fraud procedures
Communication with those charged with governance Planning audits

What Did Not Change?

Understanding the Entity and Assessing the Risks of Material Misstatement Materiality Analytical procedures Audit sampling

What Did Not Change?

Auditing estimates, fair value and disclosures
Subsequent events

Remember
Change your opinion Update your engagement letter

Update your representation letter

Remember
Use new materiality worksheet Contact Quality Control if you have questions about group audits

Remember
SAS 115 letters - communicate the potential effects of any significant deficiencies or material weaknesses

Inspect correspondence with regulatory or licensing authorities