Proposed Statement on Auditing Standards, Quality Control for an Audit of Financial Statements

Introduction
This memorandum provides background to the proposed Statement on Auditing Standards (SAS) Quality Control for an Audit of Financial Statements.This proposed SAS would supersede SAS No. 25, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards (AICPA, Professional Standards, vol. 1, AU sec. 161). The accompanying proposed SAS represents the redrafting of SAS No. 25 to apply the Auditing Standards Board’s (ASB) clarity drafting conventions and to converge with International Standards on Auditing (ISAs), as discussed in the following sections.

Background

Clarity
To address concerns over the clarity, length, and complexity of its standards, the ASB is currently making a significant effort to clarify the SASs.¹The ASB issued a discussion paper, Improving the Clarity of ASB Standards,² in March 2007. In response to the feedback received on the discussion paper and subsequent discussions with interested parties, the ASB has established clarity drafting conventions and has undertaken to revise all of its SASs in accordance with those conventions. The proposed SAS has been drafted in accordance with the ASB’s clarity drafting conventions, which include the following:

Establishing objectives for each of the standards
Including a definitions section, if relevant, in each standard
Separating requirements from application and other explanatory material
Numbering application and other explanatory material paragraphs using an A-prefix and presenting them in a section following the requirements section
Using formatting techniques, such as bulleted lists, to enhance readability
Including, where appropriate, special considerations relevant to audits of smaller, less complex entities within the text of the standards
Including, where appropriate, special considerations relevant to audits of governmental entities within the text of the standard

Convergence
Consistent with the ASB’s strategy to converge its standards with those of the International Auditing and Assurance Standards Board (IAASB),³ the proposed SAS has been drafted using ISA No. 220, Quality Control for an Audit of Financial Statements, as a base. There are no differences between this proposed SAS and ISA No. 220 other than those for which the ASB believes compelling reasons exist. Differences in objectives, definitions, or requirements between the proposed SAS and ISA No. 220 are identified in the exposure draft’s exhibit.

The ASB has made various changes to the language of the ISA to use terms or phrases that are more common in the United States, and to tailor examples and guidance to the U.S. environment. The ASB believes that such changes will not create differences between the application of ISA No. 220 and the application of the proposed SAS.

Effective Date
The proposed SAS would be effective for audits of financial statements for periods beginning on or after December 15, 2010. This effective date is provisional but will not be earlier than December 15, 2010.

Changes from Existing Standards
The proposed SAS would supersede SAS No. 25, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards (AICPA, Professional Standards, vol. 1, AU sec. 161). The explanatory memorandum to the ASB's exposure draft of the redrafted Risk Assessment standards states that paragraphs .28–.32 of extant AU section 311, Planning and Supervision (AICPA, Professional Standards, vol. 1), which address supervision in an audit, were omitted from the proposed SAS, Planning an Audit "because it is expected that these requirements and guidance will be included in proposed SAS, Quality Control for Audit Engagements when this proposed SAS is prepared in connection with convergence with ISA 220 (Redrafted), Quality Control for an Audit of Financial Statements, as part of the ASB's Clarification and Convergence project.” The supplementary materials accompanying this exposure draft show how the material in AU section 161 and AU section 311, paragraphs .29–.32 are either reflected in the proposed SAS or contained in proposed Statement on Quality Control Standards (SQCS), A Firm’s System of Quality Control (Redrafted) or in other SASs.

AU section 161 contains no requirements. The proposed SAS contains requirements and application material that address specific responsibilities of the auditor regarding quality control procedures for an audit of financial statements. Quality control systems, policies, and procedures are the responsibility of the audit firm. The proposed SAS specifies quality control procedures at the engagement level that assist the auditor in achieving the objectives of the quality control standards. As these procedures are required to be established by SQCS No. 7, A Firm’s System of Quality Control (AICPA, Professional Standards, vol. 2, QC sec. 10), the proposed SAS should not result in a change to existing practice; however, the proposed SAS would strengthen existing standards by making it easier for auditors to understand and apply those quality control procedures that apply to an audit of financial statements.

Issue for Consideration
Although the ASB’s standards do not apply to the audits of issuers, in converging with the ISAs, the ASB wishes to avoid unnecessary differences with the standards of the Public Company Accounting Oversight Board (PCAOB). ISA No. 220 contains requirements relating to engagement quality control review that apply only to audits of listed entities (issuers). The proposed SAS does not include such requirements. The PCAOB has a proposed standard, Proposed Auditing Standard—Engagement Quality Review, that contains requirements relating to engagement quality control reviews that apply only to audits of issuers. Certain of these requirements are not included in the proposed SAS. The ASB is interested in hearing from respondents about whether additional requirements relating to engagement quality control review should be included in the proposed SAS.

Guide for Respondents
The ASB is seeking comments specifically on changes resulting from applying the clarity drafting conventions and converging with the ISA, and their effect on the content of the proposed SAS. Respondents are asked to respond, in particular, to the following questions:

Are the objectives of the auditor appropriate?
Are the revisions made to converge the existing standard with ISA No. 220 appropriate?
Are the differences between the proposed SAS and ISA No. 220 identified in the exhibit, and other language changes, appropriate?
4. Have considerations for audits of smaller, less complex entities and governmental entities been dealt with appropriately?

Comments are most helpful when they refer to specific paragraphs, include the reasons for the comments, and, where appropriate, make specific suggestions for any proposed changes to wording. When a respondent agrees with proposals in the exposure draft, it will be helpful for the ASB to be made aware of this view, as well. Written comments on the exposure draft will become part of the public record of the AICPA and will be available for public inspection at the offices of the AICPA after August 31, 2009, for one year. Responses should be sent to Sherry Hazel at shazel@aicpa.org and received by August 31, 2009.

Supplements to the Exposure Draft
To assist respondents in identifying changes and in responding to this request to comment on the proposed SAS, the Audit and Attest Standards staff has prepared the following supplementary materials:

A matrix document, which compares ISA No. 220 and the proposed SAS. The schedule has three columns containing the following:
1. ISA No. 220
2. The proposed SAS, marked to show differences in language between the ISA and the proposed SAS (new and deleted material are shown in colored track changes)
3. Comments and rationale
A mapping document, which demonstrates how the material in extant AU section 161 and AU section 311, paragraphs .28–.32 is either reflected in the proposed SAS or is contained SQCS No. 7 or in other SASs.

This staff-prepared supplementary material is available below. It is for informational purposes only and does not form part of the exposure draft; however, it may be useful for respondents in formulating comments.

Comment Period
The comment period for this exposure draft ends on August 31, 2009.

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Download the Exposure Draft

Download the Supplementary Material

¹ The pamphlet Clarification and Convergence provides information about the Auditing Standards Board’s (ASB) clarity project.

² The discussion paper is available online at "Improving the Clarity of ASB Standards."

³ The ASB’s convergence paper, "AICPA’s Auditing Standards Board International Convergence Plan."