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SAS 118-120 Presentation by H Kyle Anderson and Bill Ellis 10 27 2011
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SAS 118-120 Presentation by H Kyle Anderson and Bill Ellis 10 27 2011

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  • 1. SAS 118-120 UpdatesA&A UPDATESH. Kyle Anderson, CMA, CPABill Ellis, CPA
  • 2. A & A Update and Review, Inc 6514 Dobbins Bridge Road Anderson, SC 29626 (864) 933-3815 Fax: (888) 411-7668 Website: www.aandaupdate.com E-mail: kyle@aandaupdate.com Skype: hkacpa
  • 3. SAS 118-120 Updates SAS 118: Other Information in Documents Containing Audited Financial Statements AU Section 550 SAS 119: Supplementary Information in Relation to the Financial Statements as a Whole AU Section 551 SAS 120: Required Supplementary Information AU Section 558A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA
  • 4. Objectives What are the new reporting requirements when:  Auditors are asked to read and comment on supplementary/other information contained in Audited Financial Statements.  Auditors are engaged to report on the supplementary information and give an opinion regarding whether the information is fairly stated in relation to the required basic financial statements.  Auditors are engaged to report on supplementary information that a designated accounting standards setting body such as FASB, GASB, FAS and ISB requires the information to be included with the basic financial statements.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA
  • 5. Objectives  Auditor’s professional responsibilities for supplementary information  Required procedures  Reporting requirements  What is the Auditor’s responsibility when management does not provide the supplemental information or enable the auditor to complete the required procedures?  What are the resources available to the Auditor to ensure these engagements are conducted in accordance with GAAS?A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA
  • 6. Update from Clarity Project released October 2011  SAS 118-120 were issued using Clarity project standards and are currently effective.  SAS 122, Statements on Auditing Standard:  Clarification and Recodification,  SAS 123, Omnibus Statement on Auditing Standards – 2011, Released October 2011 amends SAS 118.  The effective date for SAS 123 is for audits of financial statements for periods ending after 12/15/2012.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA
  • 7. Update from Clarity Project released October 2011  SAS No. 118, Other Information in Documents Containing Audited Financial Statements (issued February 2010; became effective December 15, 2010. Early Application permitted. Currently AU 550 / New AU-C 720.  SAS No. 119, Supplementary Information in Relation to the Financial Statements as a Whole (issued February 2010; became effective December 15, 2010. Early Application permitted Currently AU 551 /New AU-C 725.  SAS No. 120, Required Supplementary Information (issued February 2010; became effective December 15, 2010. Early Application permitted Currently AU 558 /New AU-C 730.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA
  • 8. Material Coverage  Today, we will cover material available on the AICPA website at: http://www.aicpa.org/Research/Standards/AuditAttes t/Pages/SAS.aspx  Please download AU 550, AU 551 and AU 558 prior to the start of the webinar.  The material covered will be referenced to the current AU section and the new Clarity Project section AU-C.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA
  • 9. SAS 118 Other Information in Documents Containing Audited Financial Statements Scope Auditor’s Responsibility for other information in audited financial statements and the auditor’s report. Auditors are required to read the other information to determine if the credibility of the audited financial statements could be undermined by material inconsistencies between the financial statements and the other information. Effective Date Effective for periods beginning on or after December 15, 2010 with early application permitted. AU 550.01/ AU-C 720.01A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 550.03 / AU-C 720.03
  • 10. SAS 118 Definitions  Inconsistency: conflicts with other information and information contained in the audited financial statements.  Material inconsistencies may raise doubt about the audit conclusions and basis for the auditor’s opinion.  Misstatement of fact: Other information incorrectly stated or presented that may undermine the credibility of the audited financial statements.  Other information: Other financial and nonfinancial information excluding required supplementary information.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 550.05 / AU-C 720.05
  • 11. SAS 118 Requirements Reading Other Information  The auditor should read the other information to identify material inconsistencies.  If material Inconsistencies are identified, the auditor should determine if the information needs to be revised.  Material Inconsistencies identified after the auditor’s report date and prior to release should follow section 560, Subsequent Events and Subsequently Discovered Facts.  Material Inconsistencies identified after the auditor’s report release should follow section 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report. AU 550.06-550.14/AU-C 720.06–720.14A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 560 & 561 now AU-C 560
  • 12. SAS 118 Material Inconsistencies AU 550.10 - 550.12 / AU-C 720.10 - 720.12 Discovered prior to the report release date requiring revision of the other information when management refuses to make the revision should:  Include an AU-C 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report or  Withhold Auditor’s Report or  Withdraw from engagement if possible.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 550.06-550.14/AU-C 720.06–720.14
  • 13. SAS 118 Application and Other Explanatory Material Other information required to be included by a designated accounting standards setter is addressed in AU 558, Required Supplementary Information and AU-C 730, Required Supplementary Information.  Management reports  Financial highlights  Ratios  Quarterly data, etc.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 550.A1/AU-C 720.A1
  • 14. SAS 118 Example Other Matter Paragraph to Disclaim an Opinion Identify the audit conducted to form an opinion on the basic financial statements The other information is not a required part of those financial statements and has not been subjected to auditing procedures No opinion or assurance is provided. Change from SAS #122: AU 550.B, Comparison of Section 550, Other Information in Documents Containing Audited Financial Statements, With International Standard on Auditing 720, The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements has been removed in AU-C 720.BA&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 550.A13/AU-C 720.A13
  • 15. SAS 119 Supplementary Information in Relation to the Financial Statements as a Whole Scope Auditor’s responsibility when engaged to report whether supplementary information is fairly stated in relation to the financial statements. Such information is not necessary for financial statements to be in accordance with the applicable financial reporting framework Effective Date Effective for periods beginning on or after December 15, 2010 with early application permitted. Objective The auditor is to evaluate the supplementary information and report whether the supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. AU 551.01/AU-C 725.01 AU 551.02/AU-C 725.02A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 551.03/AU-C 725.03
  • 16. SAS 119 Definitions  Supplementary information: information presented outside the basic financial statements and not required for the financial statements to be in accordance with the applicable financial reporting framework.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 551.04/AU-C 725.04
  • 17. SAS 119 Requirements Procedures to Determine Whether Supplementary Information is Fairly Stated, in All Material Respects, in Relation to the Financial Statements as a Whole The auditor should determine that the supplementary information:  was derived from and relates directly to the financial statements.  relates to the same period  the auditor was the principal auditor in preparing the audited financial statements  an adverse opinion nor a disclaimer of opinion was issued, if so, see AU 551.11/AU-C 725.11  the supplementary information will be included with the audited financial statements, or made readily available by the entityA&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 551.05/AU-C 725.05
  • 18. SAS 119 Requirements Management’s Responsibility Management should acknowledge and understands its responsibility to the auditor for  preparation of the supplementary information  provide written representations in AU 551.07g/AU-C 725.07g  include the auditor’s report with the supplementary information  present the supplementary information with the audited financial statements or make the audited financial statements readily available to the intended users of the supplementary information.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 551.06/AU-C 725.06
  • 19. SAS 119 Requirements Procedures the auditor should perform regarding the supplementary information include  inquiry about the purpose of and the criteria used in preparation  compliance with the applicable criteria  methods used to prepare and whether the methods have changed from prior periods  compare and reconcile with accounting records, other records and financial statements  significant assumptions or interpretations used in measurement or presentation  appropriateness and completeness of the informationA&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 551.07/AU-C 725.07
  • 20. SAS 119 Requirements Procedures the auditor should perform regarding the supplementary information include  Management’s written representations regarding  responsibility for presentation in accordance with the applicable criteria  belief information is fairly presented in accordance with the applicable criteria  the methods of measurement or presentation have not changed from prior period or the reasons for changes  significant assumptions or interpretations utilized in the measurement or presentation  audited financial statements will be made readily available if not included with the supplementary information.  There are no requirements regarding subsequent events unless they come to the auditor’s attention.  Follow AU 560 Subsequent Events or AU 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report. AU-C 560, Subsequent Events and Subsequently Discovered Facts. AU 551.07/AU-C 725.07A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 551.08/AU-C 725.08
  • 21. SAS 119 Reporting The auditor’s explanatory paragraph (Other-Matter AU-C 706) in the report or separate report should include the following statements:  audit was conducted to form an opinion on the financial statements as a whole  supplementary information is for additional analysis and not a required part of the financial statements  supplementary information is the responsibility of management and derived from underlying accounting and other records  supplementary information has been subjected to the auditing procedures including comparing and reconciling such information directly to the underlying accounting and other records in accordance to GAAS  supplementary information is fairly stated in all material respects when auditor issues an unmodified opinion  any effect on the supplementary information if the auditor issues a qualified opinion.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 551.09/AU-C 725.09
  • 22. SAS 119 Reporting Separate report on Supplementary information  Separate reports on supplementary information should also reference the report, the date and nature of opinion on the financial statements. Adverse or Disclaimed Opinion on Financial Statements  An auditor cannot express an opinion on supplementary information when the audited financial statements contains an adverse opinion or a disclaimer of opinion. Materially Misstated Other Supplemental Information  Materially misstated Supplemental information should be revised  If management does not revise the supplementary the auditor should either modify the auditor’s opinion in the auditor’s report or if a separate report, withhold their report. Meaning of Readily Available AU 551.10/AU-C 725.10  Third party users should be able to obtain the audited AU 551.11/AU-C 725.11 financial statements without any further action by the entity AU 551.13/AU-C 725.13A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 551.A9/AU-C 725.A9
  • 23. SAS 119 Procedures Performed on Supplementary Information  Procedures in engagements included with the audit of financial statements are not as extensive as a stand- alone engagement  No requirement to obtain a separate understanding of the entity’s internal control or to fraud risk.  Materiality can be considered in selection of information to compare and reconcile to accounting and other records  Auditor can utilize testing records, observation, examination of source documents and other auditing procedures to evaluating appropriateness and completeness of supplementary information AU 551.A10/AU-C 725.A10  Auditor may consider performing procedures such as: AU 551.A11/AU-C 725.A11  updated representation letter AU 551.A12/AU-C 725.A12  subsequent events procedures AU 551.A13/AU-C 725.A13A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis,client’s  letter of audit inquiry to the CPA lawyer AU 551.A14/AU-C 725.A14
  • 24. SAS 119 Procedures Performed on Supplementary Information Contains the following explanatory paragraph report with audit report and as a separate report examples for:  Unqualified opinion on the financial statements as a whole and the supplementary information is fairly stated  Qualified opinion on the financial statements as a whole and a qualified opinion on the supplementary information  Auditor disclaims an opinion on the financial statements as a whole and ion on the supplementary information  Adverse opinion on the financial statements as a whole and ion on the supplementary information AU 551.A17/AU-C 725.A17A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 9551/AU-C 9725
  • 25. SAS 119 Procedures Performed on Supplementary Information Supplementary Information in Relation to the Financial Statements as a Whole  This contains guidance/questions and answers on dating the Auditor’s report on Supplementary Information  The report should not be dated earlier than the date the auditor completes AU 551.07 procedures. AU 551.A17/AU-C 725.A17A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 9551/AU-C 9725
  • 26. SAS 120 Required Supplementary Information Scope Auditor’s responsibility when engaged to report on Required Supplementary Information that a designated accounting standards setter requires as part of an entity’s basic financial statements. Effective Date Effective for periods beginning on or after December 15, 2010 with early application permitted. Objective The auditor should perform specified procedures necessary to report if the entity presented the required supplementary information according to guidelines established by the accounting standards setter or if they have identified material modifications required to be in compliance with those guidelines. AU 558.01/AU-C 730.01 AU 558.02/AU-C 730.02A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 558.03/AU-C 730.03
  • 27. SAS 120 Definitions  Applicable financial reporting framework. The financial reporting framework adopted by management or those charged with governance deemed appropriate or required by law or regulation.  Basic financial statements. Financial statements presented in accordance with an applicable financial reporting framework excluding required supplementary information.  Designated accounting standards setter. A body designated by the Council of the AICPA to promulgate GAAP, including FASB, GASB, FAS & ISB  Prescribed guidelines. The authoritative guidelines established by the designated accounting standards for measurement and presentation.  Required supplementary information. Information required to accompany an entity’s basic financial statements that a designated accounting standards setter considers an essential part of financial reporting.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 558.04/AU-C 730.04
  • 28. SAS 120 Requirements Auditor procedures for required supplementary information should include: a) Inquiry about the methods of preparing the information to insure in accordance with guidelines, whether any methods have changed and any significant assumptions or interpretations b) Comparison for consistency with management’s responses to part a), the basic financial statements, and other knowledge obtained during the regular audit c) Management’s written representations regarding  Responsibility for the required supplementary information  Whether the required supplementary information is in accordance with prescribed guidelines  That methods of measurement or presentation have not changed or the reasons for such changes  Significant assumptions or interpretations utilized in the measurement or presentationA&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 558.05/AU-C 730.05
  • 29. SAS 120 Reporting The auditor’s explanatory (Other-matter AU-C 706) paragraph in the report should include the following statements as applicable: a) The required supplementary information is included and the auditor complied with section 558.05, Procedures b) Required supplementary information is omitted c) Some information is missing and some presented properly d) Identification of material departures from guidelines e) Auditor could not complete requirements in section 558.05, Procedures f) Unresolved doubts exist regarding if presentationA&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 558.07/AU-C 730.07
  • 30. SAS 120 Reporting If all or some of the required information is presented, the auditor’s explanatory (Other-matter AU-C 706) paragraph in the report should include: a) identification of the applicable financial reporting framework and required supplemental information b) identification of the designated accounting standards requiring the required supplemental information c) if procedures in section 551.05 were completed:  statement auditor completed limited procedures in accordance to GAAS  The auditor does not provide an opinion or provide assurance on the information due to limited procedures.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 558.08/AU-C 730.08
  • 31. SAS 120 Reporting If all or some of the required information is presented, the auditor’s explanatory (Other-matter AU-C 706) paragraph in the report should include: d) if procedures in section 551.05 were not completed: a) statement auditor was unable to complete limited procedures in accordance to GAAS b) The auditor does not provide an opinion or provide assurance on the information due to limited procedures. e) if some of required supplementary information is omitted, the auditor should include statements noting: a) the information omitted by management b) the information was required by the designated accounting standards setter c) the auditor’s opinion on basic financial statements was not affected. f) Any material departures from the measurement or presentation guidelines g) Any unresolved doubts about measurement of presentation compliance with guidelines.A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 558.08/AU-C 730.08
  • 32. SAS 120 Reporting If all of the required information is omitted, the auditor’s explanatory (Other-matter AU-C 706) paragraph in the report should include the following a) The information omitted by management b) The information was required by the designated accounting standards setter c) The auditor’s opinion on basic financial statements was not affected. Application and Other Explanatory Material If the entity omits required supplementary information, the auditor is not required to present the information AU 558.09/AU-C 730.09A&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 558.A2/AU-C 730.A2
  • 33. SAS 120 Examples of Reports  The Required Supplementary Information is included, the auditor has applied the specified procedures, and no material departures from prescribed guidelines have been identified  All required supplementary information omitted  Some required supplementary information is omitted and some is presented in accordance with the prescribed guidelines  Material departures from prescribed guidelines identified  Specified procedures not completed  Unresolved doubts about whether the required supplementary information is in accordance with prescribed guidelinesA&A UPDATES H. Kyle Anderson, CMA, CPA Bill Ellis, CPA AU 558.A3/AU-C 730.A3
  • 34. Thank you.A&A UPDATESH. Kyle Anderson, CMA, CPABill Ellis, CPA

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