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Welcome to the Spring 2005 Arens/Elder/Beasley Auditing Newsletter highlighting recent events affecting the auditing profession. In addition to providing a brief overview of key issues, this newsletter shows how each event relates to specific chapter material in Auditing and Assurance Services: An Integrated Approach (10th Edition, Prentice Hall, Inc.). We hope this newsletter will prove to be a valuable resource for you. Feel free to forward this on to interested colleagues.

Don’t forget to visit our accompanying Companion Website (arens) where you can find other useful information.

This Spring 2005 Newsletter includes coverage of the following:

• PCAOB Issues Proposed Ethics and Independence Rules

• SEC Defers Section 404 Reporting for Non-Accelerated Filers and Hosts Roundtable on Implementation of Internal Control Reporting Provisions of the Sarbanes-Oxley Act

• COSO Launches Project to Develop Internal Control Guidance for Small, Public Companies

• ASB Issues Exposure Draft to Clarify Professional Responsibilities

• AICPA Antifraud Programs and Controls Task Force Issues Audit Committee Guidance for Assessing the Risk of Fraud from Management Override of Internal Control

• ARSC Issues Exposure Drafts of Proposed SSARS

Note: PowerPoint ® slides are provided so that you can conveniently incorporate any or all of these topics in your classroom.

❖ PCAOB Issues Proposed Ethics and Independence Rules - The PCAOB issued proposed rules to strengthen the independence of registered public accounting firms that audit and review the financial statements of public companies. The proposed rules would treat an accounting firm as not independent if:

▪ the firm provides any service or product to an audit client for a contingent fee or a commission, or receives from an audit client, directly or indirectly, a contingent fee or commission, or

▪ the firm or an affiliate provided assistance in planning, or provided tax advice on, certain types of potentially abusive tax transactions to an audit client or provided any tax services to certain senior officers of an audit client.

The proposed rules would also require accounting firms to provide certain information to the audit committee of an audit client in connection with seeking pre-approval to provide non-prohibited tax services to the audit client. More information on the proposed rules is available at the PCAOB’s website (Standards/index.asp). Relevant textbook chapter - 4.

❖ SEC Defers Section 404 Reporting for Non-Accelerated Filers and Hosts Roundtable on Implementation of Internal Control Reporting Provisions of the Sarbanes-Oxley Act - In March 2005, the SEC deferred the filing deadline for initial management reports on internal control required under Section 404 for non-accelerated filers by one year. As a result, non-accelerated filers, which are companies with a market capitalization under $75 million, must include management and auditor reports on internal control over financial reporting in their Form 10-K for the first fiscal year ending on or after July 15, 2006. Since the SEC’s adoption of rules implementing Section 404 in June 2003, public companies and accounting firms have invested vast amounts of time and large sums of money to prepare for the necessary internal control reporting. To obtain feedback about experiences of registrants and auditors during this first-time reporting, the SEC hosted a roundtable on April 13, 2005 to discuss issues surrounding the implementation of 404 reporting. More information on the roundtable and related documents are available at the SEC website (spotlight/soxcomp.htm). Relevant textbook chapters - 3 and 10.

❖ COSO Launches Project to Provide Internal Control Guidance for Small Public Companies – At the request of the SEC, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) has launched a project to develop implementation guidance to assist small, public companies in applying the COSO Internal Control – Integrated Framework. Virtually all public companies are referring to COSO’s internal control framework when evaluating the operating effectiveness of internal control. Many small public companies are seeking more detailed interpretative guidance to help them apply the framework in a smaller company setting. While COSO is committed to developing an exposure draft of this guidance by July 2005, COSO is emphasizing that the guidance will not change the Internal Control – Integrated Framework. Rather the guidance will provide illustrations of how the framework can be applied in small public companies. More information about this project is available at COSO’s website (). Relevant textbook chapter - 10.

❖ ASB Issues Exposure Draft to Clarify Professional Responsibilities - The Auditing Standards Board has issued an exposure draft entitled Defining Professional Requirements in Statements on Auditing Standards that establishes and defines terminology to describe varying degrees of responsibility imposed on an auditor or practitioner by professional standards. The ASB issued this guidance to be consistent with similar guidance issued earlier by the PCAOB and the International Auditing and Assurance Standards Board (IAASB). The proposed statement defines the following two categories of professional standards requirements:

▪ Requirements relate to situations where the auditor or practitioner is required to comply with the provisions within the standards (i.e., departure from requirements is not allowed). A “requirement” is indicated by the words must or is required in professional standards.

▪ Presumptive requirements relate to situations where the auditor or practitioner is required to comply with the provisions within the standards unless the auditor or practitioner can justify departure. To depart from a presumptive requirement an auditor must (1) perform alternative procedures that achieve the objectives of the presumptive requirement and (2) document the reason for the departure and how alternative procedures achieved the objectives of the presumptive requirement. The word should indicates a presumptive requirement.

The complete text of the proposed standard is available at the AICPA’s website (members/div/auditstd/drafts.htm). Relevant textbook chapter - 6.

❖ AICPA Antifraud Programs and Controls Task Force Issues Audit Committee Guidance For Assessing the Risk of Fraud from Management Override of Internal Control - The AICPA’s Antifraud Programs and Controls Task Force has issued guidance for audit committees to assist committee members in addressing the risk of fraud arising from management override of internal control over financial reporting. The guidance suggests that audit committees can deal with this ever-present risk of management override by:

▪ Maintaining an appropriate level of skepticism.

▪ Strengthening the audit committee’s understanding of the business.

▪ Brainstorming to identify fraud risks.

▪ Using the code of conduct to assess the financial reporting culture.

▪ Cultivating a vigorous whistleblower program.

▪ Developing an information and feedback network that includes communication with internal auditors, independent auditors, compensation committee, and key employees outside the financial reporting areas of responsibility.

The task force’s complete document is available from the Audit Committee Effectiveness Center at the AICPA’s website (audcommctr/homepage.htm). Relevant textbook chapter - 11.

❖ ARSC Issues Exposure Drafts of Proposed Statements on Standards for Accounting and Review Services (SSARS) - The Accounting and Review Services Committee (ARSC) has issued exposure drafts of three proposed SSARS. Here is a brief synopsis of each.

▪ Compilation of Financial Statement Elements, Accounts, or Items of a Financial Statement and Pro Forma Financial Information, amends SSARS No. 1 to enable an accountant to compile or review elements, accounts, or items of a financial statement, and pro forma financial Information. The proposal would expand the applicability of SSARS, which currently are applicable only to financial statements.

▪ Restricting the Use of an Accountant’s Compilation or Review Report, provides guidance on restricting the use of reports issued pursuant to SSARS. The exposure draft defines the terms general use and restricted use, describes circumstances in which the use of an accountant’s report should be restricted, and specifies language to be used in accountants’ reports that are restricted as to use.

▪ Omnibus Statement on Standards for Accounting and Review Services - 2005, amends existing SSARS as follows:

- SSARS No. 1: to require the communication to management of circumstances that come to the accountant’s attention that lead him/her to believe fraud may exist and provide guidance regarding matters that should cause the accountant to consider obtaining an updated representation letter from management.

- SSARS No. 2: to enable a successor accountant to compile or review a restatement adjustment when prior period financial statements have been changed.

The complete text of each of the exposure drafts is available at the AICPA’s website (members/div/auditstd/drafts.asp) Relevant textbook chapter - 25.

Please share this newsletter with interested colleagues. If you have questions or suggestions about how to improve future newsletters, please send them to Professor Greg Jenkins at greg_jenkins@ncsu.edu.

If you prefer to not receive newsletters in the future, please send a request to remove your name from the distribution list to greg_jenkins@ncsu.edu

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