Studies on Single Audit and Yellow Book Deficiencies Book Yellow and Audit StudiesSingle on Accounting and Auditing Supplement No. 3–2019 PBV1701P PBV1701P AICPAStore.com | CIMAglobal.com 1811-9880 Update CPE Text Covers w/ AICPA&CIMA logo.indd 1-3 11/30/18 3:49 PM Chapter 1 Accounting and Auditing Supplement No. 3–2019 Introduction This update includes the more significant accounting and auditing developments from July 1, 2019, through September 30, 2019. Included in this update are standard-setting and project activities of the Auditing Standards Board (ASB), Accounting and Review Services Committee (ARSC), Professional Ethics Executive Committee (PEEC), Financial Accounting Standards Board (FASB, Public Company Accounting Oversight Board (PCAOB), and the Securities and Exchange Commission (SEC). These developments, although believed to be complete as of the date they were prepared for this course material, may not cover all areas within accounting and auditing relevant to all users of this material. This update may refer you to other sources of information, in which case you are strongly encouraged to review that information if relevant to your needs. © 2019 Association of International Certified Professional Accountants. All rights reserved. 1-1 Audit and accounting final and proposed standards Final standards, interpretations, and regulations AICPA Auditing Standards Board Statement on Auditing Standards Statement on Auditing Standards (SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA Issue date July 2019 Background According to the AICPA report Enhancing Audit Quality, 2017 Highlights and Progress, enhanced oversight of audits of employee benefit plans (EBPs) subject to the Employee Retirement Income Security Act of 1974 (ERISA) found troubling levels of nonconformity with the standards and with the two primary areas challenging EBP audit practitioners that follow: . 20% of engagements had material nonconformity related to improper use of system and organization controls (SOC) reports and certifications. 50% of engagements had material nonconformity related to inadequate or no documentation. These findings prompted the ASB to propose a new audit standard for reporting on EBP audits subject to ERISA. The proposal sought to: . help auditors better understand their responsibilities with respect to EBP audits and . provide financial statement users with more information about auditors’ responsibilities. SAS No. 136 creates a new AU-C section 703 in AICPA Professional Standards and addresses the auditor’s responsibility to form an opinion and report on the audit of financial statements of EBPs subject to ERISA. The SAS amends the form and content of the auditor’s report issued as a result of an audit of ERISA plan financial statements. This SAS applies to audits of single employer, multiple employer, and multiemployer plans subject to ERISA. It applies to an audit of a complete set of general-purpose financial statements of EBPs subject to ERISA, and includes performance requirements specific to auditing ERISA plans relating to engagement acceptance, audit risk assessment and response relating to plan provisions, communication of reportable findings to those charged with governance, responsibilities relating to the ERISA-required supplemental schedules, etc. © 2019 Association of International Certified Professional Accountants. All rights reserved. 1-2 Main provisions and significant changes To enhance the communicative value and transparency of the auditor’s report, SAS No. 136 creates a new reporting model for audits of ERISA plans in the following ways: . It changes the form and content of the auditor’s report when management elects to exclude from the audit certain investment information held and certified by a qualified institution. It includes incremental performance requirements to effect certain new reporting requirements in addition to those currently set forth in the existing AU-C sections in AICPA Professional Standards. Effective date The SAS is effective for audits of ERISA plan financial statements for periods ending on or after December 15, 2020. Early implementation is not permitted. New resources (the “At a Glance” document and Frequently Asked Questions) are available. Auditing Standards Board SAS No. 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports Issue date July 2019 Background This SAS supersedes SAS No. 118, Other Information in Documents Containing Audited Financial Statements, as amended (AICPA, Professional Standards, AU-C sec. 720). The ASB believes the standard will benefit financial statements users by providing transparency related to the auditor’s responsibility for other information when the auditor has obtained all other information at the date of the auditor’s report on the financial statements. SAS No. 137 is expected to reduce diversity in practice with respect to information and documents within the scope of this SAS. Main provisions and significant changes This SAS addresses the auditor’s responsibilities relating to other information, whether financial or nonfinancial (other than financial statements and the auditor’s report on the financial statements), included in an entity’s annual report. An entity’s annual report may be a single document or a combination of documents that serve the same purpose. Specifically, SAS No. 137 amends the following: . SAS No. 119, Supplementary Information in Relation to the Financial Statements as a Whole, as amended (AU-C sec. 725) . SAS No. 120, Required Supplementary Information, as amended (AU-C sec. 730) . SAS No. 122, Statements on Auditing Standards: Clarification and Recodification, as amended – AU-C section 210, Terms of Engagement – AU-C section 230, Audit Documentation – AU-C section 260, The Auditor’s Communication With Those Charged With Governance – AU-C section 450, Evaluation of Misstatements Identified During the Audit – AU-C section 600, Special Considerations — Audits of Group Financial Statements (Including the Work of Component Auditors) – AU-C section 810, Engagements to Report on Summary Financial Statements © 2019 Association of International Certified Professional Accountants. All rights reserved. 1-3 . SAS No. 133, Auditor Involvement With Exempt Offering Documents (AICPA, Professional Standards, AU-C sec. 945) . SAS No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements, as amended – AU-C section 700, Forming an Opinion and Reporting on Financial Statements – AU-C section 705, Modifications to the Opinion in the Independent Auditor’s Report – AU-C section 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report Effective date This SAS becomes effective for audits of financial statements for periods ending on or after December 15, 2020. Early implementation is not permitted. Accounting and Review Services Committee The ARSC did not issue any new or revised standards or interpretations in this period. Professional Ethics Executive Committee The PEEC did not issue any new or revised standards or interpretations in this period. FASB Accounting standards updates Accounting Standards Update (ASU) No. 2019-07, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33- 10442, Investment Company Reporting Modernization, and Miscellaneous Updates Issue date July 2019 Background The FASB Accounting Standards Codification® is the authoritative source of U.S. generally accepted auditing principles (GAAP). It includes relevant portions of authoritative content issued by the SEC and selected SEC staff interpretations and administrative guidance. The FASB updated the SEC portions of its Codification to reflect changes the SEC made to simplify disclosures and modernize the reporting and disclosure of information by registered investment companies. Major provisions and significant changes The SEC amended its disclosure rules in 2018 with the aim of providing investors with more useful disclosure information and to simplify compliance without altering the mix of information being provided. ASU 2019-07 updates the Codification to reflect the amendments of various SEC disclosure requirements that the agency determined were redundant, duplicative, overlapping, outdated, or superseded. © 2019 Association of International Certified Professional Accountants. All rights reserved. 1-4 Effective date Upon issuance. SEC The SEC did not issue any new or revised regulations or guidance in this period. PCAOB PCAOB Staff Guidance: Auditing Accounting Estimates Issue Date August 2019 Background New requirements for auditing accounting estimates will take effect for audits of financial statements for fiscal years ending on or after December 15, 2020. These requirements will apply to estimates in significant accounts and disclosures and will replace three PCAOB standards with a single, uniform risk- based approach to auditing estimates, including fair value measurements. The new requirements are reflected in the revised and retitled AS 2501, Auditing Accounting Estimates, Including Fair Value Measurements, and related amendments to other PCAOB standards. When the revised standard takes effect, AS 2502, Auditing Fair Value Measurements and Disclosures, and AS 2503, Auditing Derivative Instruments, Hedging Activities, and Investments in Securities, will be