University of Mississippi eGrove Industry Guides (AAGs), Risk Alerts, and American Institute of Certified Public Accountants Checklists (AICPA) Historical Collection 1-1-2007 Securities industry developments - 2006/07; Audit risk alerts American Institute of Certified Public Accountants. Auditing Standards Division Follow this and additional works at: https://egrove.olemiss.edu/aicpa_indev Part of the Accounting Commons, and the Taxation Commons Recommended Citation American Institute of Certified Public Accountants. Auditing Standards Division, "Securities industry developments - 2006/07; Audit risk alerts" (2007). Industry Guides (AAGs), Risk Alerts, and Checklists. 1111. https://egrove.olemiss.edu/aicpa_indev/1111 This Book is brought to you for free and open access by the American Institute of Certified Public Accountants (AICPA) Historical Collection at eGrove. 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ARA-Securities-Cover.qxp 1/26/2007 3:23 PM Page 1 AUDIT RISK ALERTS Securities Industry Developments— 2006/07 Strengthening Audit Integrity Safeguarding Financial Reporting CCOUNTANTS A UBLIC P ERTIFIED C NSTITUTE OF AICPA Member and I Public Information: www.aicpa.org MERICAN A AICPA Online Store: www.cpa2biz.com ISO Certified 022387 ARA-Securities-Title Page.qxp1/25/20072:47PMPage1(Blackplate) AMERICAN INSTITUTE OF CERTIFIED P UBLIC ACCOUNTANTS 2006/07 Developments — Securities Industry Strengthening AuditIntegrity AUDIT RISKALERTS AUDIT Safeguarding FinancialReporting ARA-Securities-Front Matter.qxd 1/26/2007 2:34 PM Page ii Notice to Readers This Audit Risk Alert is intended to provide auditors of financial statements of broker-dealers in securities with an overview of re- cent economic, industry, regulatory, and professional develop- ments that may affect the audits they perform. Because securities broker-dealers often deal in commodity futures or function as commodity pool operators, this Audit Risk Alert expands the dis- cussion of recent developments to include matters that may affect the audits of commodity entities as well. This publication is an Other Auditing Publication as defined in AU section 150, Generally Accepted Auditing Standards (AICPA, Professional Standards, vol. 1). Other Auditing Publications have no authoritative status; however, they may help the auditor un- derstand and apply SASs. If an auditor applies the auditing guidance included in an Other Auditing Publication, he or she should be satisfied that, in his or her judgment, it is both appropriate and relevant to the circum- stances of his or her audit. The auditing guidance in this docu- ment has been reviewed by the AICPA Audit and Attest Standards staff and published by the AICPA and is presumed to be appropriate. This document has not been approved, disap- proved, or otherwise acted on by a senior technical committee of the AICPA. Yelena Mishkevich, CPA Technical Manager Accounting and Auditing Publications Copyright © 2007 by The American Institute of Certified Public Accountants, Inc. New York, NY 10036-8775 All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please visit www.copyright.com or call (978) 750-8400. 1 2 3 4 5 6 7 8 9 0 AAG 0 9 8 7 ARA-Securities-Front Matter.qxd 1/29/2007 9:08 AM Page iii Table of Contents ACKNOWLEDGMENTS.........................................................................vi SECURITIES INDUSTRY DEVELOPMENTS—2006/07 ..............................1 How This Alert Helps You..................................................1 Economic and Industry Developments................................1 Economic Developments................................................1 The Securities Industry...................................................2 The Commodities Industry ............................................3 Regulatory Issues and Developments ..................................4 Portfolio Margining ........................................................5 Rulemaking Regarding Responsibility When Outsourcing Activities to Third-Party Service Providers.........................................................9 Internal Risk Management Control Systems of Consolidated Supervised Entities..............................12 Broker-Dealer Internal Audit/Compliance Priorities .....16 Anti-Money Laundering Recent Regulatory Developments ..........................................................21 Registration With PCAOB—Extension of Order Regarding Broker-Dealer Financial Statement Requirements Under Section 17 of the Exchange Act............................................................24 Breakpoint Refund Liability..........................................25 Recent Concerns of Regulators .....................................26 SEC Regulations...........................................................34 Other Recent SEC Developments.................................37 CFTC Regulations........................................................43 CFTC Annual “Dear CPO” Letter ...............................46 Self-Regulatory Organization Regulations.....................47 Audit and Accounting Issues and Developments ...............56 Trends in SEC Comment Letters..................................56 ARA-Securities-Front Matter.qxd 1/26/2007 2:34 PM Page iv AML Testing Requirements and Auditor Independence...........................................................58 Annual Certification of Compliance and Supervisory Processes...................................................................60 Report on Internal Control...........................................61 Brady Bond Warrants ...................................................66 Demutualization of Exchanges .....................................66 AICPA 2006 Audit and Accounting Guide Brokers and Dealers in Securities ................................69 Recent Auditing and Attestation Pronouncements, and Related Guidance..........................................................70 AICPA Risk Assessment Standards................................72 Statement on Auditing Standards No. 103....................74 Statement on Auditing Standards No. 114....................75 FASB Statement No. 157..............................................79 FASB Statement No. 156..............................................83 FASB Statement No. 155..............................................85 FASB Interpretation No. 48..........................................86 FASB Staff Position FIN 46(R)-6 .................................88 AICPA Technical Practice Aid Convertible Debt, Convertible Preferred Shares, Warrants, and Other Equity-Related Financial Instruments—working draft as of December 1, 2006 ...................................91 SEC Staff Accounting Bulletins.........................................92 Staff Accounting Bulletin No. 108................................93 On the Horizon.................................................................94 Proposed FASB Statement, Accounting for Transfers of Financial Assets......................................................96 Proposed FASB Statement, The Fair Value Option for Financial Assets and Financial Liabilities...............97 Proposed FASB Statement, Disclosures about Derivative Instruments and Hedging Activities— an amendment of FASB Statement No. 133 ................98 ARA-Securities-Front Matter.qxd 1/26/2007 2:34 PM Page v EITF Issue No. 06-12, Application of AICPA Audit and Accounting Guide, Brokers and Dealers in Securities, to Entities That Engage in Commodity Trading Activities and Related Issues ...........................99 Proposed FASB Staff Position FIN 39-a, Amendment of FASB Interpretation No. 39..................................103 Proposed FASB Statement No. 133 Implementation Issue No. B40, Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets.......................................104 Proposed SOP, Clarification of the Scope of the Audit and Accounting Guide Audits of Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies...........................................105 Revision of AICPA Practice Aid Audits of Futures Commission Merchants, Introducing Brokers, and Commodity Pools.....................................................107 Auditing Pipeline—Nonpublic Companies.................108 Auditing Pipeline—Public Companies........................109 SEC Proposed Guidance on Management’s Report on Internal Control Over Financial Reporting................112 Resource Central.............................................................113 On the Bookshelf........................................................113 Educational Courses ...................................................114 Webcasts.....................................................................116 National Securities Industry Conference.....................117 Member Satisfaction Center .......................................117 Hotlines......................................................................117 Web Sites....................................................................118 ARA-Securities-Front Matter.qxd 1/26/2007 2:34 PM Page vi Acknowledgments The AICPA staff would like to thank the Stockbrokerage and In- vestment Banking Expert Panel for its assistance in development and review of this