Loading...

New Clarity Standards &Yellow Book Requirements

 

• , , • Leave a Comment

By: Bruce Kingshill

Summary of New Clarity Standards & Yellow Book Independence Requirements

What effect do the 2011 Yellow Book Standards and the Clarified Auditing Standards have on firms going through peer review in 2013 and beyond?  What are peer reviewers looking for from firms with regard to documentation and performance in light of these new standards?

Both the 2013 Clarified Auditing Standards and the 2011 Yellow Book Standards are effective for periods ending on or after December 15, 2012.

2011 Yellow Book Standards and the Effect on Peer Review

Let’s look at the 2011 Yellow Book Standards and the new independence requirements regarding non- audit services. The Yellow Book establishes a conceptual framework that auditors use to identify, evaluate, and apply safeguards to address threats to independence.

Peer Reviewers must evaluate the firm’s compliance and documentation with 2011 Yellow Book independence requirements related to non-audit services.

  • Did the auditor establish and document their understanding with the auditee in regards to non-audit services?
  • Did the auditor document the assessment of management’s SKE (skills, knowledge, and expertise)?
  • Did the auditor identify and evaluate threats to independence?
  • Did the auditor identify the existence of significant threats?
  • Did the auditor document significant threats and application of safeguards to reduce threats to an acceptable level?
  • If the answer to the first two and the last questions is no, can the auditor otherwise convincingly demonstrate that the firm is in compliance with applicable independence requirements?
  • If yes to above, then Yellow Book independence impairment does not exist, but Yellow Book documentation violation exists.  Depending on the extent of the documentation, the engagement might be considered as not performed in conformity with applicable professional standards in all material respects.
  • If no to above, then Yellow Book independence impairment exits.  This would also cause the engagement to be not performed in conformity with applicable professional standards in all material respects.
  • If the firm and reviewer determine that independence was impaired, the reviewer will likely need to ask the firm to respond to whether they need to recall previously issued reports.

The documentation and performance standards of the new Yellow Book independence requirements regarding non-audit services is going to require additional time for peer reviewers to evaluate the firm’s compliance with these standards. These new standards might cause a firm that ordinarily would receive a pass report to either receive a pass with deficiency or fail report. It is also going to require team captain judgment on firms that have partial or marginal documentation of the above items. The AICPA Peer Review Program has developed practice aids and has enhanced the checklists to assist peer reviewers with this new standard.

Clarified Auditing Standards and the Effect on Peer Review:

If the reviewed firm does not conform the wording of its auditor’s report to the new reporting language, and the peer reviewer concluded that the condition was pervasive across the firm’s audit engagements, then this typically would be elevated to a deficiency or significant deficiency and a pass with deficiency or a fail report would have to be issued. However, if the peer reviewer determined that the non-conforming audit report wording was isolated, and not pervasive across the firm’s audit engagements, then a pass report would be issued.

The AICPA Peer Review Board has also identified other practice areas where there is a higher risk of non-compliance with the new clarity standards:

  • Updating engagement letters.
  • Inspecting correspondence with relevant licensing and regulatory authorities to identify instances of non-compliance with laws and regulations that may have a material effect on the financial statements.
  • Communicating the potential effects of material weaknesses and significant deficiencies identified during the audit.
  • Complying with the requirements when reporting on financial statements prepared in accordance with special purpose frameworks (cash basis, tax basis, etc.).
  • Group audits.
  • Same results in peer review as auditor’s reports.

Peer review checklists and other workpapers have been updated to include the requirements of the new 2013 Clarified Auditing Standards. It is important to understand the compliance with the new 2013 Clarified Auditing Standards might cause firms that would have otherwise received a pass report to potentially receive a pass with deficiency or failed report. The AICPA has posted videos, publications, and other guidance to the “Improving the Clarity of Auditing Standards” section of its website.

Bruce-Kingshill_avatar-70x70Bruce Kingshill is managing partner of Ray, Bumgarner, Kingshill & Associates in Waynesville, NC. A former member of NCACPA’s Board of Directors, Bruce has actively served on the Peer Review Committee since 1996. Additionally, Bruce teaches CPE on peer review during the months of May–July for NCACPA.