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Accounting and Auditing Supplement No. 2-2017

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Chapter 1

ACCOUNTING AND AUDITING

SUPPLEMENT NO. 2–2017

INTRODUCTION

This update includes the more significant accounting and auditing developments from April 1, 2017

through June 30, 2017. 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), FASB, PCAOB, and the SEC.

These developments, although believed to be complete at the date at which they were prepared for this

course material, may not cover all areas within accounting and auditing relevant to all users of this

material. Readers are encouraged to visit the AICPA’s Financial Reporting Center for additional

resources, including various ―Standards Trackers‖ for the most recent standard-setting activity in the

areas of accounting and financial reporting, audit and attest, and compilation, review, and preparation.

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.

After completing this course, you should be able to identify some of the more significant accounting and

auditing developments from April 1, 2017 through June 30, 2017.

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Audit and Accounting Final and Proposed Standards

FINAL STANDARDS, INTERPRETATIONS, AND REGULATIONS

AICPA

Auditing Standards Board

Auditing, Attestation, and Quality Control Standards and Interpretations

Concepts Common to All Attestation Engagements: Attestation Interpretations of AT-C Section 105

Issue Date

May 2017

Background

The ASB released a new interpretation under AT-C section 9105, Concepts Common to All Attestation

Engagements (AICPA, Professional Standards), for members requested to follow both the AICPA and

another set of attestation standards, for example, those issued by the PCAOB or the International

Auditing and Assurance Standards Board (IAASB).

Main Provisions

The interpretation indicates that a member may perform and report on an attestation engagement in

accordance with AICPA attestation standards in addition to another set of attestation standards if both

sets of attestation standards are followed in their entirety.

A member who chooses to reference both sets of attestation standards in the attestation report should do

the following:

Amend the statement that the attestation engagement was conducted in accordance with attestation standards established by the AICPA to add that the engagement was also conducted in accordance with the interim attestation standards of the PCAOB.

– Members should choose their words carefully as reference to ―the standards‖ of the PCAOB

indicates that the auditor has complied not only with the PCAOB interim attestation standards

but also with the related professional practice standards of the PCAOB, including its

independence rules. However, a reference to ―the attestation standards‖ of the PCAOB is limited

to compliance with the interim attestation standards of the PCAOB and would exclude the

broader PCAOB professional standards.

The interpretation provides illustrative reports with examples of additional language that a practitioner

may include in attestation reports to indicate that the engagement was conducted in accordance with the

AICPA attestatio3n standards and the PCAOB interim attestation standards.

Effective Date

The interpretation was effective upon issuance.


Accounting and Review Services Committee

ARSC did not issue any new or revised standards or interpretations during this period.

Professional Ethics Executive Committee

New interpretation “Hosting Services” (ET sec. 1.295.143) under the “Independence Rule” (ET sec. 1.200.001)

Issue Date

June 2017

Background

The Professional Ethics Executive Committee (PEEC) adopted a new independence interpretation

entitled, ―Hosting Services,‖ which will appear under the ―Independence Rule‖ in the AICPA Code of

Professional Conduct (the code), and applies to members in public practice who provide attest services to

a client.

As noted in the exposure draft, ―The PEEC believes hosting services involve situations where a client

engages a member to have custody or control of data or records that the client uses to conduct its

operations. As it is management’s responsibility to have custody and control over its assets, the PEEC

believes providing hosting services creates threats to independence that are not at an acceptable level and

cannot be reduced to an acceptable level by the application of safeguards; therefore, impairing

independence.‖

Main Provisions and Significant Changes

Under the new rule, hosting services impair independence when a member takes responsibility for

maintaining internal control over an attest client’s data or records. Specifically, a member performs

hosting services when he or she takes responsibility for the following:

Being the sole host of a client’s financial or nonfinancial information system

Custody or storage of the client’s data, leaving the client’s data incomplete and accessible only through the member

Providing data or records security or back-up services for a client’s electronic data or records

Because members may have access, take possession, or retain copies of client records for various reasons,

the interpretation provides several examples of activities that do and do not result in a member providing

hosting services.

Hosting services

The new interpretation provides three examples of situations that create hosting services, that is, if the attest client engages the member to be responsible for any of the following activities, independence is impaired.

The member houses the client’s website or other nonfinancial information system on the member’s server(s) (whether the member owns or leases the server(s)).

The member keeps the client’s financial data or records (for example, general ledger, legal documents, amortization schedules) on the member’s server(s) (whether leased or owned) or hardcopies of data or records in a physical location the member maintains.

The member provides business continuity or disaster recovery services to the client for its data or records.


Nonhosting services

Not all custody or control of a client’s records results in hosting services because a member’s access, use,

custody, or control of the client’s data may be appropriate and necessary when rendering professional

services. The primary question is whether the member has accepted responsibility to maintain custody or

control of the client’s information. For example, a member may

have custody of the client’s records to support a nonattest service. For example, the client provides payroll data to the member to support the member’s preparation of a payroll tax return.

retain copies of work product, or data collected to support the member’s work product, when providing a professional service for a client.

provide bookkeeping services using accounting software, such as QuickBooks, if the member and client separately maintain the software on their respective servers. Or, the client can contract with a third-party cloud-based software provider, such as Xero, and give the member permission to access the client’s books via the software to perform the services.

exchange data, records, or the member’s work product with the client electronically (for example, through a portal). Exchanges are related to performance of the member’s professional services to the client or to deliver the member’s work product to third parties at the client’s request. To avoid hosting services when exchanging client data or records through a portal, the member should terminate the client’s access to the data or records in the portal on a timely basis once the engagement is complete.

license software to a client for the client’s own use, provided the software performs an activity that the member could provide under the independence rules. For example, under the ―Appraisal, Valuation, and Actuarial Services‖ interpretation (AICPA, Professional Standards, ET sec. 1.295.110), the member should not license business valuation software to the client that is subject to significant subjectivity and material to the client because independence would be impaired. However, the member could license software that performs only tax-related valuations and appraisals because the member is permitted to perform those types of valuations under the independence rules.

hold depreciation schedules the member prepared for the client; the member should supply the schedules and calculations to the client so their books and records are complete.

possess a client’s original data or records to facilitate performance of a nonattest services, such as tax return preparation; the member should return the data or records at the completion of the engagement (or if the engagement is ongoing, on an annual basis).

Members are reminded to comply with requirements of other interpretations in the Nonattest Services

subtopic (ET sec. 1.295). For example, all nonattest services are subject to certain general requirements,

including documentation, and because elements akin to hosting may arise when a member performs tax,

bookkeeping, or other nonattest services, members should comply with all applicable rules in that section

of the code.

Effective Date

The interpretation will be effective September 1, 2018.

Revised interpretation “Knowing Misrepresentations in the Preparation and Presentation of Information,” formerly “Knowing Misrepresentations in the Preparation of Financial Statements or Records” (ET sec. 2.130.010) under the “Integrity and Objectivity Rule” (ET sec. 2.100.001)

Issue Date

June 2017

Background

PEEC adopted a revised version of this rule following review of a similar provision in the International

Ethics Standards Board for Accountants (IESBA) ethics code. This rule applies only to members in

business and, as before, appears under the ―Integrity and Objectivity Rule‖ (ET sec. 2.100.001).



The rule has traditionally applied to members preparing financial statements and records by barring them

from knowingly and materially misrepresenting such information or directing others to do so.

The revised interpretation expands the current rule to include information beyond the financial

statements that is distributed both within and outside the member’s employing organization.

―Information‖ is described as follows:

“… financial and non-financial information that may be made public or used for internal purposes such as the

following: a. Operating and performance reports b. Decision support analyses c. Budgets and forecasts d. Information

provided to the internal and external auditors e. Risk analyses f. General and special purpose financial statements g.

Tax returns h. Reports filed with regulators for legal and compliance purposes.”

The interpretation also addresses information that is not subject to a reporting framework.

The rule provides safeguards the member should apply to resolve a matter when he or she becomes

associated with misleading information as described previously.

A member who intends to rely on the work of others, either internal or external to the organization, is

instructed to use professional judgment to determine steps to take to ensure that the requirements of the

interpretations are met. For example, factors to consider in determining whether reliance on others is

reasonable would include the reputation, expertise, objectivity, and resources available to the individual or

organization and whether the other individual is subject to applicable professional and ethical standards.

The member may have gained this information through prior association with others or by consulting

others about the individual or the organization.

Under the revisions rule, if a member suspects he or she may be associated with misleading information,

he or she should apply the following safeguards:

Consult the employing organization’s policies and procedures (for example, an ethics or whistleblowing policy) regarding how such matters should be addressed internally

Discuss concerns that the information is misleading with the member’s supervisor or the appropriate levels of management within the member’s employing organization or those charged with governance and request such individuals take appropriate action to resolve the matter.

Additional actions, including refusal to be associated with the misleading information, will be required if

the member applies the preceding safeguards and the situation is not resolved because threats will be at

an unacceptable level if the member remains associated with the misleading information. In addition, the

member may decide to resign his or her position at the employing organization. Following is an excerpt

from the interpretation.

If, after exhausting all feasible options, the member determines that appropriate action has not been taken and there is

reason to believe that the information is still misleading, the member should refuse to be or to remain associated with the

information. The member also should consider whether to continue a relationship with the employing organization.

Members are encouraged to thoroughly document the facts and circumstances, actions taken, and other

relevant factors about the matter.

Note: Members are referred to the following interpretation when threats to compliance with the ―Integrity

and Objectivity Rule‖ are due to differences of opinion between a member and his or her supervisor (or any

other person within the member’s organization) relating to the application of accounting principles, auditing

standards, or other relevant professional standards, the member should also refer to the ―Subordination of

Judgment‖ interpretation (AICPA, Professional Standards, ET sec. 2.130.020).


Effective Date

The interpretation becomes effective August 31, 2017.

New interpretation “Pressure to Breach the Rules” (ET sec. 2.170.010) under the “Integrity and Objectivity Rule” (ET sec. 2.100.001)

Issue Date

June 2017

Background

PEEC adopted this new rule following review of a similar provision in the IESBA ethics code. This rule

applies only to members in business.

The new interpretation, ―Pressure to Breach the Rules,‖ will appear as part of the ―Integrity and

Objectivity Rule‖ (ET sec. 2.100.001) and provides guidance to members who come under pressure

(whether explicit or implicit) from various parties when they perform professional services. The

interpretation provides several examples, factors to consider, and safeguards.


This interpretation addresses pressures that could result in a member taking actions that breach or cause

others to breach the rules and guides the member on addressing threats (for example, undue influence

threats) to compliance with the ―Integrity and Objectivity Rule‖ when undertaking a professional service.

Pressure may be explicit or implicit and come from

within the employing organization, for example, from a colleague or superior,

an external individual or organization, such as a vendor, customer, or lender, or

the need to meet internal or external targets and expectations.

A member should not allow pressure from others to result in a breach of the ―Integrity and Objectivity

Rule‖ and should also not place pressure on others that the member knows, or has reason to believe,

would result in the other individuals breaching the rules of the AICPA Code of Professional Conduct.

Examples

Examples of pressure that could result in a breach of the ―Integrity and Objectivity Rule‖ include the

following:

Pressure related to conflicts of interest, for example, pressure from a family member bidding to act as a vendor to the member’s employing organization to select that vendor over another prospective vendor

Pressure to influence the presentation of information, for example, pressure

– to report misleading financial results to meet investor, analyst, or lender expectations

– from elected officials to misrepresent programs or projects to voters

– from colleagues to misstate income, expenditure, or rates of return to bias decision-making on

capital projects and acquisitions

– from superiors to approve or process expenditures that are not legitimate business expenses

– to suppress internal audit reports containing adverse findings

– to act without sufficient competence or due care (for example, without sufficient skills or

training or under unrealistic deadlines)

– to manipulate performance indicators from superiors, colleagues, or others, such as those who

may benefit from participation in compensation or incentive arrangements


– related to gifts or entertainment (for example, offering gifts or entertainment to inappropriately

influence the judgment or decision-making process of an individual or organization or accept

inappropriate gifts or entertainment from potential vendors in a bidding process)

In determining whether the pressure could result in a breach of the ―Integrity and Objectivity Rule,‖ the

member may consider the following factors:

The intent of the individual who is exerting the pressure and the nature and significance of the pressure.

The application of relevant laws, regulations, and professional standards to the circumstances.

The culture and leadership of the employing organization, including the extent to which it emphasizes the importance of ethical behavior and the expectation that employees will act in an ethical manner. For example, a corporate culture that tolerates unethical behavior may increase the likelihood that the pressure would result in a breach of the rules.

Policies and procedures, if any, that the employing organization has established, such as ethics or human resources policies that address pressure.

In considering the preceding factors, members may wish to consult with the following:

A colleague, superior, human resources personnel, internal compliance personnel, or another professional accountant

Relevant professional or regulatory bodies or industry associations

Legal counsel

If the member determines that the pressure would result in a breach of the ―Integrity and Objectivity

Rule,‖ the member might consider safeguards, including the following:

Discuss the matter with the individual who is exerting the pressure to seek to resolve it.

Discuss the matter with the member’s supervisor if the supervisor is not the individual exerting the pressure.

Escalate the matter within the employing organization, for example, with higher levels of management, internal or external auditors, or those charged with governance, including independent directors and, when appropriate, explaining any consequential risks to the organization.

Request restructuring or segregating certain responsibilities and duties so that the member is no longer involved with the individual or entity exerting the pressure, when doing so would eliminate the pressure to breach the ―Integrity and Objectivity Rule.‖ For example, if a member is pressured in relation to a conflict of interest, the pressure to breach the rule may be eliminated if the member avoids being associated with the matter creating the conflict.

Disclose the matter in accordance with the employing organization’s policies, including ethics and whistleblowing policies, using an established mechanism, such as a confidential ethics hotline.

Consult with legal counsel.

When the member determines that the pressure to breach the ―Integrity and Objectivity Rule‖ has not

been eliminated, the member should

decline to undertake or discontinue the professional activity that would result in a breach of the rule.

consider whether to continue a relationship with the employing organization.

The member is also encouraged to document the facts, communications, courses of action considered, the parties with whom these matters were discussed, and how the matter was addressed.

Effective Date

The interpretation becomes effective August 31, 2017.


FASB

Accounting Standards Updates

ASU No. 2017-09, Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting

Issue Date

May 2017

Background

FASB issued this Accounting Standards Update (ASU) to provide clarity and reduce both diversity in

practice and cost and complexity when applying the guidance in FASB Accounting Standards Codification

(ASC) 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based

payment award.

An entity may change the terms or conditions of a share-based payment award for many different

reasons, and the nature and effect of the change can vary significantly. FASB currently defines the term

modification as ―a change in any of the terms or conditions of a share-based payment award.‖ Such a broad

definition has caused diversity in practice as entities consider whether a change is substantive in

determining whether they should apply modification accounting in FASB ASC 718. Examples follow:

When some entities conclude that a change is not substantive, they typically do not apply modification accounting, however, FASB ASC 718 does not provide guidance about what changes are substantive.

Other entities apply modification accounting for any change to an award, except for a change they deem to be purely administrative in nature, but FASB ASC 718 does not provide guidance about what changes are purely administrative.

Some entities apply modification accounting when a change to an award changes the fair value, the vesting, or the classification of the award, that is, to evaluate whether a change is substantive.

The amendments in this ASU affect any entity that changes the terms or conditions of a share-based

payment award.


This ASU clarifies which changes to the terms or conditions of a share-based payment award require an

entity to apply modification accounting in FASB ASC 718. That is, an entity should account for the

effects of a modification unless all of the following are met:

No change in fair value. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value) of the original award immediately before the original award is modified.

– If the modification does not affect any of the inputs to the valuation technique that the entity

uses to value the award, the entity is not required to estimate the value immediately before and

after the modification

No change in vesting conditions. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified

No change in classification. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.


Effective Date

The amendments in this ASU are effective for all entities for annual periods, and interim periods within

those annual periods, beginning after December 15, 2017.

The guidance may be adopted early, including adoption in any interim period, for

public business entities for reporting periods for which financial statements have not yet been issued and

all other entities for reporting periods for which financial statements have not yet been made available for issuance.

Apply this ASU prospectively to an award modified on or after the adoption date.

ASU No. 2017-10, Service Concession Arrangements (Topic 853), Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force)

Issue Date

May 2017

Background

This ASU addresses the diversity in practice stakeholders observed in how an operating entity determines

the customer of the operation services for transactions within the scope of FASB ASC 853, Service

Concession Arrangements. The amendments in this ASU apply to the accounting by operating entities for

service concession arrangements within the scope of FASB ASC 853.

As defined, a service concession arrangement is between a grantor and an operating entity; the operating entity

operates the grantor’s infrastructure (that is, a bridge or tunnel) for a specified timeframe and may also

maintain the infrastructure. The operating entity may provide periodic capital-intensive maintenance to

enhance or extend the life of the infrastructure. Infrastructure already may exist or the operating entity

may construct the infrastructure during the period of the service concession arrangement.

FASB ASC 853 provides guidance for operating entities when they enter into a service concession

arrangement with a public-sector grantor who does the following:

Controls or can modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price

Controls any residual interest in the infrastructure at the end of the term of the arrangement


In a service concession arrangement within the scope of FASB ASC 853, the operating entity should not

account for the infrastructure as a lease or as property, plant, and equipment. Rather, the operating entity

should refer to other FASB ASC sections to account for various aspects of a service concession

arrangement.

For example, an operating entity should account for revenue relating to construction, upgrade, or

operation services in accordance with FASB ASC 605, Revenue Recognition or FASB ASC 606, Revenue from

Contracts with Customers. In applying the revenue guidance under FASB ASC 605, it is reportedly not clear

whether the customer of the operation services is the grantor or the third-party user for certain service

concession arrangements. This lack of clarity has resulted in diversity in practice when applying certain

aspects of FASB ASC 605 and similarly under FASB ASC 606.


The amendments in this ASU eliminate diversity in practice by clarifying that the grantor is the customer

of the operation services in all cases for those arrangements and enabling more consistent application of

other aspects of the revenue guidance, which are affected by this customer determination.

Effective Dates

Entity Has Not Yet Adopted FASB ASC 606

The effective date and transition requirements for the amendments in this ASU generally are the same as the effective date and transition requirements for FASB ASC 606 (and any other ASC section amended by ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)). ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, deferred the effective date of ASU No. 2014-09 by one year.

Specifically, an entity that adopts the guidance in FASB ASC 606 after the issuance of this ASU should also adopt the amendments in this ASU when the entity adopts the guidance in FASB ASC 606 and use the same transition method elected for the application of FASB ASC 606 (including applying the same practical expedients, to the extent applicable), unless the entity elects to adopt the amendments in this ASU early, before adopting FASB ASC 606.

An entity may apply the amendments in this ASU earlier, including within an interim period, even though the entity has not yet adopted FASB ASC 606. An entity that adopts this ASU early is required to apply the amendments in this ASU using either

– a modified retrospective approach by recording a cumulative-effect adjustment to equity as of

the beginning of the fiscal year of adoption or

– a retrospective approach.

Entity Already Has Adopted FASB ASC 606

The effective date of the amendments in this ASU is as follows:

A public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and an employee benefit plan that files or furnishes financial statements with or to the SEC. Effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.

All other entities. Effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. An entity that already has adopted FASB ASC 606 is required to apply the amendments in this ASU using either

– a modified retrospective approach by recording a cumulative-effect adjustment to equity as of

the beginning of the fiscal year of adoption or

– a retrospective approach.

The transition method that the entity uses for the amendments in this ASU is not required to be the same

as the transition method that the entity used when adopting FASB ASC 606.

An entity that already has adopted FASB ASC 606 may apply the amendments in this ASU earlier, including within an interim period. If an entity adopts the amendments in this ASU early in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.


KNOWLEDGE CHECK

1. Which statement best describes why FASB issued ASU No. 2017-09 and ASU No. 2017-10 this

quarter?

a. FASB was attempting to simplify accounting standards in anticipation of the new revenue

recognition standard.

b. FASB was addressing diversity of practice inherent in certain accounting standards.

c. FASB issued the ASUs as part of its comprehensive review of the principles in the

conceptual framework.

d. FASB issued the ASUs to harmonize its accounting standards with international financial

reporting standards.

SEC

The SEC did not release any new or revised regulations in this period.

PCAOB

Final Standard

The Auditor’s Report on an Audit of Financial Statements when the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards

Issue Date

June 2017

Background

The new standard puts forth the most dramatic changes to the auditor’s report in decades, incorporating

new language, procedures, and documentation, especially regarding the new concept of ―critical audit

matters‖ or CAMs.

Emerging from the board’s ―transparency‖ project, in 2016, the PCAOB re-proposed a standard that

built on five years of board outreach and considered responses from the original 2013 proposal. The goal

was to make the auditor’s report more informative for investors due to the

increasing complexity in companies’ financial reporting,

significant judgment and other challenges auditors face, and

investor requests for information that is more relevant and useful.

The final standard sought to respond to investor requests for additional insights without imposing

requirements on the auditor that go beyond the auditor’s expertise and mandate.

Though the PCAOB has adopted the standard, the implementation of the standard will not occur until

the SEC approves the standard.


Application The standard affects firms conducting audits under PCAOB standards, however, the requirements related

to CAMs would not apply to audits of brokers and dealers, investment companies (other than business

development companies), and employee stock purchase, savings, and similar plans (benefit plans).

However, those entities’ auditors may elect to disclose CAMS in their audit reports.

Highlights of the New Standard

The final standard retains the pass or fail model in the existing auditor’s report and requires auditors to

provide additional information in the report, such as the critical audit matters that arose from the audit.

Highlights of the final standard are as follows:

A critical audit matter is any matter that was communicated, or required to be communicated, to the audit committee and

– relates to accounts or disclosures that are material to the financial statements and

– involved especially challenging, subjective, or complex auditor judgment.

Auditors are required to communicate critical matters in the audit report and document in the working papers the basis for its determination of critical matters disclosed in the report.

The audit report incorporates a new element indicating how long the auditor has served as the company’s auditor.

Changes to the standard audit report language are also included, for example, there’s a new statement about the auditor’s independence and the order of various items in the report has changed.

Significant Changes

Critical Audit Matters

The most signficant change in the standard is the new requirements surrounding CAMs, which must

meet the criteria noted previously (that is, matters communicated, or required to be communicated, to the

audit committee that relate to accounts or disclosures that are material to the financial statements and

involved especially challenging, subjective, or complex auditor judgment). In evaluating auditor judgment,

auditors should consider the following (nonexclusive) list of factors:

Assessed risk of material misstatement, including signficant risks

Degree of judgment applied to the financial statement accounts or disclosures that required signficant judgment or management estimates, especially estimates that are particularly subjective or uncertain

Nature or timing of significant, unusual transactions and the extent of audit effort related to these transactions

Degree of subjectivity in applying audit procedures to address the matter or evaluate the results of audit procedures

Nature and extent of audit effort to address the matter, including the extent of specialized skills or knowledge needed or the nature of consultations outside the engagement team that were needed

Nature of audit evidence obtained

Thus, the PCAOB has indicated that the rule is ―principles-based‖ and does not prescribe to the auditor

which matters would (or would not) be considered a CAM.

Reporting

The auditor should report and describe CAMs in a separate section of the audit report entitled, ―Critical

Audit Matters.‖ Preceding this will be standard language, which states that CAMs do not alter the opinion


on the financial statements, and the auditor is not providing a separate opinion on the CAMs or the

accounts or disclosure to which the CAMs relate. Each CAM will be reported as follows:

Identity of the CAM

Description of why the CAM is being reported

Description of how the CAM was addressed in the audit

Reference to the applicable financial statement account(s) or disclosure(s) related to the CAM

The standard states that auditors should provide audit-specific (not generic) information about CAMs.

The PCAOB set an expectation that most audits subject to CAMs reporting will report at least one CAM

in an audit; however, if none are identified, the auditor is required to state such.

Some commenters on the 2016 re-proposed rule expressed concern that reporting CAMs may lead the

auditor to disclose new information about the company to the public. However, the board noted that (for

example) the auditor may describe the issues that led to its disclosure of a CAM in general terms to avoid

disclosing original information. For instance, an auditor may describe relevant control issues that relate to

a matter broadly, rather than indicate the existence of a significant deficiency.

In the rules release, the board cautioned auditors not to use illustrative examples of CAMs as templates for future reporting but, rather, to provide tailored, audit-specific information. CAMs need only be reported in the current financial statement period; however, the auditor may disclose CAMs from prior periods, too.

Documentation

For each matter meeting the first two criteria—communicated or required to be communicated to the

audit committee and material to the financial statements—the auditor must document whether the matter

was determined to be a CAM, that is, it involved especially challenging, subjective, or complex auditor

judgment and fully describes the basis for each decision. Thus, even matters that are not deemed to meet

the latter criteria, and not required to be reported as CAMs, will be fully documented. Documentation

should be sufficient to facilitate others’ review of the engagement, including by the engagement quality

control reviewer.

Auditor Tenure

Auditors should indicate in the report (location not prescribed) the year in which the audit firm began to

perform consecutive audits of the company.

Other Changes in the Report

Additional changes to the report are as follows:

New section titles are as follows:

– Opinion on the Financial Statements (moved to first section of report)

– Basis for Opinion

– Critical Audit Matters

The explanatory paragraph follows the opinion paragraph.

Auditor tenure is added (location left to the auditor’s discretion).

New statement about independence: ―We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.‖

Clarification of the auditor’s responsibilities, that is, that material misstatements in the financial statements may be due to error or fraud, and that the audit included performing procedures to assess the risk of material misstatement and performing procedures in response to those risks.


Effective Date Pending SEC approval, the effective dates will be phased in as follows:

Entire standard, except the requirement for communicating CAMs, becomes effective for audits of fiscal years ending on or after December 15, 2017.

Auditors of companies requiring application of the CAMs portion of the standard should begin communicating CAMs either on or after December 15, 2019 (large accelerated filers) or December 15, 2020 (all other filers).

Earlier application is permitted once the SEC approves the final standard.

KNOWLEDGE CHECK

2. An audit of which type of entity would be subject to the PCAOB’s new rule to communicate and

report critical audit matters or CAMs?

a. Business development company.

b. Employee stock purchase plan.

c. Closely held private company.

d. A nonpublic brokerage firm.

PROPOSED STANDARDS, INTERPRETATIONS, AND REGULATIONS

AICPA

Proposed Auditing, Attestation, or Quality Control Standards

Auditing Standards Board

Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA

Issue Date

April 2017

Comment Deadline and Effective Date

Comments on the proposed auditing standard are due August 21, 2017. The proposed SAS would be

effective for audits of financial statements for periods ending on or after December 15, 2018.

Background

The Chief Accountant of the Department of Labor (DOL) requested the ASB take a fresh look at the

auditor reporting model for Employee Retirement Income Security Act of 1974 (ERISA) plan audits to

provide better insight to the public regarding the scope of the responsibilities of management and the

auditor, including when management imposes a limitation on the scope of the audit, as permitted by the

DOL’s Rules and Regulations for Reporting and Disclosure under ERISA.


In January 2015, the ASB formed a task force to consider a proposal to improve the quality of employee

benefit plan (EBP) audits by strengthening the EBP auditor’s report. The ASB developed this proposal

with helpful insights and recommendations from the DOL Chief Accountant and DOL staff.

This proposed SAS is specific to audits of financial statements of EBPs subject to ERISA. The SAS

would be codified as AU-C section 703 in AICPA Professional Standards and for audits of ERISA plan

financial statements only and would do the following:

Apply in place of AU-C section 700, Forming an Opinion and Reporting on Financial Statements (AICPA, Professional Standards)

Apply in place of paragraph .09 of AU-C section 725, Supplementary Information in Relation to the Financial Statements as a Whole (AICPA, Professional Standards)

Contain incremental requirements to AU-C section 210, Terms of Engagement, and AU-C section 580, Written Representations (AICPA, Professional Standards).

The specific plan provisions relating to the financial statement areas to be tested under the proposed SAS

are based on information provided by the DOL related to areas of audit quality concern that could have a

direct effect on the financial statements. The new procedures are intended to leverage those that are

performed in a financial statement audit. However, because procedures specific to these areas would be

required irrespective of the risk of material misstatement, it is possible that they would result in additional

audit work effort.

Application

The proposed SAS would apply to audits of single employer, multiple employer, and multiemployer plans

subject to ERISA.

Limited Scope Audits

The DOL asked the ASB to consider ways to provide more transparency and address certain audit quality

concerns when an ERISA-permitted audit scope limitation exists. In response to this request, the

proposal would require a new form of report, including specific language that explains the auditor’s

responsibilities when a limited scope audit engagement is being conducted.

Form 5500

In July 2016, the DOL’s Employee Benefits Security Administration the IRS, and the Pension Benefit

Guaranty Corporation (PBGC) asked for public comments on proposed revisions to modernize and

improve Form 5500, Annual Report for Employee Benefit Plans, filed by private-sector EBPs. The

proposal seeks to improve the reliability and transparency of information reported regarding EBP

investments and other financial transactions. The proposed form revisions would be effective for plan

year 2019 Form 5500 reports. The ASB is monitoring this project for changes that may conflict with the

proposed SAS.


The ASB is proposing a new reporting model for audits of ERISA plans that, among other things,

changes the form and content of the auditor’s report when management imposes a limitation on the

scope of the audit, as permitted by ERISA. In addition, this proposed SAS includes a requirement to

report findings from procedures performed on specific plan provisions relating to the financial

statements.


New Reporting Model

The proposed SAS includes the following:

The form and content of the auditor’s report for an unmodified opinion

New form of opinion when an ERISA-permitted audit scope limitation exists

Reporting requirements on findings from procedures performed on specific plan provisions relating to the financial statements (either included in the auditor’s report on the ERISA plan financial statements or issued as a separate report)

Limited Scope Audit - The new form of report in the proposed SAS would require the following:

A new ―Basis for Limitation on the Scope of the Audit‖ section

Expanded management and auditor responsibilities sections

A special form of opinion on the ERISA plan financial statements that is based on the audit and on the use of the certification of the investment information that the auditor was instructed not to audit

An other-matter paragraph that provides an opinion on whether the supplemental schedules are fairly stated, in all material respects, in relation to the financial statements as a whole

An opinion on whether the form and content of the supplemental schedules are presented in conformity with the DOL’s rules and regulation for reporting and disclosure under ERISA

A by-product report that reports findings on specific plan provisions relating to the financial statements

Other Changes

The proposed SAS would apply in place of AU-C section 700 for audits of ERISA plan financial

statements and, therefore, contain many of the same requirements as AU-C section 700 as well as

enhancements to the auditor reporting model for ERISA plans, including the following:

Engagement acceptance requirements in addition to AU-C section 210

New performance requirements that serve as a basis for a new reporting requirement, ―Report on Specific Plan Provisions Relating to the Financial Statements‖

New required procedures when the ERISA-permitted audit scope limitation is imposed

Written management representations in addition to AU-C section 580

Considerations relating to Form 5500 filing, which the auditor’s report accompanies

Expanded description of management’s responsibilities

Expanded communication on the ERISA supplemental schedules

New form and content requirements of the auditor’s report when management instructs the auditor to limit the scope of the audit

Required emphasis-of-matter paragraphs

Accounting and Review Services Committee

ARSC did not issue any proposed standards or interpretations in this period.

Professional Ethics Executive Committee

PEEC did not issue any proposed standards or interpretations in this period.


FASB

Proposed ASU

Consolidation (Topic 810), Targeted Improvements to Related Party Guidance for Variable Interest Entities

Issue Date

June 22, 2017

Comment Deadline

September 5, 2017

Background

This proposed ASU would affect reporting entities that are required to determine whether they should

consolidate a legal entity under the guidance within the Variable Interest Entities (VIE) subsections of

FASB ASC 810-10, Consolidation—Overall, including private companies that have elected the accounting

alternative for leasing arrangements under common control.

This proposed ASU for the private company accounting alternative applies to all entities except for

public business entities,

not-for-profit entities, and

employee benefit plans within the scope of FASB ASC 960, 962, and 965 on plan accounting.

Main Provisions

Private Company Accounting Alternative

Under the proposed amendments, a private company (reporting entity) would not have to apply VIE

guidance to legal entities under common control (including common control leasing arrangements) if

neither the parent nor the legal entity being evaluated for consolidation are public business entities.

The accounting alternative would provide an accounting policy election that a private company would

apply to all current and future legal entities under common control that meet the criteria for applying this

alternative and, therefore, could not be applied to select common control arrangements. If the alternative

is elected, a private company still would be required to follow other consolidation guidance unless

another scope exception applies.

Under the accounting alternative, a private company would provide detailed disclosures about its

involvement with and exposure to the legal entity under common control.

Decision-Making Fees

In determining whether fees paid to decision-makers and service providers are variable interests, indirect

interests held through related parties in common control arrangements would be considered on a

proportional basis. For example:

A decision-maker owns a 20 percent interest in a related party.

That related party owns a 40 percent interest in the legal entity being evaluated.

The decision-maker’s indirect interest in the VIE held through the related party under common control would be considered the equivalent of an 8 percent direct interest for determining whether its fees are variable interests.


VIE Related Party Guidance

The ASU would eliminate mandatory consolidation for situations in which power is shared among related

parties or when a group of commonly controlled related parties have the characteristics of a controlling

financial interest but no individual reporting entity has a controlling financial interest. Instead, when a

reporting entity within the related party group under common control or in a related party shared-power

situation concludes that substantially all the VIE’s activities of the VIE do not involve and are not

performed on behalf of any single entity in the group, then the reporting entity would consider whether it

has a controlling financial interest in the VIE by considering the following:

Purpose and design of the VIE

Relationship and significance of the activities of the VIE to the related parties

Nature of the reporting entity’s exposure to the VIE

Magnitude of the reporting entity’s exposure to the variability associated with the anticipated economic performance of the VIE

When related parties under common control as a group have a controlling financial interest, the parent

entity would consolidate the VIE unless a scope exception applies, regardless of the conclusions reached

by the individual related parties under its control.

Significant Changes

This proposed ASU would expand the accounting alternative to include all private company common

control arrangements if the common control parent and the legal entity being evaluated for consolidation

are not public business entities. FASB expects many private companies to elect the alternative, thus, it

should reduce diversity in applying VIE guidance to private companies under common control. This

proposed accounting alternative also should improve user relevance by providing users of private

company financial statements with additional disclosures structured in a more consistent manner.

Further, FASB expects it will also reduce the costs and complexity associated with applying VIE guidance

to common control arrangements for private companies.

Transition and Effective Date

To be determined when the board considers feedback on the proposed ASU.

Adopting the guidance early would be allowed.

SEC

The SEC did not issue any proposed regulations or guidance in this period.

PCAOB

Auditing Accounting Estimates, Including Fair Value Measurements and Proposed Amendments to PCAOB Auditing Standards

Issue Date

June 2017


Comment Deadline and Effective Date

Comments on the proposed auditing standard are due August 30, 2017.

The board is seeking feedback on the amount of time auditors would need before the proposed new

auditing standard and amendments become effective, if adopted by the PCAOB and approved by the

SEC.

Background

The PCAOB is proposing changes to its auditing standards for many reasons, including the following:

Increasing prevalence and significance of accounting estimates, many with subjective assumptions, measurement uncertainty, and complex processes

The growing use of third-party pricing sources

Results of the PCAOB’s outreach, which indicate that improvements in the standards for auditing accounting estimates may be needed

The number of audit deficiencies identified in the board’s inspection activities, which has begged the question of whether improving the standards could enhance auditors’ application of professional skepticism and consideration of potential management bias

PCAOB enforcement findings related to auditing estimates, which generally involve failure to

– perform procedures to determine the reasonableness of significant assumptions,

– test the relevance, sufficiency, and reliability of the data supporting the accounting estimates, and

– failure to perform procedures to obtain corroboration for management representations regarding

accounting estimates.

Similarly, the SEC has brought Rule 102(e) proceedings against auditors for substantive failures in

auditing accounting estimates, including failure to obtain sufficient competent evidential matter for

significant accounting estimates in an entity’s financial statements and failure to exercise due professional

care, including professional skepticism, throughout the audit.

The board is proposing the following actions:

Replace its existing standards on estimates, fair value, and derivatives with a single standard, proposed AS 2501, Auditing Accounting Estimates, Including Fair Value Measurements

Amend the risk assessment standards to more specifically address certain aspects of auditing accounting estimates

Include a special topics appendix that addresses certain matters relevant to auditing the fair value of financial instruments

Align several PCAOB auditing standards with the proposed single standard on auditing accounting estimates


In summary, the proposal would do the following:

Add or revise requirements and provide direction to prompt auditors to devote greater attention to addressing potential management bias in accounting estimates

Reinforce the need for exercising professional skepticism

Extend certain key requirements in the existing fair value standard to all accounting estimates in significant accounts and disclosures to reflect a more uniform approach to substantive testing

Further integrate the risk assessment standards to focus auditors on estimates with greater risk of material misstatement


Update requirements for auditing accounting estimates, for example, setting forth specific requirements for testing data and pricing information used by the company or the auditor

Provide specific requirements and direction to address auditing fair values of financial instruments

In a companion release, the board is proposing amendments to PCAOB auditing standards to strengthen

the requirements that apply when auditors use the work of specialists in an audit.

Proposed Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists

Issue Date

June 2017

Comment Deadline/Effective Date

Comments on the proposed auditing standard are due August 30, 2017.

The board is seeking feedback on the amount of time auditors would need before the proposed new

auditing standard and amendments become effective if adopted by the PCAOB and approved by the

SEC.

Background

The PCAOB is proposing to amend its auditing standards to strengthen the requirements that apply

when auditors use the work of specialists in an audit. The amendments are designed to increase audit

attention in areas where a specialist is used and to align the applicable requirements with the PCAOB’s

risk assessment standards.

In proposing amendments to its standards for using the work of specialists, the PCAOB would amend

two existing standards and update and retitle a third existing standard. The proposed amendments would

further investor protection by strengthening the requirements for evaluating the work of a company’s

employed or engaged specialist and applying a risk-based supervisory approach to both auditor-employed

and auditor-engaged specialists.

The PCAOB has observed that there is substantial diversity in practice regarding the use of the work of

specialists, such as how auditors use employed or engaged specialists and what procedures they perform

to evaluate the work of companies’ specialists. Moreover, PCAOB inspections staff continues to observe

deficiencies related to auditors’ use of specialists’ work, such as failures to evaluate the assumptions of

company specialists in fair value measurements or failures to consider contradictory evidence or issues

raised by an auditor’s specialist. Both the SEC and the PCAOB have brought enforcement actions

involving situations in which auditors allegedly failed to comply with current auditing standards when

using the work of specialists.

The PCAOB has observed that auditors often use the work of a specialist to test, or assist in testing, the

company’s process to develop an accounting estimate or in developing an independent expectation of an

accounting estimate. In a companion release, the board is proposing to replace its existing standards on

auditing accounting estimates, derivatives, and fair value with a single standard, proposed AS 2501,

Auditing Accounting Estimates, Including Fair Value Measurements, that sets forth a uniform, risk-based

approach designed to strengthen and enhance the requirements for auditing accounting estimates.

Main Provisions

The board is proposing to amend AS 1105, Audit Evidence, to add a new appendix that addresses using the work of a company’s specialist as audit evidence, based on the risk-based approach of the risk assessment standards. The board also is proposing to add a new appendix on supervising the work of auditor-


employed specialists to AS 1201 and to replace AS 1210, which would set forth requirements for using the work of auditor-engaged specialists. In summary, the board’s proposal would make the following changes to PCAOB auditing standards:

Amend AS 1105

– Add a new appendix B that would supplement the requirements in AS 1105 for circumstances in

which the auditor uses the work of the company’s specialist as audit evidence related to the

following: o Obtaining an understanding of the work and report(s) of the company’s specialist(s) and

related company processes and controls o Obtaining an understanding of and assessing the specialist’s knowledge, skill, and ability, as

well as the specialist’s relationship to the company o Performing procedures to test and evaluate the work of a company’s specialist

– Align the proposed requirements for using the work of a company’s specialist with the risk

assessment standards and the board’s separate proposal on auditing accounting estimates,

including fair value measurements.

– Provide factors for determining the necessary evidence to support the auditor’s conclusion

regarding a relevant assertion when using the work of a company’s specialist.

– Direct the auditor to the respective standard for auditing accounting estimates to determine the

procedures to be applied to test and evaluate data and evaluate methods and significant

assumptions used by a company’s specialist when auditing accounting estimates, including fair

value measurements.

Amend AS 1201

– Add a new appendix C to AS 1201 that would supplement the requirements for applying the

supervisory principles in AS 1201.05–.06 when using the work of an auditor-employed specialist

to assist the auditor in obtaining or evaluating audit evidence, including proposed requirements

related to the following: o Determining the necessary extent of the auditor’s review of the work of the specialist o Informing the specialist of the work to be performed o Reviewing and evaluating whether the work of the specialist provides sufficient appropriate

audit evidence o Providing factors for determining the necessary extent of supervision of the work of the

auditor-employed specialist o Leveraging the requirements in other PCAOB standards for assigning competent staff and

determining compliance with independence and ethics requirements, reflecting the fact that auditor-employed specialists are members of the engagement team, and referencing applicable independence and ethics requirements

Replace existing AS 1210

– Replace existing AS 1210 with proposed AS 1210, Using the Work of an Auditor-Engaged Specialist,

which would establish requirements for using the work of an auditor-engaged specialist to assist

the auditor in obtaining or evaluating audit evidence

– Include proposed requirements for reaching an understanding with the specialist and reviewing

and evaluating the specialist’s work that parallel the proposed amendments to AS 1201 for

auditor-employed specialists

– Provide factors for determining the necessary extent of review of the work of the auditor-

engaged specialist

– Amend requirements related to assessing the knowledge, skill, ability, and objectivity of the

specialist

– Describe objectivity as the specialist’s ability to exercise impartial judgment on all issues

encompassed by the specialist’s work related to the audit and expand the list of matters that the

auditor would consider when assessing whether the specialist has the necessary objectivity


The proposed requirements are aligned with the board’s risk assessment standards, so that the necessary

audit effort is commensurate with, among other things, the significance of the specialist’s work to the

auditor’s conclusion regarding the relevant assertion and the associated risk.

The proposal also would require the auditor to evaluate the methods and significant assumptions of a

company’s specialist when the auditor uses that work as audit evidence. This evaluation is not explicitly

required under the board’s existing standards, except with respect to the significant assumptions of a

company's specialist regarding fair value measurements and disclosures.

KNOWLEDGE CHECK

3. Which activity would NOT be considered a ―hosting service‖ under the new AICPA independence

interpretation on hosting services?

a. CPA firm has accepted responsibility to be the sole host of a client’s general ledger system.

b. CPA firm has agreed to store the client’s electronic lease agreements, which the client will

need to access through the member.

c. CPA firm signs an engagement letter to provide tax compliance services for the client and

has requested the client provide certain data to the firm.

d. CPA firm signs an engagement letter to provide back-up services for a client’s electronic

data.

AA2 GS-0417-0A

ACCOUNTING AND AUDITING

SUPPLEMENT NO. 2-2017

Solutions

The AICPA offers a free, daily, e-financial articles as well as video content, research and analysis concerning CPAs and those who work with the accounting profession. Visit the CPA Letter Daily news box on the www.aicpa.org home page to sign up. You can opt out at any time, and only the AICPA can use your e-mail address or personal information. Have a technical accounting or auditing question? So did 23,000 other professionals who contacted the AICPA's accounting and auditing Technical Hotline last year. The objectives of the hotline are to enhance members' knowledge and application of professional judgment by providing free, prompt, high-quality technical assistance by phone concerning issues related to: accounting principles and financial reporting; auditing, attestation, compilation and review standards. The team extends this technical assistance to representatives of governmental units. The hotline can be reached at 1-877-242-7212.

Copyright 2017 AICPA • Unauthorized Copying Prohibited Solutions 1

SOLUTIONS

CHAPTER 1

Solutions to Knowledge Check Questions

1.

a. Incorrect. Diversity in practice, not simplification, was FASB’s overriding concern in issuing this quarter’s ASUs.

b. Correct. In both instances, the board was addressing diversity in practice. c. Incorrect. The ASUs issued in the second quarter addressed a concern raised by stakeholders. d. Incorrect. The ASUs did not indicate harmonization with IFRS but diversity in practice as the

reason for their issuance.

2.

a. Correct. The new rule exempts investment companies except business development companies. b. Incorrect. An audit of this type of company would not be subject to the CAM reporting

requirements. However, the auditor would be subject to all other requirements. c. Incorrect. An audit of this type of company would not be subject to any of the PCAOB’s

requirements. d. Incorrect. Audits of brokers and dealers were exempted from CAM reporting requirements in

the new rule. However, they are subject to all other requirements.

3.

a. Incorrect. This is an example of a hosting service under the new rule because this would be the only copy of the client records.

b. Incorrect. This situation describes a hosting service under the new rule because the client would need access to this information at all times.

c. Correct. A CPA firm may hold certain client data to perform a tax or other service for a client, and it is not considered to be a hosting service.

d. Incorrect. Providing data security or back-up services for a client’s data is considered a hosting service under the new rule because if something were to happen to the original data, the CPA firm would have the only copy of the client records.

Book Title Accounting and Auditing Supplement No. 2-2017 · 2020-06-08 · client separately...

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