There have been several updates to various accounting and auditing standards that will impact your audit reports and the processes your auditors follow in completing the engagement. See below for some key highlights:
Accounting Standards Updates (ASU’s)
- ASU 2020-07 Gifts in Kind Presentation and Disclosure: ASU 2020-07 is now effective for the June 30, 2022 and December 31, 2022 audit periods, and the objective of this standard is to increase transparency about contributed non-financial assets (gifts-in-kind) through enhancements to presentation and disclosure. Examples of contributed non-financial assets include cryptocurrency, donated food, clothing, medical equipment, fixed assets, auction items, rent, and contributed services. Contributed non-financial assets do not include the donation of stock or other securities to an organization. This standard does not change the definition of when contributed services are recorded. Contributed services continue to be recorded at their estimated fair value if they create or enhance non-financial assets or require specialized skills that would need to be purchased if they were not donated. ASU 2020-07 requires the presentation of contributed non-financial assets as a separate line item on the statement of activities, apart from contributions of cash and other financial assets. In addition, disclosures are required including both quantitative and qualitative disaggregation of the types of contributed non-financial assets received by the organization, a description of the programs and activities they are used for if utilized, monetization policy if liquidated, any donor-imposed restrictions on the contributed non-financial assets received, and the determination of the fair value which the non-financial contributed assets are recorded.
- Current Expected Credit Loss (CECL, Topic 326): CECL will be applicable to organizations with loans and debt instruments, financial guarantee contracts and loan commitments, and trade receivables and contract assets, following revenue recognition (Topic 606). CECL will be effective for fiscal years beginning in 2023, and organizations will be required to record the cumulative effect adjustment to opening net assets/retained earnings as of the earliest period presented. Under current accounting guidance, credit losses are recorded under the incurred loss model, where losses are not recorded until the loss is likely. The new CECL model for recording credit losses requires organizations to record the net amount expected to be received for a contract based upon historical losses, plus any adjustments for current conditions, any supportable forecasts, and any revisions to historical losses. Contributions receivable, including pledges, and most grants receivable, if following the contribution model-conditional contributions are excluded from the scope of Topic 326.
Statement on Auditing Standards (SAS’s) Updates
- SAS 134: Auditor Reporting and Amendments: SAS 134 is effective for periods ending on or after December 15, 2021 and impacts the presentation of your audit report in the following ways: the opinion section will now be included first in the audit opinion, the “Basis for Opinion” section will now be presented second, an Optional Key Audit Matters section can be included (New AU-C Section 701) – must be engaged upon, the audit opinion now includes an expanded description of management and auditor responsibilities, and the audit opinion will still have emphasis-of-matter and other matter paragraphs.
- SAS 135: Omnibus Statement on Auditing Standards – 2019: This statement amends AU-C 260, Communication To Those Charged With Governance, and AU-C 550, Related Parties, as well as various other sections. These amendments are intended to enhance audit quality by heightening the audit’s focus on related parties and relationships and transactions with related parties, significant unusual transactions, and making inquiries of the predecessor auditor regarding their understanding of related party relationships/transactions and significant unusual transactions. You should anticipate additional inquiries from your audit team to your governing body members.
- SAS No. 136: Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA: SAS No. 136 introduces new AU-C Section 703 (AU-C 700 is no longer applicable for ERISA plans.) There are key changes to the form and content of the auditor’s report and new performance requirements along with requirements to enhance audit quality and a revised auditor’s report on ERISA plan financial statements. The intent is to provide better insight into the responsibilities of Management and the Auditor. Lastly, “Limited-Scope” audits are now referred to as ERISA Section 103(a)(3)(c) audits. Your auditors are now required to have a substantially completed IRS Form 5500 in hand before they can issue the audit report. The prior requirement was that only Schedule H of the Form 5500 was required to be obtained prior to issuance. In addition, reportable findings are required to be included in the communication to those charged with governance, if applicable.
- SAS No. 137: The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports: SAS 137 is effective for periods ending on or after December 15, 2021. SAS 137 clarifies auditor’s responsibilities for other information included in organization’s annual reports. An annual report includes any report that contains, accompanies, or incorporates by reference the financial statements and the auditor’s report thereon. Your auditor will be required to remain alert for indications that a material inconsistency or misstatement of facts exists between the other information presented in the annual report and the auditor’s knowledge obtained in the audit.
- SAS No. 138 and SSAE No. 20 Amendments to the Description of the Concept of Materiality: This statement amends the description of the concept of materiality. The goal of this update is to eliminate inconsistencies between the AICPA Professional Standards and the definition of materiality used by the U.S. judicial system and other U.S. Standard setters and regulators. The change is not anticipated to change current auditor practice in applying materiality.
- SAS No. 139 Amendments to AU-C Sections 800, 805, and 810 to Incorporate Auditor Reporting Challenges From SAS No. 134: This update aligns certain AU-C sections with the reporting provisions of SAS No. 134 and other recently issued SASs. This involves special purpose accounting frameworks and other unique reporting scenarios.
- SAS No. 142 Audit Evidence: This standard is effective on or after December 15, 2022 and will bring modernization to the standards for audit evidence. It addresses the use of emerging technologies and techniques used by clients and auditors, provides examples to illustrate how automated tools and techniques can be used by auditors such as data analytics, drones, and remote observation, etc., and provides the application of professional skepticism.
- SAS No. 143 Auditing Accounting Estimates and Related Disclosures: SAS No. 143 will be effective on or after December 15, 2023 and addresses the auditor’s responsibilities relating to accounting estimates and related disclosures and enables them to appropriately address the increasingly complex scenarios that arise from new accounting standards that include estimates.
- SAS No. 144 Amendments to AU-C Sections 501, 540, and 620 Related to the Use of Specialists and the Use of Pricing Information Obtained From External Information Sources: SAS No. 144 will be effective on or after December 15, 2023 and enhances guidance about evaluating the work of the management’s specialist, provides additional guidance on the use of specialists, both auditor’s and management’s, and provides a new appendix, “Use of Pricing Information From Third Parties as Audit Evidence,” which provides guidance on using such information as audit evidence.
- SAS No. 145 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement: SAS No. 145 will be effective for periods ending on or after December 15, 2023, and its key aspects include the new and revised risk assessment terminology. This includes a revised definition of significant risk, clarifies the work effort related to understanding each of the components of internal control, including enhanced guidance on information technology, separately assesses inherent risk and control risk, defining ‘maximum’ control risk when controls are not tested for operating effectiveness, and a risk assessment ‘stand-back’ requirement.
- SAS No. 146 Engagement Resources: This statement clarifies that the engagement partner is required to take responsibility for the direction and supervision of the engagement team and review of their work and that if the resources are insufficient or inappropriate, the engagement partner is required to take appropriate action.
- SAS No. 147: Inquiries of the Predecessor Auditor Regarding Fraud and Noncompliance With Laws and Regulations: This statement clarifies requirements and guidance related to the auditor’s inquiries of a predecessor auditor about matters that will assist the auditor in determining whether to accept the engagement.
If you have any questions regarding how these standards may impact your upcoming audit, please contact a member of your audit team.