Auditing laws on tap: CBA discusses everything from audit documentation to restatements.

The California Board of Accountancy's Reform Statutes Implementation Task Force has drafted proposed regulations related to audit documentation and retention; the reporting of financial statement restatements, settlements arbitration awards and judgments; and work done by non-CPA owners of firms.

The proposals, scheduled for a public hearing in March 2003, may be reviewed at www.calcpa.org.

Though these regulations have not been adopted, laws are in place that are effective Jan. 1, 2003. For example, CPAs are required to report any restatements of financial statements by a client audited by the licensee and the other reportable events contained in Section 5063 of the Business and Professions Code.

The new audit documentation and retention standards are also effective Jan. 1, 2003. Additionally, firms with non-licensee owners are required to disclose to their clients any involvement of non-licensee owners in the services provided.

Reportable Events

AB 270 (Enacted 2002 and effective Jan. 1, 2003, Chapter 231) allows the CBA to require CPAs to report restatements of any client's financial statements. The CBA is considering requiring the reporting of any restatement of a financial statement issued for the purpose of correcting any error that relates to:

* A publicly traded company located, incorporated or doing business in California;

* A government agency in California;

* Any other entity where disclosure of the financial statement is required by law and the entity is incorporated, located or doing business in California;

* A charitable organization registered with the Attorney General's Registry of Charitable Trusts where the restatement has resulted in the filing of an amended or superceding IRS Form 990 or 990PF.

The CPA would be required to report within 30 days of issuance of the restatement and describe the facts, including an explanation of the reason for the restatement.

CPAs reporting on a public company financial statement would be required to include copies of the original and the restated financial statements. CPAs providing services to charitable institutions would be required to include only those portions of the original and the amended forms 990 or 990PF related to the reissued financial statement.

One of the proposed regulations to be heard in March would require that CPAs report the notice of an opening or initiation of an investigation by the Public Company Accounting Oversight Board involving the licensee or any associated person of the licensee.

The definition of associated person is the same as that used in the Sarbanes-Oxley Act of 2002--any professional employee, partner, shareholder or contractor of the CPA or CPA firm.

Audit Documentation, Retention

AB 2873 (Enacted 2002 and effective Jan. 1, 2003, Chapter 230) requires that all firms have a written audit documentation retention and destruction policy. The CBA is proposing that the policy provide for the authorized custody, security, access, retention and destruction of the documentation.

Also, the policy would have to provide for the maintenance of back-up copies of electronic audit documentation at secure locations and procedures for maintaining audit documentation, approving any changes to audit documentation and approving the destruction of documentation.

The proposed regulation also would require firms to identify a person to be responsible for documenting compliance with the policy and approving the destruction of documents after the seven-year retention period expires.

Audit records that pertain to a CBA disciplinary investigation would have to be retained until the CBA notifies the licensee that the investigation is complete and the records are no longer needed.

The CBA is proposing that the seven-year retention period required by AB 2873 begins from the report date. If there are related reports, the retention period would be measured from the most recent report.

Generally, documentation would be required to include the objectives, scope and methodology of the audit, including any sampling criteria used, and documentation of the work performed to support the audit's conclusions.

Also required would be descriptions of transactions and records that were examined that would enable a reviewer with relevant knowledge and experience--having no previous connection with the audit--to understand the work.

Audit documents must include an index that identifies preparers and reviewers and work completion date.

Changes to audit documentation that are made after the report is issued would be subject to additional documentation standards.

The person making and approving the change, the date of the change and the reason for the change--if the reason is other than the assembling of pre-existing documents--must be documented. Any documents changed must also contain sufficient detail to enable a reviewer, unrelated to the audit, to understand the nature, timing, reason for and extent of the change.

Non-CPA Owner Notice

The board is proposing that any firms with non-CPA owners be required to notify each client of the actual or potential involvement of a non-CPA owner in any services provided to the client.

Documentation of the notice would be required to be kept for five years.

Members wishing to provide input into these proposals may submit written comments and recommendations to [e-mail].

Bruce C. Allen is CalCPA's director of government relations.