Clarifying CBA, PCAOB differences.

The following guidance clarifies some apparent conflicts noted by Bertha Minnihan of Mohler, Nixon & Williams in Campbell between the California Board of Accountancy's audit documentation rules--outlined in the October 2004 issue of California CPA--and the Public Company Accounting Oversight Board's Audit Standard No. 3.

Minnihan's questions, and our responses, are below and should aid California practitioners who audit publicly traded companies.

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Can you clarify the key dates related to the audit documentation requirements?

There are two key dates under both the CBA rules and PCAOB standards: the report issuance date, or report release date, and the documentation completion date.

The report issuance date is not clearly defined in the CBA rules (Rule Sec. 68.4), but can be interpreted to mean the date the final report leaves the practitioner's office. PCAOB Audit Standard No. 3 (AS-3) uses the term "report release date" and defines it as "... the date the auditor grants permission to use the auditor's report in connection with the issuance of the company's financial statements ...." (AS-3, Paragraph 14).

As for the documentation completion date, the auditor has 60 days after the report issuance date to complete the audit documentation under CBA Rule 68.4. The PCAOB allows 45 days from the report release date to complete audit documentation. (AS-3, Paragraph 15).

Audit documentation is not allowed to be deleted after the report issuance date under CBA rules, but the PCAOB appears to allow deletions prior to the documentation completion date. Am I reading this correctly?

Yes, the rules have some significant differences.

Rule Sec. 68.4(c) states that prior to the audit completion date "... documents may be added to the file for the assemblage and documentation of work previously performed." Because the rules only allow documents to be added, documents, by inference, may not be deleted.

The PCAOB, though, appears to allow deletions between the report completion date and the documentation completion date.

The PCAOB states that "[c]ircumstances may require additions to audit documentation after the report release date. Audit documentation must not be deleted or discarded after the documentation completion date, however, information may be added." (AS-3, Paragraph 16). Therefore, documents may not be deleted after the documentation completion date, but the inference is that documents may be deleted up to that date.

Can changes be made to working papers after the report issuance date?

Yes and no. Under CBA and PCAOB rules, documents may be added, but must reflect audit procedures that were performed before the report issuance date. The documentation completion period is only for assemblage and documentation of work previously performed.

CBA Rule Sec. 68.4(a) defines "changes" as "... any addition, removal, deletion, substitution, or editing ..." but, as noted previously, Rule 68.4(c), does not appear to allow deletions. These two sections appear to be in conflict.

Can changes be made to working papers after the document completion date?

Yes and no. Both CBA and PCAOB rules allow changes after the documentation completion date, but the auditor must provide the identity of the person making the change, the identity of the person approving the change, the date of the change and the reason for the change.

Further, the PCAOB is clear that documentation must not be deleted or discarded after the documentation completion date (AS-3, Paragraph 16). As noted above, the CBA rules also appear to disallow deletions, but the rules appear to conflict.

There are two instances where auditing standards may require additions to audit documentation. Those instances are if the practitioner, subsequent to the report date, discovers:

* Facts that existed at the report date which might have affected the report. In this instance, the guidance in AU Sec. 561 should be followed.

* That one or more auditing procedures that were considered necessary at the time the audit was conducted were omitted, but there is no indication that the financial statements are not fairly stated. The guidance in AU Sec. 390 should be followed in this case.

Don't these differences present problems for California practitioners who audit publicly traded companies?

Yes. Generally, the more restrictive guidance must be followed.

Four major areas of concern for California practitioners are:

1. The report issuance date under CBA rules may be different than the PCAOB's report release date. The California practitioner may be bound to a date earlier than the PCAOB allows for computing the documentation completion period.

2. For California practitioners who audit publicly traded companies, there is, effectively, only a 45-day period after the report issuance date to complete the audit documentation. The 60 days allowed under the CBA rules would no longer be applicable.

3. During the 45-day documentation period, documents may not be deleted, even though the PCAOB may allow such deletions.

4. Working papers exiting at the documentation completion date are effectively "frozen." While documents may be added or modified, they may not be deleted.

California practitioners must carefully review the key dates when auditing publicly traded companies. The differences between the CBA rules and PCAOB standards can create havoc if not carefully monitored and implemented.

California practitioners and firms also should note that they are required to maintain and comply with a written audit documentation retention and destruction policy. CBA Rule Sec. 68.5, effective Jan. 23, 2004, contains the minimum policy requirements.

The devil, they say, is in the details.

BY MICHAEL G. UELTZEN, CPA, CFE & JOHN D. MOYLE, CPA, CFE

Michael G. Ueltzen, CPA, CFE is managing partner of Ueltzen & Company in Sacramento and legislative co-chair of CalCPA's Government Relations Committee.

John D. Moyle, CPA, CFE is director of litigation consulting and accounting services at Ueltzen & Company in Sacramento. They can be reached at [e-mail] and [e-mail].