Official releases: SAS No. 98 ... SSAE No. 12 ... SQCS No. 6 ... auditing interpretation ... ethics interpretation and ruling.

SAS No. 98--Omnibus Statement on Auditing Standards--2002

(Amendment to Statement on Auditing Standards No. 95, Generally Accepted Auditing Standards, AICPA, Professional Standards, vol. 1, AU sec. 150.05; amendment to SAS No. 25, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards, AICPA, Professional Standards, vol. 1, AU sec. 161.02 and .03; amendment to SAS No. 47, Audit Risk and Materiality in Conducting an Audit, AICPA, Professional Standards, vol. 1, AU sec. 312.34-.41; amendment to SAS No. 70, Service Organizations, AICPA, Professional Standards, vol. 1, AU sec. 324, and rescindment of Interpretation No. 6, "Responsibilities of Service Organizations and Service Auditors With Respect to Subsequent Events in a Service Auditor's Engagement," of SAS No. 70; amendment to SAS No. 58, Reports on Audited Financial Statements, AICPA, Professional Standards, vol. 1, AU sec. 508.65; amendment to SAS No. 8, Other Information in Documents Containing Audited Financial Statements, AICPA, Professional Standards, vol. 1, AU sec. 550.07, and amendment to SAS No. 52, Required Supplementary Information, AICPA, Professional Standards, vol. 1, AU sec. 558.08 and .10; amendment to SAS No. 52, Required Supplementary Information, AICPA, Professional Standards, vol. 1, AU sec. 558.02; amendment to SAS No. 29, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents, AICPA, Professional Standards, vol. 1, AU sec. 551.12 and .15; amendment to SAS No. 1, Codification of Auditing Standards and Procedures, AICPA, Professional Standards, vol. 1, AU sec. 561.03, "Subsequent Discovery of Facts Existing at the Date of the Auditor's Report"; amendment to SAS No. 1, Codification of Auditing Standards and Procedures, AICPA, Professional Standards, vol. 1, AU sec. 560.01, "Subsequent Events"; and amendment to SAS No. 1, Codification of Auditing Standards and Procedures, AICPA, Professional Standards, vol. 1, AU sec. 530.03-.05, "Dating of the Independent Auditor's Report.")

AMENDMENT TO STATEMENT ON AUDITING STANDARDS NO. 95, GENERALLY ACCEPIED AUDITING STANDARDS (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SEC. 150.05)

1. Statement on Auditing Standards (SAS) No. 95, Generally Accepted Auditing Standards (AICPA, Professional Standards, vol. 1, AU sec. 150), provides guidance with respect to the authoritative nature of generally accepted auditing standards (GAAS). This amendment clarifies the status of appendixes to SASs as being interpretive publications. New language is shown in boldface italics. Footnotes are to be renumbered.

.05 Interpretive publications consist of auditing Interpretations of the SASs, appendixes to the SASs, (3) auditing guidance included in AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position. (4 [begin strikethrough]5[end strikethrough]) interpretive publications are not auditing standards. Interpretive publications are recommendations on the application of the SASs in specific circumstances, including engagements for entities in specialized industries. An interpretive publication is issued under the authority of the ASB after all ASB members have been provided an opportunity to consider and comment on whether the proposed interpretive publication is consistent with the SASs.

2. This amendment is effective upon issuance.

AMENDMENT TO SAS NO. 25, THE RELATIONSHIP OF GENERALLY ACCEPTED AUDITING STANDARDS TO QUALITY CONTROL STANDARDS (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SEC. 161.02 AND .03)

3. SAS No. 25, The Relationship of Generally Accepted Auditing Standards to Quality Control Standards (AICPA, Professional Standards, vol. 1, AU sec. 161), is being amended to clarify the relationship between Statements on Quality Control Standards (SQCSs) and engagements performed under SASs. The amendment clarifies that although an effective quality control system is conducive to compliance with GAAS, deficiencies in or noncompliance with a firm's quality control system do not, in and of themselves, indicate that an engagement was not performed in accordance with the applicable professional standards. New language is shown in boldface italics; deleted language is shown by strikethrough.

(Supersedes Statement on Auditing Standards No. 4, Quality Control Considerations for a Firm of Independent Auditors) ([begin strikethrough]1[end strikethrough])

.02 A firm of independent auditors [begin strikethrough]also needs to comply with the quality control standards[end strikethrough] has a responsibility to adopt a system of quality control in conducting an audit practice. (1) Thus, a firm should establish quality control policies and procedures to provide it with reasonable assurance that its personnel comply [begin strikethrough]of conforming[end strikethrough] with generally accepted auditing standards in its audit engagements. The nature and extent of a firm's quality control policies and procedures depend on factors such as its size, the degree of operating autonomy allowed its personnel and its practice offices, the nature of its practice, its organization, and appropriate cost-benefit considerations.

.03 Generally accepted auditing standards relate to the conduct of individual audit engagements; quality control standards relate to the conduct of a firm's audit practice as a whole. Thus, generally accepted auditing standards and quality control standards are related, and the quality control policies and procedures that a firm adopts may affect both the conduct of individual audit engagements and the conduct of a firm's audit practice as a whole. However, deficiencies in or instances of noncompliance with a firm's quality control policies and procedures do not, in and of themselves, indicate that a particular audit engagement was not performed in accordance with generally accepted auditing standards.

4. This amendment is effective upon issuance.

AMENDMENT TO SAS NO. 47, AUDIT RISK AND MATERIALITY IN CONDUCTING AN AUDIT (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SEC. 312.34-.41)

5. SAS No. 47, Audit Risk and Materiality in Conducting an Audit (AICPA, Professional Standards, vol. 1, AU sec. 312.04 and .09), requires the auditor to consider adjustments individually and in the aggregate. In the section entitled "Evaluating Audit Findings," SAS No. 47 (AU sec. 312.34-.41) does not indicate that the auditor should evaluate misstatements individually and in the aggregate. This amendment clarifies the auditor's responsibility with respect to evaluating audit adjustments. New language is shown in boldface italics; deleted language is shown by strikethrough. Footnotes are to be renumbered.

Evaluating Audit Findings

.34 In evaluating whether the financial statements are presented fairly, in all material respects, in conformity with generally accepted accounting principles, the auditor should consider the effects, both individually and in the aggregate, of misstatements that are not corrected by the entity. [begin strikethrough]has not corrected in a way that enables him or her to consider whether, in relation to individual amounts, subtotals, or totals in the financial statements, they materially misstate the financial statements taken as a whole.[end strikethrough] In evaluating the effects of misstatements, the auditor should include both qualitative and quantitative considerations (see SAS No. 47 [AU sec. 312.08-.11]). The consideration and aggregation of misstatements should include the auditor's best estimate of the total misstatements in the account balances or classes of transactions that he or she has examined (hereafter referred to as likely misstatements (13)), not just the amount of misstatements specifically identified (hereafter referred to as known misstatements). (14) Likely misstatements should be aggregated in a way that enables the auditor to consider whether, in relation to individual amounts, subtotals, or totals in the financial statements, they materially misstate the financial statements taken as a whole. Qualitative considerations also influence the auditor in reaching a conclusion as to whether misstatements are material.

.35 [begin strikethrough]The aggregation of misstatements should include the auditor's best estimate of the total misstatements in the account balances or classes of transactions that he or she has examined (hereafter referred to as likely misstatements ([begin strikethrough]13[end strikethrough])), not just the amount of misstatements specifically identified (hereafter referred to as known misstatement).[end strikethrough] ([begin strikethrough]14[end strikethrough]) When the auditor tests an account balance or a class of transactions and related assertions by an analytical procedure, he or she ordinarily would not specifically identify misstatements but would only obtain an indication of whether misstatement might exist in the balance or class and possibly its approximate magnitude. If the analytical procedure indicates that a misstatement might exist, but not its approximate amount, the auditor ordinarily would have to employ other procedures to enable him or her to estimate the likely misstatement in the balance or class. When an auditor uses audit sampling to test an assertion for an account balance or a class of transactions, he or she projects the amount of known misstatements identified in the sample to the items in the balance or class from which the sample was selected. That projected misstatement, along with the results of other substantive tests, contributes to the auditor's assessment of likely misstatement in the balance or class.

.36 The risk of material misstatement of the financial statements is generally greater when account balances and classes of transactions include accounting estimates rather than essentially factual data because of the inherent subjectivity in estimating future events. Estimates, such as those for inventory obsolescence, uncollectible receivables, and warranty obligations, are subject not only to the unpredictability of future events but also to misstatements that may arise from using inadequate or inappropriate data or misapplying appropriate data. Since no one accounting estimate can be considered accurate with certainty, the auditor recognizes that a difference between an estimated amount best supported by the audit evidence and the estimated amount included in the financial statements may be reasonable, and such difference would not be considered to be a likely misstatement. However, if the auditor believes the estimated amount included in the financial statements is unreasonable, he or she should treat the difference between that estimate and the closest reasonable estimate as a likely misstatement [begin strikethrough]and aggregate it with other likely misstatements.[end strikethrough] The auditor should also consider whether the difference between estimates best supported by the audit evidence and the estimates included in the financial statements, which are individually reasonable, indicate a possible bias on the part of the entity's management. For example, if each accounting estimate included in the financial statements was individually reasonable, but the effect of the difference between each estimate and the estimate best supported by the audit evidence was to increase income, the auditor should reconsider the estimates taken as a whole.

.37 In prior periods, likely misstatements may not have been corrected by the entity because they did not cause the financial statements for those periods to be materially misstated. Those misstatements might also affect the current period's financial statements. (15) If the auditor believes that there is an unacceptably high risk that the current period's financial statements may be materially misstated when those prior-period likely misstatements that affect the current period's financial statements are considered along with likely misstatements arising in the current period, the auditor should include in aggregate likely misstatement the effect on the current period's financial statements of those prior-period likely misstatements.

.38 If the auditor concludes, based on the accumulation of sufficient evidential matter, that the effects [begin strikethrough]aggregation[end strikethrough] of likely misstatements, individually or in the aggregate, cause[begin strikethrough]s[end strikethrough] the financial statements to be materially misstated, the auditor should request management to eliminate the [begin strikethrough]material[end strikethrough] misstatement. If the material misstatement is not eliminated, the auditor should issue a qualified or an adverse opinion on the financial statements. Material misstatements may be eliminated by, for example, application of appropriate accounting principles, other adjustments in amounts, or the addition of appropriate disclosure of inadequately disclosed matters. Even though the [begin strikethrough]aggregate[end strikethrough] effects of likely misstatements on the financial statements may be immaterial, the auditor should recognize that an accumulation of immaterial misstatements in the balance sheet could contribute to material misstatements of future financial statements.

.39 If the auditor concludes that the effects [begin strikethrough]aggregation[end strikethrough] of likely misstatements, individually or in the aggregate, do[begin strikethrough]es[end strikethrough] not cause the financial statements to be materially misstated, he or she should recognize that they could still be materially misstated because of further misstatement remaining undetected. As the aggregate likely misstatements increase[begin strikethrough]s[end strikethrough], the risk that the financial statements may be materially misstated also increases. The auditor generally reduces this risk of material misstatement in planning the audit by restricting the extent of detection risk he or she is willing to accept for an assertion related to an account balance or a class of transactions. The auditor can reduce this risk of material misstatement by modifying the nature, timing, and extent of planned auditing procedures [begin strikethrough]on a continuous basis[end strikethrough] in performing the audit. (See paragraph .33.) Nevertheless, if the auditor believes that such risk is unacceptably high, he or she should perform additional auditing procedures or satisfy himself or herself that the entity has adjusted the financial statements to reduce the risk of material misstatement to an acceptable level.

.40 The auditor should document the nature and effect of aggregated misstatements. The auditor also should document his or her conclusion as to whether the aggregated misstatements cause the financial statement to be materially misstated.

.41 In aggregating [begin strikethrough]known and[end strikethrough] likely misstatements that the entity has not corrected, pursuant to paragraphs .34 and .35, the auditor may designate an amount below which misstatements need not be accumulated. This amount should be set so that any such misstatements, either individually or when aggregated with other such misstatements, would not be material to the financial statements, after the possibility of further undetected misstatements is considered.

6. This amendment is effective upon issuance.

AMENDMENT TO SAS NO. 70, SERVICE ORGANIZATIONS (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SEC. 324), AND RESCINDMENT OF INTERPRETATION NO. 6, "RESPONSIBILITIES OF SERVICE ORGANIZATIONS AND SERVICE AUDITORS WITH RESPECT TO SUBSEQUENT EVENTS IN A SERVICE AUDITOR'S ENGAGEMENT," OF SAS NO. 70

7. Interpretation No. 6, "Responsibilities of Service Organizations and Service Auditors With Respect to Subsequent Events in a Service Auditor's Engagement," of SAS No. 70, Service Organizations (AICPA, Professional Standards, vol. 1, AU sec. 9324.41 and .42), includes guidance regarding subsequent events. This guidance currently states, "A service auditor should consider inquiring of management" about subsequent events. This amendment revises the guidance to state, "A service auditor should inquire of management" about subsequent events and brings the guidance from the Interpretation into SAS No. 70. This amendment also rescinds Interpretation No. 6. Bold-face italic denotes new language. Paragraphs are to be renumbered.

Responsibilities of Service Organizations and Service Auditors With Respect to Subsequent Events

.57 Changes in a service organization's controls that could affect user organizations' information systems may occur subsequent to the period covered by the service auditor's report but before the date of the service auditor's report. These occurrences are referred to as subsequent events. A service auditor should consider information about two types of subsequent events that come to his or her attention.

.58 The first type consists of events that provide additional information about conditions that existed during the period covered by the service auditor's report. This information should be used by the service auditor in determining whether controls at the service organization that could affect user organizations' information systems were placed in operation, suitably designed, and, if applicable, operating effectively during the period covered by the engagement.

.59 The second type consists of those events that provide information about conditions that arose subsequent to the period covered by the service auditor5 report that are of such a nature and significance that their disclosure is necessary to prevent users from being misled. This type of information ordinarily will not affect the service auditor's report if the information is adequately disclosed by management in a section of the report containing "Other Information Provided by the Service Organization." If this information is not disclosed by the service organization, the service auditor should disclose it in a section of the report containing "Other Information Provided by the Service Auditor" and/or in the service auditor's report.

.60 Although a service auditor has no responsibility to detect subsequent events, the service auditor should inquire of management as to whether it is aware of any subsequent events through the date of the service auditor's report that would have a significant effect on user organizations. In addition, a service auditor should obtain a representation from management regarding subsequent events.

Written Representations of the Service Organization's Management

.61 [begin strikethrough]57[end strikethrough] Regardless of the type of report issued, the service auditor should obtain written representations from the service organization's management that--

* Acknowledge management's responsibility for establishing and maintaining appropriate controls relating to the processing of transactions for user organizations.

* Acknowledge the appropriateness of the specified control objectives.

* State that the description of controls presents fairly, in all material respects: the aspects of the service organization's controls that may be relevant to a user organization's internal control.

* State that the controls, as described, had been placed in operation as of a specific date. State that management believes its controls were suitably designed to achieve the specified control objectives.

* State that management has disclosed to the service auditor any significant changes in controls that have occurred since the service organization's last examination.

* State that management has disclosed to the service auditor any illegal acts, fraud, or uncorrected errors attributable to the service organization's management or employees that may affect one or more user organizations.

* State that management has disclosed to the service auditor all design deficiencies in controls of which it is aware, including those for which management believes the cost of corrective action may exceed the benefits.

* State that management has disclosed to the service auditor any subsequent events that would have a significant effect on user organizations.

If the scope of the work includes tests of operating effectiveness, the service auditor should obtain a written representation from the service organization's management stating that management has disclosed to the service auditor all instances, of which it is aware, when controls have not operated with sufficient effectiveness to achieve the specified control objectives.

8. This amendment is effective for reports issued on or after January 1, 2003. Earlier application is permissible.

AMENDMENT TO SAS NO. 58, REPORTS ON AUDITED FINANCIAL STATEMENTS (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SEC. 508.65)

9. SAS No. 58, Reports on Audited Financial Statements (AICPA, Professional Standards, vol. 1, AU sec. 508.65), states that the auditor's report on comparative financial statements should be dated as of the date of completion of the most recent audit. The guidance found in SAS No. 1, Codification of Auditing Standards and Procedures (AICPA, Professional Standards, vol. 1, AU sec. 530.01, "Dating of the Independent Auditor's Report"), states, "Generally, the date of completion of the field work should be used as the date of the independent auditor's report." This amendment makes the guidance in SAS No. 58 (AU sec. 508.65) consistent with the guidance in SAS No. 1 (AU sec. 530.01) by using the term completion of fieldwork as opposed to "completion of his most recent audit." New language is shown in boldface italics; deleted language is shown by strikethrough.

.65 The fourth standard of reporting requires that an auditor's report contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. Reference in the fourth reporting standard to the financial statements taken as a whole applies not only to the financial statements of the current period but also to those of one or more prior periods that are presented on a comparative basis with those of the current period. Therefore, a continuing auditor (22) should update (23) [begin strikethrough]his or her[end strikethrough] the report on the individual financial statements of the one or more prior periods presented on a comparative basis with those of the current period. (24) Ordinarily, the auditor's report on comparative financial statements should be dated as of the date of completion official-work for the most recent audit. (See section 530, Dating of the Independent Auditor's Report, paragraph .01.)

10. This amendment is effective upon issuance.

11. The following amendments to SAS No. 8, Other Information in Documents Containing Audited Financial Statements; SAS No. 52, Required Supplementary Information; and SAS No. 29, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents, address the appropriate reporting for supplementary information.

AMENDMENT TO SAS NO. 8, OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SIC. 550.07), AND AMENDMENT TO SAS NO. 52, REQUIRED SUPPLEMENTARY INFORMATION (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SEC. 558.08 AND .10)

12. SAS No. 8, Other Information in Documents Containing Audited Financial Statements (AICPA, Professional Standards, vol. 1, AU sec. 550), and SAS No. 52, Required Supplementary Information (AICPA, Professional Standards, vol. 1, AU sec. 558.08 and .10), do not indicate whether an auditor may issue a report providing an opinion, in relation to the basic financial statements taken as a whole, on supplementary information and other information that has been subjected to the auditing procedures applied in the audit of those basic financial statements. This amendment clarifies that such reporting is allowed. New language is shown in boldface italics; deleted language is shown by strikethrough. Footnotes and paragraphs are to be renumbered.

Amendment to SAS No. 8, Other Information in Documents Containing Audited Financial Statements

.07 If certain other information (3) has been subjected to auditing procedures applied in the audit of the basic financial statements, the auditor may express an opinion on whether the information is fairly stated in all material respects in relation to those financial statements taken as a whole. In those circumstances, the auditor's report on the information should describe clearly the character of the auditor's work and the degree of responsibility the auditor is taking. The auditor may report on such information using the guidance in SAS No. 29, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents (AICPA, Professional Standards, vol. 1, AU sec. 551.12 and. 14).

Amendment to SAS No. 52, Required Supplementary Information

[begin strikethrough]Circumstances Requiring[end strikethrough] Reporting on Required Supplementary Information

.08 Since the supplementary information is not audited and is not a required part of the basic financial statements, the auditor need not add an explanatory paragraph to [begin strikethrough]his[end strikethrough] the report on the audited financial statements to refer to the supplementary information or to his or her limited procedures, except in any of the following circumstances: (7) (a) the supplementary information that GAAP [begin strikethrough]the FASB, CASB, or FASAB[end strikethrough] requires to be presented in the circumstances is omitted; (b) the auditor has concluded that the measurement or presentation ,of the supplementary information departs materially from prescribed guidelines; (c) the auditor is unable to complete the prescribed procedures; (d) the auditor is unable to remove substantial doubts about whether the supplementary information conforms to prescribed guidelines. Since the required supplementary information does not change the standards of financial accounting and reporting used for the preparation of the entity's basic financial statements, the circumstances described above do not affect the auditor's opinion on the fairness of presentation of such financial statements in conformity with generally accepted accounting principles. Furthermore, the auditor need not present the supplementary information if it is omitted by the entity. The following are examples of additional explanatory paragraphs an auditor might use in these circumstances.

Omission of Required Supplementary Information

The (Company or Governmental Unit) has not presented [describe the supplementary information required by GAAP * [begin strikethrough]the FASB, GASB, or FASAB in the circumstances[end strikethrough]] that accounting principles generally accepted in the United States [begin strikethrough]the (Financial, Governmental, or Federal) Accounting Standards (Advisory) Board[end strikethrough] has determined is necessary to supplement, although not required to be part of, the basic financial statements.

Material Departures From Guidelines

The [specifically identify the supplementary information] on page XX is not a required part of the basic financial statements, and we did not audit and do not express an opinion on such information. However, we have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. As a result of such limited procedures, we believe that the [specifically identify the supplementary information] is not in conformity with accounting principles generally accepted in the United States [begin strikethrough]guidelines established by the (Financial, Governmental, or Federal) Accounting Standards (Advisory) Board[end strikethrough] because [describe the material departure(s) from the GAAP * [begin strikethrough]FASB, GASB, or FASAB, guidelines].[end strikethrough]

Prescribed Procedures Not Completed

The [specifically identify the supplementary information] on page XX is not a required part of the basic financial statements, and we did not audit and do not express an opinion on such information. Further, we were unable to apply to the information certain procedures prescribed by professional standards because [state the reasons].

Unresolved Doubts About Adherence to Guidelines

The [specifically identify the supplementary information] on page XX is not a required part of the basic financial statements, and we did not audit and do not express an opinion on such information. However, we have applied certain limited procedures prescribed by professional standards that raised doubts that we were unable to resolve regarding whether material modifications should be made to the information for it to conform with guidelines established by accounting principles generally accepted in the United States [begin strikethrough]the (Financial, Governmental, or Federal) Accounting Standards (Advisory) Board.[end strikethrough] [The auditor should consider including in [begin strikethrough]his[end strikethrough] the report the reason(s) he or she was unable to resolve his or her substantial doubts.]

Even though [begin strikethrough]he[end strikethrough] the auditor is unable to complete the prescribed procedures, if, on the basis of facts known to him or her, the auditor concludes that the supplementary information has not been measured or presented within prescribed guidelines, he or she should suggest appropriate revision; failing that, he or she should describe the nature of any material departure(s) in [begin strikethrough]his[end strikethrough] the report.

.09 In conjunction with the audit of the financial statements, the auditor may subject the supplementary information to certain auditing procedures. If the procedures are sufficient to enable the auditor to express an opinion on whether the information is fairly stated in all material respects in relation to the financial statements taken as a whole, the auditor may expand the audit report in accordance with section 550.07.

[begin strikethrough].09[end strikethrough] 10 If the entity includes with the supplementary information an indication that the auditor performed any procedures regarding the information without also indicating that the auditor does not express an opinion on the information presented, the auditor's report on the audited financial statements should be expanded to include a disclaimer on the information or, if appropriate, report on whether the information is fairly stated in all material respects in relation to the financial statements taken as a whole.

[begin strikethrough].10[end strikethrough] 11 Ordinarily, the required supplementary information should be distinct from the audited financial statements and distinguished from other information outside the financial statements that is not required by GAAP [begin strikethrough]the FASB, GASB, or FASAB.[end strikethrough] However, management may choose not to place the required supplementary information outside the basic financial statements. In such circumstances, unless it is audited as part of the basic financial statements, the information should be clearly marked as unaudited. If the information is not clearly marked as unaudited, the auditor's report on the audited financial statements should be expanded to include a disclaimer on the supplementary information.

13. This amendment is effective upon issuance.

AMENDMENT TO SAS NO. 52, REQUIRED SUPPLEMENTARY INFORMATION (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SEC. 558.02)

14. The applicability paragraph to SAS No. 52, Required Supplementary Information (AICPA, Professional Standards, vol. 1, AU sec. 558), as currently written, does not include such items as AICPA Industry Audit and Accounting Guides, which are considered GAAP as described in SAS No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles (AICPA, Professional Standards, vol. 1, AU sec. 411), as amended. This amendment includes all sources of GAAP in the applicability section of SAS No. 52. New language is shown in boldface italics; deleted language is shown by strikethrough.

.02 This section is applicable in an audit in accordance with generally accepted auditing standards of financial statements included in a document that should contain supplementary information required by generally accepted accounting principles (GAAP) [begin strikethrough]the FASB, GASB, or FASAB[end strikethrough]. However, this section is not applicable if the auditor has been engaged to audit such supplementary information. (2)

15. This amendment is effective upon issuance.

AMENDMENT TO SAS NO. 29, REPORTING ON INFORMATION ACCOMPANYING THE BASIC FINANCIAL STATEMENTS IN AUDITOR. SUBMITTED DOCUMENTS (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SEC. 551.12 AND .15)

16. The current guidance on supplementary information is silent as to whether the auditor is permitted to report that required supplementary information in an auditor-submitted document that is neither incomplete nor otherwise deficient is fairly stated in relation to the basic financial statements taken as a whole. This amendment revises the guidance in SAS No. 29, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents (AICPA, Professional Standards, vol. 1, AU sec. 551.15), which has been split and revised as AU sections 551.15 and 551.16, and deletes footnote 6 to clarify the reporting guidance with respect to required supplementary information. New language is shown in boldface italics; deleted language is shown by strikethrough. Footnotes and paragraphs are to be renumbered.

.12 An example of reporting on information accompanying the basic financial statements in an auditor-submitted document follows:

   Our audit was conducted for the purpose of forming an opinion on the basic
   financial statements taken as a whole. The (identify accompanying
   information) is presented for purposes of additional analysis and is not a
   required part of the basic financial statements. Such information has been
   subjected to the auditing procedures applied in the audit of the basic
   financial statements and, in our opinion, is fairly stated in all material
   respects in relation to the basic financial statements taken as a whole.
   ([begin strikethrough]6[end strikethrough])

Supplementary Information Required by GAAP [begin strikethrough]FASB or GASB Pronouncements[end strikethrough]

.15 When supplementary information required by GAAP [begin strikethrough]the FASB or GASB[end strikethrough] is presented outside the basic financial statements in an auditor-submitted document, the auditor should [begin strikethrough]disclaim an opinion on the information unless[end strikethrough] (a) express an opinion on the information if the auditor [begin strikethrough]he[end strikethrough] has been engaged to examine the information, [begin strikethrough]and express an opinion on it,[end strikethrough] (b) report on the information using the guidance in paragraphs. 12 and. 14, provided such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, or (c) disclaim an opinion on the information. ([begin strikethrough]7[end strikethrough] 6) The following is an example of a disclaimer an auditor might use in these circumstances:

   The [identify the supplementary information] on page XX is not a required
   part of the basic financial statements but is supplementary information
   required by accounting principles generally accepted in the United States
   of America (7) [begin strikethrough]the (Financial or Governmental)
   Accounting Standards Board.[end strikethrough] We have applied certain
   limited procedures, which consisted principally of inquiries of management
   regarding the methods of measurement and presentation of the supplementary
   information. However, we did not audit the information and express no
   opinion on it.

.16 [begin strikethrough]Also, t[end strikethrough] The auditor's report should be expanded in accordance with AU section 558, Required Supplementary Information, paragraph .08, if (a) supplementary information that GAAP [begin strikethrough]the FASB or GASB[end strikethrough] requires to be presented in the circumstances is omitted, (b) the auditor has concluded that the measurement or presentation of the supplementary information departs materially from guidelines prescribed by GAAP [begin strikethrough]the FASB or GASB,[end strikethrough] (c) the auditor is unable to complete the procedures prescribed by section 558, or (d) the auditor is unable to remove substantial doubts about whether the supplementary information conforms to prescribed guidelines.

17. This amendment is effective upon issuance.

18. The following amendments to SAS No. 1, Codification of Auditing Standards and Procedures, AU sec. 561.03, "Subsequent Discovery of Facts Existing at the Date of the Auditor's Report"; AU sec. 560.01, "Subsequent Events"; and AU sec. 530.03-.05, "Dating of the Independent Auditor's Report," clarify the auditor's responsibility with respect to subsequent events.

AMENDMENT TO SAS NO. 1, CODIFICATION OF AUDITING STANDARDS AND PROCEDURES (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SEC. 561.03, "SUBSEQUENT DISCOVERY OF FACTS EXISTING AT THE DATE OF THE AUDITOR'S REPORT")

19. SAS No. 1, Codification of Auditing Standards and Procedures (AICPA, Professional Standards, vol. 1, AU sec. 561.01, "Subsequent Discovery of Facts Existing at the Date of the Auditor's Report"), and the title to the section, refer to subsequent discovery of facts existing at the date of the auditor's report. The wording of SAS No. 1 (AU sec. 561.03), however, implies that the auditor's responsibility extends through the date of issuance of the report. This is inconsistent with the intent of the section. This amendment to SAS No. 1 (AU sec. 561.03) clarifies the auditor's responsibility with respect to subsequent events. This amendment also inserts a footnote into paragraph 1 to cite the appropriate guidance in the situation when the issuance of the financial statements has not occurred. New language is shown in boldface italics; deleted language is shown by strikethrough. Footnotes are to be renumbered.

.01 The procedures described in this section should be followed by the auditor who, subsequent to the date of the [begin strikethrough]his[end strikethrough] report upon audited financial statements, becomes aware that facts may have existed at that date which might have affected the [begin strikethrough]his[end strikethrough] report had he or she then been aware of such facts. (1)

.02 Because of the variety of conditions which might be encountered, some of these procedures are necessarily set out only in general terms; the specific actions to be taken in a particular case may vary somewhat in the light of the circumstances. The auditor would be well advised to consult with [begin strikethrough]his[end strikethrough] an attorney when he or she encounters the circumstances to which this section may apply because of legal implications that may be involved in actions contemplated herein, including, for example, the possible effect of state statutes regarding confidentiality of auditor-client communications.

.03 After [begin strikethrough]he has issued[end strikethrough] the date of [begin strikethrough]his[end strikethrough] the report, the auditor has no obligation ([begin strikethrough]1[end strikethrough] 2) to make any further or continuing inquiry or perform any other auditing procedures with respect to the audited financial statements covered by that report, unless new information which may affect [begin strikethrough]his[end strikethrough] the report comes to his or her attention. [begin strikethrough]In addition, this section does not apply to situations arising from developments or events occurring after the date of the auditor's report; neither does it apply to situations where, after issuance of the auditor's report, final determinations or resolutions are made of contingencies or other matters which had been disclosed in the financial statements or which had resulted in a departure from the auditor's standard report.[end strikethrough]

20. This amendment is effective upon issuance.

AMENDMENT TO SAS NO. 1, CODIFICATION OF AUDITING STANDARDS AND PROCEDURES (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SEC. 560.01, "SUBSEQUENT EVENTS")

21. SAS No. 1, Codification of Auditing Standards and Procedures (AICPA, Professional Standards, vol. 1, AU sec. 560.01, "Subsequent Events"), currently defines subsequent events in terms of the date of issuance of the auditor's report. In order to make the auditing standards consistent with accounting standards, meaning, Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, this amendment deletes the reference to the auditor's report from the definition of subsequent events as follows (strikethrough denotes deletion).

.01 An independent auditor's report ordinarily is issued in connection with historical financial statements that purport to present financial position at a stated date and results of operations and cash flows for a period ended on that date. However, events or transactions sometimes occur subsequent to the balance-sheet date, but prior to the issuance of the financial statements [begin strikethrough]and auditor's report,[end strikethrough] that have a material effect on the financial statements and therefore require adjustment or disclosure in the statements. These occurrences hereinafter are referred to as "subsequent events."

22. This amendment is effective upon issuance.

AMENDMENT TO SAS NO. 1, CODIFICATION OF AUDITING STANDARDS AND PROCEDURES (AICPA, PROFESSIONAL STANDARDS, VOL. 1, AU SEC. 530.03-.05, "DATING OF THE INDEPENDENT AUDITOR'S REPORT")

23. SAS No. 1, Codification of Auditing Standards and Procedures (AICPA, Professional Standards, vol. 1, AU sec. 530, "Dating of the Independent Auditor's Report"), provides guidance regarding the dating of the independent auditor's report. When discussing the time frame with respect to subsequent events, the current guidance refers to the date of issuance of the auditor's report. This amendment clarifies that the date referred to is the date of issuance of the related financial statements. New language is shown in boldface italics; deleted language is shown by strikethrough.

.03 In case a subsequent event of the type requiring adjustment of the financial statements (as discussed in section 560.03) occurs after the date of the independent auditor's report but before [begin strikethrough]its[end strikethrough] the issuance of the related financial statements, and the event comes to the attention of the auditor, the financial statements should be adjusted or the auditor should qualify his or her opinion. (2) When the adjustment is made without disclosure of the event, the report ordinarily should be dated in accordance with paragraph .01. However, if the financial statements are adjusted and disclosure of the event is made, or if no adjustment is made and the auditor qualifies his or her opinion, (3) the procedures set forth in paragraph .05 should be followed.

.04 In case a subsequent event of the type requiring disclosure (as discussed in section 560.05) occurs after the date of the auditor's report but before the issuance of the related financial statements [begin strikethrough]his report,[end strikethrough] and the event comes to the attention of the auditor, it should be disclosed in a note to the financial statements or the auditor should qualify his or her opinion. (4) If disclosure of the event is made, either in a note or in the auditor's report, the auditor would date the [begin strikethrough]his[end strikethrough] report as set forth in the following paragraph.

.05 The independent auditor has two methods available for dating the [begin strikethrough]his[end strikethrough] report when a subsequent event disclosed in the financial statements occurs after completion of [begin strikethrough]his[end strikethrough] field work but before the issuance of the related financial statements [begin strikethrough]his report.[end strikethrough] The auditor [begin strikethrough]He[end strikethrough] may use "dual dating," for example, "February 16, 20 [begin strikethrough]19[end strikethrough], except for Note, is to which the date is March 1, 20 [begin strikethrough]19[end strikethrough]," or [begin strikethrough]he[end strikethrough] may date the [begin strikethrough] his[end strikethrough] report as of the later date. In the former instance, the [begin strikethrough]his[end strikethrough] responsibility for events occurring subsequent to the completion of [begin strikethrough]his[end strikethrough] field work is limited to the specific event referred to in the note (or otherwise disclosed). In the latter instance, the independent auditor's responsibility for subsequent events extends to the date of the [begin strikethrough]his[end strikethrough] report and, accordingly, the procedures outlined in section 560.12 generally should be extended to that date.

24. This amendment is effective upon issuance.

This Statement titled Omnibus Statement on Auditing Standards--2002 was unanimously adopted by the assenting votes of the 14 members of the board.

Auditing Standards Board
(2001-2002)

James S. Gerson, Chair
Jeffery C. Bryan
Linda K. Cheatham
Craig W. Crawford
John A. Fogarty
Lynford Graham
Auston G. Johnson
Michael P. Manspeaker
Susan L. Menelaides
Alan G. Paulus
Mark Scoles
Bruce P. Webb
O. Ray Whittington
Carl L. Williams III

Omnibus--2002 Task Force

O. Ray Whittington, Chair
Michael P. Manspeaker
Bruce P. Webb
Carl L. Williams III

AICPA Staff

Charles E. Landes, Director,
Audit and Attest Standards
Kim M. Gibson, Technical Manager,
Audit and Attest Standards

Note: Statements on Auditing Standards (SASs) are issued by the Auditing Standards Board (ASB), the senior technical body of the Institute designated to issue pronouncements on auditing matters. Rule 202, Compliance With Standards, of the Institute's Code of Professional Conduct requires an AICPA member who performs an audit (the auditor) to comply with standards promulgated by the ASB. The auditor should have sufficient knowledge of the SASs to identify those that are applicable to his or her audit and should be prepared to justify departures from the SASs.

SSAE No. 12--Amendment to Statement on Standards for Attestation Engagements No. 10, Attestation Standards: Revision and Recodification

(Amends Statement on Standards for Attestation Engagements No. 10, AICPA, Professional Standards, vol. 1, AT sec. 101.17-.18.)

1. Statement on Standards for Attestation Engagements (SSAE) No. 10, Attestation Standards: Revision and Recodification (AICPA, Professional Standards, vol. 1, AT sec. 101), is being amended to clarify the relationship between Statements on Quality Control Standards (SQCSs) and engagements performed under SSAEs. The amendment clarifies that although an effective quality control system is conducive to compliance with attestation standards, deficiencies in or noncompliance with a firm's quality control system do not, in and of themselves, indicate that an engagement was not performed in accordance with the applicable professional standards. New language is shown in boldface italics; deleted language is shown by strikethrough.

17. A firm of practitioners [begin strikethrough]also needs to comply with the quality control standards[end strikethrough] has a responsibility to adopt a system of quality control in the conduct of a firm's attest practice. (6) Thus, a firm should establish quality control policies and procedures to provide it with reasonable assurance [begin strikethrough]of conforming[end strikethrough] that its personnel comply with the attestation standards in its attest engagements. The nature and extent of a firm's quality control policies and procedures depend on factors such as its size, the degree of operating autonomy allowed its personnel and its practice offices, the nature of its practice, its organization, and appropriate cost-benefit considerations.

18. Attestation standards relate to the conduct of individual attest engagements; quality control standards relate to the conduct of a firm's attest practice as a whole. Thus, attestation standards and quality control standards are related and the quality control policies and procedures that a firm adopts may affect both the conduct of individual attest engagements and the conduct of a firm's attest practice as a whole. However, deficiencies in or instances of noncompliance with a firm's quality control policies and procedures do not, in and of themselves, indicate that a particular engagement was not performed in accordance with attestation standards.

2. This amendment is effective upon issuance.

This Statement titled Amendment to Statement on Standards for Attestation Engagements No. 10, Attestation Standards: Revision and Recodification, was unanimously adopted by the assenting votes of the 14 members of the board.

Auditing Standards Board
(2001-2002)

James S. Gerson, Chair
Jeffery C. Bryan
Linda K. Cheatham
Craig W. Crawford
John A. Fogarty
Lynford Graham
Auston G. Johnson
Michael P. Manspeaker
Susan L. Menelaides
Alan G. Paulus
Mark Scoles
Bruce P. Webb
O. Ray Whittington
Carl L. Williams III

Omnibus--2002 Task Force

O. Ray Whittington, Chair
Michael P. Manspeaker
Bruce P. Webb
Carl L. Williams III

AICPA Staff

Charles E. Landes, Director,
Audit and Attest Standards
Kim M. Gibson, Technical Manager,
Audit and Attest Standards

Note: Statements on Standards for Attestation Engagements (SSAEs) are issued by the Auditing Standards Board, one of the senior technical bodies of the Institute designated to issue pronouncements on attest matters. Rule 202, Compliance With Standards, of the Institute's Code of Professional Conduct requires an AICPA member who performs an attest engagement (the practitioner) to comply with such pronouncements. The practitioner should have sufficient knowledge of the SSAEs to identify those that are applicable to his or her attest engagement and should be prepared to justify departures from the SSAEs.

SQCS No. 6--Amendment to Statement on Quality Control Standards No. 2, System of Quality Control for a CPA Firm's Accounting and Auditing Practice

(Amends Statement on Quality Control Standards No. 2, AICPA, Professional Standards, vol. 2, QC sec. 20.)

1. Statement on Quality Control Standards (SQCS) No. 2, System of Quality Control for a CPA Firm's Accounting and Auditing, Practice (AICPA, Professional Standards, vol. 2, QC sec. 20), is being amended to clarify that deficiencies in individual audit, attest, compilation, and review engagements do not, in and of themselves, indicate that the firm's system of quality control is insufficient to provide it with reasonable assurance that its personnel comply with applicable professional standards. New language is shown in boldface italics.

System of Quality Control

.03 A firm (3) has a responsibility to ensure that its personnel (4) comply with the professional standards applicable to its accounting and auditing practice. A system of quality control is broadly defined as a process to provide the firm with reasonable assurance that its personnel comply with applicable professional standards and the firm's standards of quality. (5) The policies and procedures designed to implement the system in one segment of a firm's practice may be the same as, different from, or interrelated with the policies and procedures designed for another segment, but the purpose of the system is the same for all segments of a firm's practice.

2. This amendment is effective upon issuance.

This Statement titled Amendment to Statement on Quality Control Standards No. 2, System of Quality Control for a CPA Firm's Accounting and Auditing Practice, was unanimously adopted by the assenting votes of the 14 members of the board.

Auditing Standards Board (2001-2002)

James S. Gerson, Chair
Jeffery C. Bryan
Linda K. Cheatham
Craig W. Crawford
John A. Fogarty
Lynford Graham
Auston G. Johnson
Michael P. Manspeaker
Susan L. Menelaides
Alan G. Paulus
Mark Scoles
Bruce P. Webb
O. Ray Whittington
Carl L. Williams III

Omnibus--2002 Task Force

O. Ray Whittington, Chair
Michael P. Manspeaker
Bruce P. Webb
Carl L. Williams III

AICPA Staff

Charles E. Landes, Director,
Audit and Attest Standards
Kim M. Gibson, Technical Manager,
Audit and Attest Standards

Note: Statements on Quality Control Standards (SQCSs) are issued by the Auditing Standards Board (ASB), the senior technical body of the Institute designated to issue pronouncements on quality control matters. Rule 202, Compliance With Standards, of the Institute's Code of Professional Conduct requires an AICPA member who performs professional services to comply with standards promulgated by the ASB. The practitioner should have sufficient knowledge of the SQCSs to identify those that are applicable to his or her practice and should be prepared to justify departures from the SQCSs.

Auditing Interpretation

Interpretations are issued by the Audit Issues Task Force of the Auditing Standards Board to provide timely guidance on the applications of pronouncements of that Board. Interpretations are reviewed by the Auditing Standards Board. An interpretation is not as authoritative as a pronouncement of that Board, but members should be aware that they may have to justify a departure from an interpretation if the quality of their work is questioned.

AU SECTION 9508

Interpretation of AU Section 508, "Reports on Audited Financial Statements"

15. Reporting as Successor Auditor When Prior-Period Audited Financial Statements Were Audited by a Predecessor Auditor Who Has Ceased Operations (2)

.60 Question--If the prior-period financial statements audited by a predecessor auditor who has ceased operations are presented for comparative purposes with current-period audited financial statements, how is the successor auditor's report affected?

.61 Interpretation--If the prior-period audited financial statements are unchanged, pursuant to section 508, Reports on Audited Financial Statements, paragraph .74, the successor auditor should indicate in the introductory paragraph of his or her report (a) that the financial statements of the prior period were audited by another auditor, (b) the date of the predecessor auditor's report, (c) the type of report issued by the predecessor auditor, and (d) if the report was other than a standard report, the substantive reasons therefor. The successor auditor ordinarily also should indicate that the other auditor has ceased operations. Footnote 29 of section 508 indicates that the successor auditor should not name the predecessor auditor in the report. An example of the reference that would be added to the introductory paragraph of the successor auditor's report is presented as follows:

   The financial statements of ABC Company as of December 31, 20X1, and for
   the year then ended were audited by other auditors who have ceased
   operations. Those auditors expressed an unqualified opinion on those
   financial statements in their report dated March 31, 20X2.

A reference to the predecessor auditor's report should be included even if the predecessor auditor's report on the prior-period financial statements is reprinted and accompanies the successor auditor's report, because reprinting does not constitute reissuance of the predecessor auditor's report.

.62 If the prior-period financial statements have been restated, and the entity does not file annual financial statements with the Securities and Exchange Commission (SEC), the successor auditor should follow the guidance in paragraph .61 above, indicating that the predecessor auditor reported on such financial statements before restatement.

.63 When the prior-period financial statements have been restated, the successor auditor may be engaged either to reaudit the prior-period financial statements or to audit only the restatement adjustments. If the successor auditor is engaged to audit only the restatement adjustments and applies sufficient procedures to satisfy himself or herself as to the appropriateness of the restatement adjustments, the successor auditor may report on the restatement adjustments using the guidance in section 508, paragraph .74. (The auditor also may use the guidance on alternative language contained in paragraph .65, below.) In determining the nature, timing and extent of procedures, the successor auditor should consider that a predecessor auditor who has ceased operations cannot perform the procedures to evaluate the appropriateness of the restatement adjustments as described in section 561, Subsequent Discovery of Facts Existing at the Date of the Auditor's Report.

.64 If the successor auditor neither performs a reaudit of the prior-period financial statements nor audits only the restatement adjustments, the note to the financial statements describing the restatement adjustments should be marked "Unaudited." Depending on the nature and extent of the restatement adjustments, it may be appropriate for the prior-period financial statements to be marked "Unaudited."

.65 If the entity files annual financial statements with the SEC, the SEC staff has indicated (specifically with respect to Arthur Andersen LLP) that, in annual reports (on Form 10-K and to shareholders), the predecessor auditor's latest signed and dated report on the prior-period financial statements should be reprinted with a legend indicating (a) that the report is a copy of the previously issued report and (b) that the predecessor auditor has not reissued the report. (3)

.66 The successor auditor should refer to the predecessor auditor's report in his or her report, as described in paragraph .61 above, and, if the prior-period financial statements have been restated, indicate that the predecessor auditor reported on such financial statements before restatement.

.67 SEC rules require that annual and, in some instances, other financial statements be audited. To satisfy the SEC audit requirement when the prior-period financial statements have been restated, the successor auditor may be engaged either to reaudit the prior-period financial statements or to audit only the restatement adjustments. A successor auditor who is engaged to audit only the restatement adjustments is not required to perform procedures to identify all adjustments to the financial statements that may be appropriate. (4)

.68 In some cases, prior-period financial statement disclosures may be revised in a manner that does not involve restating amounts in the prior-period financial statements, but rather involves the addition of disclosures. In such cases, the successor auditor may be engaged to perform audit procedures to satisfy himself or herself as to the appropriateness of the additional disclosures. Financial statements that have been revised are considered to be restated for the purposes of this Interpretation.

.69 Some revisions may be sufficiently inconsequential such that audit procedures by the successor auditor would be unnecessary and the reference to the predecessor auditor's report on the prior-period financial statements would not indicate that the predecessor auditor reported on such financial statements before restatement. For example, inconsequential revisions might include conforming editorial modifications to footnote disclosures or reclassifications made for comparative purposes in the financial statements. (5)

.70 When the successor auditor is engaged to audit only the restatement adjustments, the procedures performed will vary significantly depending on the nature of adjustment. In some instances, the successor auditor may determine that conducting a reaudit of the prior-period financial statements is necessary based on the nature of the restatement adjustments. Examples of restatement adjustments whose nature indicates that a reaudit ordinarily is necessary (particularly with respect to entities that file financial statements with the SEC) include, but are not limited to:

* Corrections of an error.

* Reflection of a change in reporting entity.

* Retroactive accounting changes (a) with significant impact on previously reported amounts or (b) that affect previously reported net income or net assets.

* Reporting discontinued operations.

* Changes affecting previously reported net income or net assets.

If the successor auditor is engaged to audit only the restatement adjustments and applies sufficient procedures to satisfy himself or herself as to the appropriateness of the restatement adjustments, the successor auditor may report on the restatement adjustments using the guidance in section 508, paragraph .74. Alternatively, the successor auditor may wish to make it clear that he or she did not audit, review, or apply other procedures to the prior-period financial statements beyond the procedures applied to the restatement adjustments. Accordingly, he or she may include the following paragraph in his or her report:

   As discussed above, the financial statements of ABC Company as of December
   31, 20X1, and for the year then ended were audited by other auditors who
   have ceased operations. As described in Note X, these financial statements
   have been restated [revised]. We audited the adjustments described in Note
   X that were applied to restate [revise] the 20X1 financial statements. In
   our opinion, such adjustments are appropriate and have been properly
   applied. However, we were not engaged to audit, review, or apply any
   procedures to the 20X1 financial statements of the Company other than with
   respect to such adjustments and, accordingly, we do not express an opinion
   or any other form of assurance on the 20X1 financial statements taken as a
   whole.

.71 If the auditor wishes to identify the procedures performed in his or her report, he or she may include in his or her report a paragraph similar to the following example:

Restatement Adjustments for Changes in Segment Composition

   As discussed above, the financial statements of ABC Company as of December
   31, 20X1, and for the year then ended were audited by other auditors who
   have ceased operations. As described in Note X, the Company changed the
   composition of its reportable segments in 20X2, and the amounts in the 20X1
   financial statements relating to reportable segments have been restated to
   conform to the 20X2 composition of reportable segments. We audited the
   adjustments that were applied to restate the disclosures for reportable
   segments reflected in the 20X1 financial statements. Our procedures
   included (a) agreeing the adjusted amounts of segment revenues, operating
   income and assets to the Company's underlying records obtained from
   management, and (b) testing the mathematical accuracy of the
   reconciliations of segment amounts to the consolidated financial
   statements. In our opinion, such adjustments are appropriate and have been
   properly applied. However, we were not engaged to audit, review, or apply
   any procedures to the 20X1 financial statements of the Company other than
   with respect to such adjustments and, accordingly, we do not express an
   opinion or any other form of assurance on the 20X1 financial statements
   taken as a whole.

.72 When the revision of the prior-period financial statements is limited to expansion of footnote disclosure, the phrase "restatement adjustments" may not be applicable. In such circumstances, the auditor may include in his or her report a paragraph similar to the following example:

Addition of FAS 142, paragraph 61, Disclosure

   As discussed above, the financial statements of ABC Company as of December
   31, 20X1, and for the year then ended were audited by other auditors who
   have ceased operations. As described in Note X, these financial statements
   have been revised to include the transitional disclosures required by
   Statement of Financial Accounting Standards (Statement) No. 142, Goodwill
   and Other Intangible Assets, which was adopted by the Company as of January
   1, 20X2. Our audit procedures with respect to the disclosures in Note X
   with respect to 20X1 included (a) agreeing the previously reported net
   income to the previously issued financial statements and the adjustments to
   reported net income representing amortization expense (including any
   related tax effects) recognized in those periods related to goodwill,
   intangible assets that are no longer being amortized, deferred credits
   related to an excess over cost, equity method goodwill, and changes in
   amortization periods for intangible assets that will continue to be
   amortized as a result of initially applying Statement No. 142 (including
   any related tax effects) to the Company's underlying records obtained from
   management, and (b) testing the mathematical accuracy of the reconciliation
   of adjusted net income to reported net income, and the related
   earnings-per-share amounts. In our opinion, the disclosures for 20X1 in
   Note X are appropriate. However, we were not engaged to audit, review, or
   apply any procedures to the 20X1 financial statements of the Company other
   than with respect to such disclosures and, accordingly, we do not express
   an opinion or any other form of assurance on the 20X1 financial statements
   taken as a whole.

.73 Question--If the prior-period financial statements audited by a predecessor auditor who has ceased operations have been subsequently restated, but the successor auditor has not yet completed an audit of current-period financial statements, can the successor auditor report on the restatement adjustments pursuant to section 508, paragraph .74?

.74 Interpretation--No. Section 508, paragraph .74, is only applicable when the prior-period financial statements are presented for comparative purposes with current-period audited financial statements. If the prior-period financial statements have been restated, and the successor auditor is requested to report on those financial statements without also reporting on current-period audited financial statements, the successor auditor would need to reaudit the prior-period financial statements in order to report on them.

Ethics Interpretation and Ruling

Ethics interpretations and rulings are promulgated by the executive committee of the professional ethics division to provide guidelines as to the scope and application of the rules but are not intended to limit such scope or application. Publication of an interpretation or ethics ruling in the Journal of Accountancy constitutes notice to members, A member who departs from interpretations or rulings shall have the burden of justifying such departure in any disciplinary hearing.

(The Professional Ethics Executive Committee has made editorial revisions to an interpretation under Rule 101 of the Code of Professional Conduct [AICPA, Professional Standards, ET section 101.07] to clarify and simplify the interpretation. In addition, two definitions in the interpretation--"financial institutions" and "normal lending procedures, terms, and requirements"--have been moved to ET section 92, "Definitions." The committee has also made editorial revisions to an ethics ruling under Rule 101 of the Code of Professional Conduct [AICPA, Professional Standards, ET section 191.214-215] in order to clarify the intended meaning of the ruling. Added text is in boldface italics; deleted text is struck through.)

INTERPRETATION 101-5 UNDER RULE 101

.07 101-5--Loans from financial institution clients and related terminology.

Interpretation 101-1.A.4 [ET section 101.02] provides that, except as permitted in this interpretation, independence shall be considered to be impaired if a covered member * has any loan to or from a client, any officer or director of the client, or any individual owning ten percent or more of the client's outstanding equity securities or other ownership interests. This interpretation describes the conditions a covered member (or his or her immediate family) must meet in order to apply an exception for a "Grandfathered Loan" or "Other Permitted Loan."

Grandfathered Loans

Unsecured loans that are not material to the covered member's net worth, home mortgages, (6) and other secured loans (6) are grandfathered if:

1. they were obtained from a financial institution under that institution's normal lending procedures, terms, and requirements,

2. after becoming a covered member they are kept current as to all terms at all times and those terms do not change in any manner not provided for in the original loan agreement, (7) and

3. they were:

(a) obtained from the financial institution prior to its becoming a client requiring independence; or

(b) obtained from a financial institution for which independence was not required and were later sold to a client for which independence is required; or

(c) obtained prior to February 5, 2001 and met the requirements of previous provisions of Interpretation 101-5 [ET section 101.07] covering grandfathered loans [begin strikethrough]obtained from a financial institution client requiring independence by a borrower prior to his or her becoming a covered member with respect to that client[end strikethrough]; or

(d) [begin strikethrough]obtained prior to February 5, 2001 and met the requirements of previous provisions of Interpretation 101-5 covering grandfathered loans,[end strikethrough] obtained between February 5, 2001 and May 31, 2002, and the covered member was in compliance with the applicable independence requirements of the SEC during that period; or

(e) obtained after May 31, 2002 from a financial institution client requiring independence by a borrower prior to his or her becoming a covered member with respect to that client [begin strikethrough]obtained between February 5, 2001 and May 31, 2002 and the covered member was in compliance with the applicable independence requirements of the SEC during that period.[end strikethrough]

In determining when a loan was obtained, the date a loan commitment or line of credit is granted must be used, rather than the date a transaction closes or funds are obtained.

For purposes of applying the grandfathered loans provision when the covered member is a partner in a partnership:

* a loan to a limited partnership (or similar type of entity) or a general partnership would be ascribed to each covered member who is a partner in the partnership on the basis of their legal liability as a limited or general partner if:

--the covered member's interest in the limited partnership, either individually or combined with the interest of one or more covered members, exceeds 50 percent of the total limited partnership interest; or

--the covered member, either individually or together with one or more covered members, can control the general partnership.

* even if no amount of a partnership loan is ascribed to the covered member(s) identified above, independence is considered to be impaired if the partnership renegotiates the loan or enters into a new loan that is not one of the permitted loans described below.

Other Permitted Loans

This interpretation permits only the following new loans to be obtained from a financial institution client for which independence is required. These loans must be obtained under the institution's normal lending procedures, terms, and requirements and must, at all times, be kept current as to all terms.

1. Automobile loans and leases collateralized by the automobile.

2. Loans fully collateralized by the cash surrender value of an insurance policy.

3. Loans fully collateralized by cash deposits at the same financial institution (e.g., "passbook loans").

4. Credit cards and cash advances where the aggregate outstanding balance on the current statement is reduced to $5,000 or less by the payment due date.

[begin strikethrough]Terminology[end strikethrough]

[begin strikethrough]For purposes of interpretation 101-1.A.4 [ET section 101.02] and 101-5 [ET section 101.07], the following terms are defined:[end strikethrough]

[begin strikethrough]Financial Institution[end strikethrough]

[begin strikethrough]A financial institution is covered to be an entity that, as part of its normal business operations, makes loans to the general public.[end strikethrough]

[begin strikethrough]Normal Lending Procedures, Terms, and Requirements[end strikethrough]

[begin strikethrough]"Normal lending procedures, terms, and requirements" relating to a covered member's loan from a financial institution are defined as lending procedures, terms, and requirements that are reasonably comparable with those relating to loans of a similar character committed to other borrowers during the period in which the loan to be covered member is committed. Accordingly, in making such comparison and in evaluating whether a loan was made under "normal lending procedures, terms, and requirements," the covered member should consider all the circumstances under which the loan was granted, including[end strikethrough]

[begin strikethrough]1. The amount of the loan in relation to the value of the collateral pledged as security and the credit standing of the covered member.[end strikethrough]

[begin strikethrough]2. Repayment terms.[end strikethrough]

[begin strikethrough]3. Interest rate, including "points."[end strikethrough]

[begin strikethrough]4. Closing costs.[end strikethrough]

[begin strikethrough]5. General availability of such loans to the public.[end strikethrough]

Related prohibitions that may be more restrictive are prescribed by certain state and federal agencies having regulatory authority over such financial institutions. Broker-dealers, for example, are subject to regulation by the Securities and Exchange Commission.

ETHICS RULING NO. 107 UNDER RULE 101: Participation in Health and Welfare Plan Sponsored by Client

.214 Question--A member participates in or receives benefits from a health and welfare plan (the "plan") sponsored by a client. Would independence be considered to be impaired with respect to the client sponsor or the plan?

.215 Answer--A covered member's participation in a plan sponsored by a client would impair independence with respect to the client sponsor and the plan. [begin strikethrough]Interpretation 101-1 [ET section 101.02] describe an exception provided for immediate family of certain covered members.[end strikethrough] However, if the covered member's participation in the plan, or benefits received thereunder, arises as a result of the permitted employment of the covered member's immediate family in accordance with interpretation 101-1 [ET section 101.02], independence would not be considered to be impaired provided that the plan is normally offered to all employees in equivalent employment positions.

(1) If the financial statements have not yet been issued, see the guidance found in section 560, "Subsequent Events."

([begin strikethrough]1[end strikethrough] 2) However, see section 71,1.10-.13 as to an auditor's obligation with respect to audited financial statements included in registration statements filed under the Securities Act of 1933 between the date of the auditor's report and the effective date of the registration statement.

All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please call the AICPA Copyright Permissions Hotline at [phone]. A Permissions Request Form for e-mailing requests is available at www.aicpa.org by clicking on the copyright notice on any page. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881.

(3) Appendixes to SASs referred to in paragraph 5 of this Statement do not include previously issued appendixes to original pronouncements that when adopted modified other SASs.

(4 [begin strikethrough]3[end strikethrough]) Auditing Interpretations of the SASs are included in the codified version of the SASs and are cross-referenced from the related AU sections in Appendix C. AICPA Audit and Accounting Guides and auditing Statements of Position are listed in Appendix D.

([begin strikethrough]1[end strikethrough]) [begin strikethrough]The elements of quality control identified in SAS No. 4 have been incorporated in the body of Statement on Quality Control Standards (SQCS) No. 2, System of Quality Control for a CPA Firm's Accounting and Auditing Practice, issued by the Auditing Standards Board. Firms that are enrolled in an Institute approved practice monitoring program are obliged to adhere to quality control standards established by the Institute. (SQCS No. 1 System of Quality Control for a CPA Firm, was superseded by the issuance of SQCS No. 2).

(1) The elements of quality control are identified in Statement on Quality Control Standards (SQCS) No. 2, System of Quality Control for a CPA Firm's Accounting and Auditing Practice (AICPA, Professional Standards, vol. 2, QC sec. 20). A system of quality control is broadly defined as a process to provide the firm with reasonable assurance that its personnel comply with applicable professional standards and the firm's standards of quality.

(13) The term likely misstatements includes any known misstatements.

See section 316.33-.35 for a further discussion of the auditor's consideration of differences between the accounting records and the underlying facts and circumstances Those paragraphs provide specific guidance on the auditor's consideration of an audit adjustment that is, or may be, the result of fraud.

(14) If the auditor were to examine all of the items in a balance or a class, the likely misstatement applicable to recorded transactions in the balance or class would be the amount of known misstatements specifically identified.

(15) The measurement of the effect, if any, on the current period's financial statements of misstatements uncorrected in prior periods involves accounting considerations and is therefore not addressed in this section.

(22) A continuing auditor is one who has audited the financial statements of the current period and of one or more consecutive periods immediately prior to the current period.

If one firm of independent auditors merges with another firm and the new firm becomes the auditor of a former client of one of the former firms, the new firm may accept responsibility and express an opinion on the financial statements for the prior period(s), as well as for those of the current period. In such circumstances, the new firm should follow the guidance in paragraphs .65 through .69 and may indicate in its report or signature that a merger took place and may name the firm of independent auditors that was merged with it. If the new firm decides not to express an opinion on the prior-period financial statements, the guidance in paragraphs .70 through .74 should be followed.

(23) An updated report on prior-period financial statements should be distinguished from a reissuance of a previous report (see section 530, Dating of the Independent Auditor's Report, paragraphs .06 through .08), since in issuing an updated report the continuing auditor considers information that he or she has become aware of during his or her audit of the current-period financial statements (see paragraph .68) and because an updated report is issued in conjunction with the auditor's report on the current-period financial statements.

(24) A continuing auditor need not report on the prior-period financial statements if only summarized comparative information of the prior period(s) is presented. For example, entities such as state and local governmental units frequently present total-all-funds information for the prior period(s) rather than information by individual funds because of space limitations or to avoid cumbersome or confusing formats Also, not-for-profit organizations frequently present certain information for the prior period(s) in total rather than by net asset class In some circumstances, the client may request the auditor to express an opinion on the prior period(s) as well as the current period. In those circumstances, the auditor should consider whether the information included for the prior period(s) contains sufficient detail to constitute a fair presentation in conformity with generally accepted accounting principles. In most cases, this will necessitate including additional columns or separate detail by fund or net asset class, or the auditor would need to modify his or her report.

(3) This information may include supplementary information required by generally accepted accounting principles.

(7) When required supplementary information is presented outside the basic financial statements in an auditor-submitted document, the auditor [begin strikethrough]should disclaim an opinion on the information unless he has been engaged to examine and express an opinion on it,[end strikethrough] should (a) express an opinion on the information if engaged to examine the information; (b) report on such information using the guidance in section 551.12 and. 14, provided such information has been subjected to the auditing procedures applied in the audit of the basic financial statements; or (c) disclaim an opinion on the information (see section 551.15 and .16).

* The auditor may identify the body requiring the information, such as the Financial Accounting Standards Board or the Governmental Accounting Standards Board.

(2) This section is not applicable to entities that voluntarily present supplementary information not required by GAAP [begin strikethrough]the FASB, GASB, or FASAB[end strikethrough] For example, entities that voluntarily present supplementary information on the effects of inflation and changes in specific prices, formerly required by FASB Statement No. 33, Financial Reporting and Changing Prices, are guided by section 550, Other Information in Documents Containing Audited Financial Statements.

([begin strikethrough]6[end strikethrough]) This form of reporting is not appropriate with respect to supplementary information required by the FASB (see paragraph .15)

([begin strikethrough]7[end strikethrough] 6) The guidance in subsection (b) of this paragraph applies to GASB required supplementary information, such as that required by GASB Statement No. 5, Disclosure of Pension Information by Public Employee Retirement Systems and State and Local Governmental Employers. The auditor should refer to section 552, Reporting on Condensed Financial Statements and Selected Financial Data, paragraphs .09-.10, for an example of a report on GASB required supplementary information.

(7) The auditor may identify the body requiring the information, such as the Financial Accounting Standards Board or the Governmental Accounting Standards Board.

(2) In some cases, a disclaimer of opinion or an adverse opinion may be appropriate.

(3) Ibid.

(4) Ibid.

(6) The elements of quality control are identified in Statement [begin strikethrough]of[end strikethrough] on Quality Control Standards (SQCS) No 2, System of Quality Control for a CPA Firm's Accounting and Auditing Practice (AICPA, Professional Standards, vol. 2, QC sec 20) A system of quality control is broadly defined as a process to provide the firm with reasonable assurance that its personnel comply with applicable professional standards and the firm's standards of quality.

(3) A firm is defined in the AICPA Code of Professional Conduct as "a form of organization permitted by state law or regulation whose characteristics conform to resolutions of Council that is engaged in the practice of public accounting, including the individual owners thereof" (AICPA, Professional Standards, vol. 2, ET sec. 92.05).

(4) The term personnel refers to all individuals who perform professional services for which the firm is responsible, whether or not they are CPAs.

(5) Deficiencies in individual audit, attest, review, and compilation engagements do not, in and of themselves, indicate that the firm's system of quality control is insufficient to provide it with reasonable assurance that its personnel comply with applicable professional standards.

(2) A firm is considered to have ceased operations when it no longer issues audit opinions either in its own name or in the name of a successor firm. A firm may cease operations with respect to public entities and still issue audit opinions with respect to non-public entities.

(3) See Securities and Exchange Commission Release No. 33-8070, Requirements for Arthur Andersen LLP Auditing Clients.

(4) However, a successor auditor who identifies other adjustments that may be appropriate to the prior-period financial statements, either in the course of auditing the restatement adjustments or in the audit of current-period financial statements, should consider their effect on the prior-period financial statements. See section 315. Section 561 provides further guidance that may be useful to a successor auditor who either reaudits the prior-period financial statements or audits only the restatement adjustments.

(5) If reclassifications result in material changes to prior-period financial statements, they should be disclosed and the successor auditor would, at a minimum, need to perform audit procedures on the related restatement adjustments.

* Terms appearing for the first time in boldface type are defined in ET section 92 of AICPA, Professional Standards.

(6) The value of the collateral securing a home mortgage or other secured loan should equal or exceed the remaining balance of the grandfathered loan during the term of the loan. If the value of the collateral is less than the remaining balance of the grandfathered loan, the portion of the loan that exceeds the value of the collateral must not be material to the covered member's net worth.

(7) Changes in the terms of the loan include, but are not limited to, a new or extended maturity date, a new interest rate or formula, revised collateral, or revised or waived covenants.