Proposed omnibus SAS encourages managers to report errors.

In response to SEC concerns and to encourage more transparent financial reporting by companies, the auditing standards board (ASB) issued for exposure guidance that will require corporate managers to inform auditors of the nature of any financial statement adjustments.

The omnibus exposure draft, Audit Adjustments, Reporting on Consistency, and Service Organizations (Omnibus Statement on Auditing Standards--1999), adds to a list of matters addressed in the audit engagement letter an item reminding management it is responsible for correcting material misstatements and for informing the auditor of any uncorrected, nonmaterial misstatements. A summary of uncorrected misstatements must be included in the financial statement representation letter. The auditor is required to inform the audit committee about any uncorrected misstatements.

"We can't mandate that managers record immaterial adjustments," said Richard Dieter, a partner of Arthur Andersen, LLP in Boston and a member of the ASB. "However, we want to ensure management informs the audit committee of the nature of such misstatements." The guidance on audit adjustments will amend SAS no. 61, Communication With Audit Committees.

Third-party information

In another part of the ED, the ASB proposed amending SAS no. 70, Reports on the Processing of Transactions by Service Organizations, to be applicable when an audited entity receives services from another organization, such as a bank or a securities broker. Under "Service Organizations," the exposure draft clarifies the factors an auditor must consider when determining the significance a third-party service organization's internal controls.

"Companies often outsource securities transactions to a financial institution and make banks custodians of their pension plans," said Dieter. According to the proposed SAS, every auditor must obtain an understanding of that service organization's internal controls to prevent misstatements from appearing in the audited company's financial statements.

Reporting on consistency

Yet another part of the proposed SAS clarifies when an auditor must add to the audit report an explanatory paragraph addressing consistency. It amends AU section 420, "Consistency of Application of Generally Accepted Accounting Principles (AICPA, Professional Standards).

Copies of the ED are available from the AICPA order department by phone at 888-777-7077 (product no. 800128) or online at www.aicpa.org/members/div/auditsd/adj index.htm. The comment period for the draft ended June 22, 1999.

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