October 1998 Issue


By John F. Burke, CPA, The CPA Journal

he Audit Issues Task Force of the Auditing Standards Board has been very busy this year issuing audit interpretations. One interpretation of AU Section 623, Special Reports, was covered in our July issue. The following is a description of other interpretations that have been or are about to be issued, including their publication date in the Journal of Accountancy. Full copies of the latest interpretations are available on the AICPA's website (www.aicpa.org).

AU Section 311, Planning and Supervision, "Audit Considerations for the Year 2000 Issue" (January 1998)

This is the first of three interpretations issued this year related to the year 2000 issue. It covers the auditor's overall responsibility, its effect on planning, and possible related internal control deficiencies. The interpretation concludes that an auditor does not have a responsibility to detect current or future effects of the year 2000 issue on operational matters that do not affect the entity's ability to prepare financial statements in accordance with GAAP or OCBOA. Also, potentially significant internal control deficiencies that may arise in 2000 are not current reportable conditions.

This interpretation was included in the publication, The Year 2000 Issue--Current Accounting and Auditing Guidance, published by the AICPA.

AU Section 336, Using the Work of a Specialist, "The Use of Legal Interpretations as Evidential Matter to Support Management's Assertion That a Transfer of Financial Assets Has Met the Isolation Criteria in Paragraph 9(a) of Statement of Financial Accounting Standards No. 125" (February 1998)

SFAS No. 125 requires that a transferor of financial assets must surrender control over the financial assets to account for the transfer as a sale. Paragraph 9(a) of that statement requires that "the transferred assets have been isolated from the transferor and its creditors, even in bankruptcy or other receivership." Such determination is largely a matter of law. The interpretation covers the following:

* Considerations in determining whether to use the work of a legal specialist

* Considerations in assessing the adequacy of any such legal opinion

* Legal opinions that restrict the use of the opinion to the client or to third parties other than the auditor

* What to do if a legal response does not provide persuasive evidence or if the legal specialist does not grant permission for the auditor to use the legal opinion.

The interpretation is effective for auditing procedures related to transactions required to be accounted for under SFAS No. 125 that are entered into on or after January 1, 1998. It does not apply to transfers of financial assets by banks where a receiver would be the FDIC or its designee as referred to in paragraph 58 of SFAS No. 125.

AU Section 324, Reports on the Processing of Transactions by Service Organizations, "Responsibilities of Service Organizations and Service Auditors With Respect to Information About the Year 2000 Issue in a Service Organization's Description of Controls (March 1998)

The title says it all. This interpretation covers the following:

* The relevant information about the year 2000 issue to be included in the service organization's description of controls

* The service auditor's procedural and reporting responsibilities if such relevant information is included or omitted from the description of controls

* Reporting responsibilities for design deficiencies that do not affect processing during the period covered by the examination but may represent potential year 2000 problems

* Inclusion of plans to modify systems to address the year 2000 issue in a description of controls

* Expansion of a service auditor's report to describe the risk of projecting conclusions to future periods because of a failure to make needed changes.

AU Section 341, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern, "Effect of the Year 2000 Issue on the Auditor's Consideration of an Entity's Ability to Continue as a Going Concern" (July 1998)

This interpretation addresses the auditor's responsibility to evaluate whether there is a substantial doubt about the entity's ability to continue as a going concern as it relates to the year 2000 issue. The following are some of the issues addressed:

* Whether the year 2000 issue causes conditions and events that indicate substantial doubt about the entity's ability to continue as a going concern

* What the auditor's responsibility is to identify such conditions and events relating to the year 2000 issue

* What the auditor should do if conditions and events relating to the year 2000 issue come to his or her attention.

* Whether there is substantial doubt about the entity's ability to continue as a going concern and the conditions and events underlying that belief include those related to the year 2000 issue

* What the auditor should do in the above situation if management does not have a year 2000 remediation plan

* What procedures an auditor should perform with respect to management's plan for dealing with the adverse effects of conditions and events relating to the year 2000 issue

* Matters an auditor might consider having included in a management representation letter related to the year 2000 issue.

A discussion of two audit interpretations issued in August 1998 will appear later this year. *

Douglas R. Carmichael,
PhD, CFE, CPA, Baruch College

John F. Burke, CPA
The CPA Journal

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