Changes to the ED

The changes agreed to by the ASB can be summarized as:

* Providing guidance when pervasive noncompliance precludes the auditor from expressing negative assurance;

* Using "government-type" terms for audit committees;

* Delaying the effective date; and

* Rephrasing the "restrictive use" sentence in all reports.

Respondents requested that the ASB provide guidance for those circumstances in which an auditor is expressing positive or negative assurance on noncompliance. However, the pervasiveness of instance of noncompliance is such that the noncompliance affects the auditor's ability to express negative assurance. The ASB agreed that the final statement should alert the auditor that such situations may occur; however, the ASB requested that illustrative reporting be included in the final SOP, "Audits of State and Local Governmental entities Receiving Federal Financial Assistance." (The ED of the proposed SOP was issued in July 1991, and was also discussed in the December 1991 Auditing column.)

The ASB also agreed to expand the definition of "others with equivalent authority and responsibility to audit committees" by including "the city council or the legislative standing committee" so as to clarify that the SAS applies equally to governmental recipients of financial assistance as well as to nongovernmental recipients.

Respondents were also concerned that the proposed effective date of audits of financial statements and of compliance with applicable laws and regulations for years ending on or after December 15, 1991, would not provide sufficient time for auditors to communicate with client entities regarding reporting requirements, scope, and fee considerations. The ASB agreed to delay the effective date to audits of financial statements and of compliance with laws and regulations for fiscal periods ending after June 15, 1992. However, the transitional guidance provided in the final statement will emphasize that, while the statement provides guidance on revised requirements as published by the Office of Management and Budget in September 1990, those revised requirements are presently effective. Further, the auditor will be encouraged to consider early application of the guidance in the final statement.

With respect to the "restrictive use" language in all the reports issued in an audit of an entity receiving governmental financial assistance, the ASB agreed toj a rephrasing of the language to be followed. The issue results from the fact that once a report is filed with a governmental entity (federal, state, or local) it becomes a public record. Therefore, to distinguish between the intention of the auditor in issuing the report and the ultimate distribution of the report, the ASB agreed to the use of the following two sentences (changes from the ED are in italics): "This report is intended for the information of the audit committee, management, and specify legislative or regulatory body. However, this report is a matter of public record and its distribution is not limited."

Other Concerns of Respondents

Several respondents expressed concerns about addressing the subject of "compliance auditing" only within the context of compliance with laws and regulations applicable to those receiving governmental financial assistance. Those respondents believed that a "generic" document should be developed applicable to all audits of compliance. The ASB has appointed a task force to consider developing such a document within the standards of attestation. It is expected that when a final standard is issued under the attest standards, that standard would supersede the revision to SAS 63. Until that issuance, the revision of SAS 63 will be applicable to all recipients of governmental financial assistance.

While changes were made to the ED, the task force to revise SAS 63 recommended that many of the concerns expressed by the respondents be addressed in the proposed SOP. In general, these concerns related to detailed guidance on determining materiality with respect to the "general requirements" and on testing and reporting in various circumstances. The task force believes that guidance on these concerns is best expressed in a statement of position or audit guide rather than in an SAS. Therefore, the AICPA's Government Accounting and Auditing Committee has been asked to consider providing this guidance in the final SOP. These considerations are to include guidance on determining materiality with respect to the general requirements at the financial statement level, total expenditures of governmental financial assistance, expenditures at the program level, depending upon the nature of the requirement. Additionally, illustrative reporting in the final SOP is to include reporting on: uncertainties with respect to the resolution of instances of noncompliance; the inability to express negative assurance when pervasive noncompliance exists; and illustration of the combination of the several compliance reports issued in such engagements.

Consider Early Application

Auditors should consider early adoption of the revision to SAS 63. For many engagement in which the SAS 63 revision is applicable, the most substantive change from current practice will be the issuance of a report on the "general requirements" when the client does not have financial assistance programs meeting the definition of "major" under either the Single Audit Act of 1984 and OMB Circular A-128, "Audits of State and Local Governments," or OMB Circular A-133, "Audits of Institutions of Higher Education and of Other Nonprofit Institutions." In some cases, federal agencies are requesting that this report be issued now even though it is not specifically required in SAS 63 nor is it specifically required by either OMB Circular A-128 or Circular A-133.