Auditing Standards Update
Credit Union Advisor, 2006 Fall 

The auditing industry, just like all other industries, is charged with the task of keeping up with the ever-changing business environment. In reaction to vast changes in the business environment over the past several years, the American Institute of Certified Public Accountants (AICPA) has issued several new audit standards that will require, among other things, auditors to assess risk at a much higher level, evaluate control activities, and pay closer attention to the monitoring and reporting of controls and information within the credit union. These standards will be phased in over a two-year period, with some requirements for the year ending December 31, 2006.

While these new standards directly impact the nature and scope of audit work for CPA firms, you and your credit union will undoubtedly experience obvious implications in future dealings with your auditors as a result of the new standards. Here’s what’s on the horizon:

Statement on Auditing Standards (SAS) No. 103, effective for December 31, 2006 year ends, measurably raises the bar concerning the quality and management of documentation that supports a CPA’s audit opinion. Accordingly, you can expect auditors to be more particular and specific in their requests for information. In turn, your institution will likely incur additional time preparing for the audit engagement. The new standard also requires the audit “report date” to be the time at which the audited financial report is “complete”—which is inclusive of all footnote information and related disclosures included in the financial statements. This too will necessitate your timely and complete preparedness to insure that additional audit procedures are not needed after the audit team leaves the field.

SAS No. 112, also effective for December 31, 2006 year ends, elevates a CPA’s responsibility to scrutinize internal control matters and communicate findings and control deficiencies in writing to boards and supervisory committees. Accordingly, you can expect auditors to more closely scrutinize your institution’s accounting policies and procedures related to financial reporting. Specifically, auditors will be requesting current documentation of your accounting procedures and be spending significant additional time testing those controls via interviews of your staff, observations, and testing sample transactions. As a result, this new rule increases the likelihood that auditors will identify concerns over issues and practices within a credit union that have not been discussed previously. Be prepared for some candid feedback and conversations regarding your institutions areas for improvement.

There are also eight new audit standards (SAS Nos. 104–111, effective for December 31, 2007 year ends) concerning risk assessment for which the specific impact on the credit union audit process is still being evaluated. Our early review of these risk assessment standards suggests the following required changes:

• Increased emphasis on evaluation of a credit union’s internal controls, including a CPA’s consideration of:
  • The credit union’s control environment (i.e., “tone at the top”)
  • The risk assessment made by the credit union to determine where controls might be needed
  • Control activities (e.g., procedures) in place to limit the risk of error or fraud
  • Information and communication (e.g., reporting) of the credit union’s financial activities
  • Monitoring (e.g., checks and balances) of the credit union’s existing control processes
• Limits on a CPA’s use of “inquiry” as audit evidence
• Greater focus on the nature and impact of potential audit adjustments by a CPA
• Additional support for information included in the notes to the financial statements
• Increases in audit sample sizes
• Increased need for credit unions to be actively involved in the preparation of their financial statements

In subsequent issues of Plante & Moran’s Credit Union Advisor, we will continue to inform you of the actual impact of these standards and how your institution can begin planning for future audits under the new standards.