Auditing Standards Board: Its Purpose and Authority

The Auditing Standards Board (ASB) is a body in the United States that develops and communicates standards for auditing. Its primary objective is to establish principles that guide auditors, promoting consistency and reliability in the examination of financial statements. The board’s work provides a framework that enhances the quality and uniformity of audit practices across a wide range of organizations.

The ASB’s Role Within the AICPA

The Auditing Standards Board is the senior technical committee of the American Institute of Certified Public Accountants (AICPA) for auditing, attestation, and quality control. Established in 1978, it consolidated the responsibility for setting these standards within a single body. The board’s mission is to serve the public interest by developing standards that enable Certified Public Accountants (CPAs) to provide high-quality, objective audit and attestation services.

The ASB is composed of 19 members who represent a diverse cross-section of the accounting profession, including individuals from large international accounting firms, smaller regional firms, private industry, academia, and government. This varied composition ensures that the standards reflect a broad range of perspectives. The board’s pronouncements are a primary source of what are known as Generally Accepted Auditing Standards (GAAS).

Who Must Follow ASB Auditing Standards

The standards set by the Auditing Standards Board are applicable to audits of “nonissuers.” A nonissuer is an entity whose securities are not registered with the U.S. Securities and Exchange Commission (SEC) and are not publicly traded. This category includes organizations such as private companies, not-for-profit organizations, and most state and local government entities. An audit conducted with ASB standards provides assurance to stakeholders about the fairness of the financial statements.

This jurisdiction is distinct from that of the Public Company Accounting Oversight Board (PCAOB). The PCAOB was created by the Sarbanes-Oxley Act of 2002 and sets the auditing standards for “issuers,” which are publicly traded companies. This division was established in response to early 2000s accounting scandals. For example, an auditor for a publicly traded corporation would follow PCAOB standards, while an auditor for a private company would use ASB standards.

The AICPA’s “Compliance With Standards Rule” requires its members to adhere to the standards promulgated by the appropriate body. This means a CPA must determine whether the entity is an issuer or a nonissuer to apply the correct set of auditing standards. While the ASB and PCAOB operate independently, the ASB often works to align its guidance with international standards to promote consistency.

The Standard-Setting Due Process

The creation of auditing standards by the ASB is a structured and transparent “due process.” This process begins when a financial reporting issue is identified through emerging industry trends, stakeholder feedback, or the board’s own research. Once the board agrees to add a project to its agenda, it forms a task force composed of experts to study the issue.

Following research and deliberation, the board issues an “exposure draft” of the proposed new standard. This document is made available to the public, and comments are solicited from interested parties, including accounting firms, industry organizations, and regulators. The comment period for a new standard is at least 60 days, providing time for feedback.

After the comment period closes, the ASB staff analyzes the feedback received. The board then redeliberates the proposed standard in public meetings, considering the arguments and suggestions submitted. The board may decide to revise the draft and, in some cases, re-expose it for another round of public comment. A final standard is issued after it receives the approval of at least two-thirds of the board members.

Understanding Statements on Auditing Standards (SAS)

The final output of the ASB’s due process is a Statement on Auditing Standards (SAS). Each SAS is an individual pronouncement that establishes a new auditing standard or amends an existing one. These statements address a specific topic, such as the auditor’s responsibility for detecting fraud or communicating with an audit committee.

These pronouncements are organized within the AICPA’s Codification of Statements on Auditing Standards, which arranges the standards by topic. Each section within the codification is given an “AU-C” prefix to distinguish it as part of the clarified standards. For example, AU-C section 240 provides guidance on the consideration of fraud in a financial statement audit.

The current AU-C structure is the result of the ASB’s “Clarity Project,” completed in 2012. The goal of this project was to redraft all existing auditing standards to make them easier to read, understand, and implement. This involved establishing a consistent format for each standard, including a clear statement of the objective, definitions of relevant terms, and explicit requirements for the auditor.