What Are the Clarified Auditing Standards?

Auditing standards are the professional guidelines auditors follow when examining the financial statements of non-public companies and non-profits. These standards are established by the Auditing Standards Board (ASB), a board of the American Institute of Certified Public Accountants (AICPA). The primary function of these standards is to ensure a consistent and high level of quality across all audit engagements.

By providing a detailed framework for the audit process, these standards guide auditors from initial planning to the final reporting of their findings. Adherence to these pronouncements is a professional obligation. The consistent application of these standards is fundamental to maintaining the reliability of audit reports, which enhances the confidence that stakeholders can place in an entity’s financial statements.

The AICPA Clarity Project

The AICPA’s Clarity Project was launched to address concerns about the complexity of U.S. Generally Accepted Auditing Standards (GAAS). Before this initiative, the standards were often criticized for being difficult to understand and apply consistently, and their structure lacked uniformity. This made it cumbersome for practitioners to navigate the requirements effectively.

A major impetus for the project was the increasing globalization of business, which highlighted differences between U.S. standards and the International Standards on Auditing (ISAs). A primary objective of the Clarity Project was to converge U.S. GAAS with ISAs to the greatest extent possible. The project’s mission was to redraft existing standards to make them more understandable and to clarify the auditor’s obligations. By separating mandatory requirements from application and explanatory guidance, the ASB aimed to eliminate ambiguity and enhance the consistency of audit practice.

Anatomy of a Clarified Auditing Standard

Every clarified auditing standard issued by the ASB follows a consistent structure to improve clarity. The format begins with an introduction that outlines the purpose and scope of the standard, followed by several distinct sections that guide the auditor’s work.

A key part of each standard is the “Objectives” section, which contains a clear statement of what the auditor is expected to achieve. For instance, in a standard about assessing risk, an objective is for the auditor to identify and assess the risks of material misstatement. Following this, a “Definitions” section clarifies the meaning of specific terms used within that standard. This ensures that all auditors have a common understanding of the terminology for consistent application.

The “Requirements” section forms the core of the standard, presenting the mandatory actions the auditor must perform. These requirements are unconditional and are identified by the use of the word “must.” For example, a requirement would state that “the auditor must perform risk assessment procedures to provide a basis for the identification and assessment of risks of material misstatement.”

Each standard also includes an “Application and Other Explanatory Material” section. This part provides context, further explanations, and practical examples to help auditors understand and implement the requirements. It does not introduce new requirements but elaborates on the existing ones. For example, it might offer examples of different types of risk assessment procedures an auditor could perform or explain how to evaluate internal controls.

Fundamental Principles of a GAAS Audit

Audits conducted under Generally Accepted Auditing Standards (GAAS) are built on principles that guide an auditor’s professional conduct. The auditor’s primary responsibility is to express an opinion on whether financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. This is distinct from management’s responsibility, which is to prepare the financial statements and implement internal controls.

An audit provides reasonable assurance, which is a high but not absolute level of assurance that the financial statements are free from material misstatement. This principle acknowledges the inherent limitations of an audit, such as the nature of audit procedures and the need to complete the audit within a reasonable timeframe and at a reasonable cost. Auditors obtain sufficient appropriate audit evidence to reduce the risk of expressing an incorrect opinion to an acceptably low level.

Auditors must possess the necessary technical competence and exercise due professional care. Two personal attributes an auditor must maintain are professional judgment and professional skepticism. Professional judgment involves applying relevant training and experience to make informed decisions, while professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence.

To form an opinion, the auditor must obtain sufficient appropriate audit evidence. Sufficiency refers to the quantity of evidence, while appropriateness is the measure of its quality, meaning its relevance and reliability. The auditor’s judgment about what constitutes sufficient appropriate evidence is influenced by the assessed risks of misstatement; higher risks require more persuasive evidence.

Navigating the AU-C Codification

Understanding the organization of the clarified auditing standards helps in efficiently locating relevant guidance. The entire body of standards for non-public entities is codified with an “AU-C” prefix to distinguish them from older, superseded AU sections. This codification is organized into a logical structure, grouping individual standards into series based on the subject matter they address.

The standards are grouped into the following series:

• The 200 series covers General Principles and Responsibilities. This group includes foundational standards like AU-C 200, which outlines the overall objectives of the auditor, and AU-C 210, which deals with the terms of an audit engagement. These standards define the auditor’s core duties and the preconditions for accepting an engagement.
• The 300 and 400 series focus on risk assessment and the auditor’s response. AU-C Section 315 details the process of understanding the entity and identifying risks, while AU-C Section 330 explains how the auditor must design and implement responses to the assessed risks of material misstatement.
• The 500 series addresses Audit Evidence. This series provides detailed guidance on the procedures auditors perform to gather evidence, covering topics such as external confirmations (AU-C 505), analytical procedures (AU-C 520), and audit sampling (AU-C 530).
• The 600 series provides guidance on Using the Work of Others. This section addresses the auditor’s responsibilities when using the work of internal auditors or specialists engaged by the auditor to obtain audit evidence.
• The 700 series is dedicated to Forming an Opinion and Reporting on Financial Statements. These standards guide the auditor in evaluating the evidence gathered and forming a conclusion, which is then communicated through the auditor’s report. This includes AU-C 700 for the standard unqualified report and AU-C 705 for modifications to the opinion.