(Amends Statement on Auditing Standards No. 61, AICPA, Professional Standards, vol. 1, AU sec. 380 and Statement on Auditing Standards No. 71, AICPA, Professional Standards, vol. 1, AU sec. 722.)

1. This amendment revises SAS No. 61 (AU sec. 380.03) and adds a new paragraph to SAS No. 61 (AU sec. 380.11) to reflect recommendation number 8 of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees in their report issued in 1999. This amendment requires auditors of Securities and Exchange Commission (SEC) clients to discuss with audit committees the auditor's judgments about the quality, and not just the acceptability, of the company's accounting principles and underlying estimates in its financial statements. The new language is shown in boldface italics. [AU sec. 380.11–.16 is renumbered 380.12–.17.]

.03 The communications may be oral or written. If information is communicated orally, the auditor should document the communication by appropriate memoranda or notations in the working papers.³ When the auditor communicates in writing, the report should indicate that it is intended solely for the information and use of the audit committee or the board of directors and, if appropriate, management, and is not intended to be and should not be used by anyone other than these specified parties.

Auditor's Judgments About the Quality of the Entity’s Accounting Principles

11. In connection with each SEC engagement (see paragraph .01), the auditor should discuss with the audit committee the auditor’s judgments about the quality, not just the acceptability, of the entity’s accounting principles as applied in its financial reporting. Since the primary responsibility for establishing an entity's accounting principles rests with management, the discussion generally would include management as an active participant. The discussion should be open and frank and generally should include such matters as the consistency of the entity's accounting policies and their application, and the clarity and completeness of the entity's financial statements, which include related disclosures. The discussion should also include items that have a significant impact on the representational faithfulness, verifiability, and neutrality of the accounting information included in the financial statements.⁶ Examples of items that may have such impact are the following:

• Selection of new or changes to accounting policies
• Estimates, judgments, and uncertainties
• Unusual transactions
• Accounting policies relating to significant financial statement items, including the timing of transactions and the period in which they are recorded

Objective criteria have not been developed to aid in the consistent evaluation of the quality of an entity's accounting principles as applied in its financial statements. The discussion should be tailored to the entity’s specific circumstances, including accounting applications and practices not explicitly addressed in the accounting literature, for example, those that may be unique to an industry.

2. This amendment is effective for audits of financial statements for periods ending on or after December 15, 2000. Earlier application is permitted.

Part 2

3. This amendment revises SAS No. 71 (AU sec. 722.25) and includes two new paragraphs (AU sec. 722.26 and .27) to reflect recommendation number 10 of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees in their report issued in 1999. It requires auditors of SEC clients to attempt to discuss with audit committees the matters described in SAS No. 61 prior to the filing of the Form 10-Q. The new language is shown in boldface italics; deleted language is shown by strikethrough. [AU sec. 722.26–.44 is renumbered 722.28–.46.]

.25 In performing the procedures in paragraphs .13 through .19, the accountant also should consider whether any of the matters described in section 380, Communication With Audit Committees, as they relate to the interim financial information, have been identified. If such matters have been identified, the accountant should be communicated them to the audit committee or be satisfied, through discussions with the audit committee, that such matters have been communicated to the audit committee by management. For instance, the accountant should determine that the audit committee is informed about the process used by management in formulating particularly sensitive accounting estimates or about a change in a significant accounting policy affecting the interim financial information.

.26 The objective of a review of interim financial information differs significantly from that of an audit. Therefore, any discussion of the accountant's judgments about the quality, not just the acceptability, of the entity's accounting principles as applied in its interim financial reporting would generally be limited to the impact of significant events, transactions, and changes in accounting estimates considered by the accountant in performing the procedures in paragraphs .13 through .19. Further, such interim review procedures do not provide assurance that the accountant will become aware of all matters affecting the accountant's judgments about the quality of the entity's accounting principles that would be identified as a result of an audit.

.27 When the accountant has conducted the review prior to the entity’s filing of the interim financial information with a regulatory agency (such as the SEC), and has identified matters to be communicated pursuant to paragraphs .25 and .26, he or she should attempt to make such communications with the audit committee, or at least its chairman, and a representative of financial management prior to such filing. If such communications cannot be made prior to the filing, they should be made as soon as practicable in the circumstances.