Statement on Auditing Standards (SAS) 135: Omnibus Statement on Auditing Standards—2019, expands an auditor’s responsibilities for identifying, evaluating, and communicating related party relationships and significant unusual transactions, as they are more conducive to fraud or error. Significant unusual transactions are those outside the normal course of business for the entity or that otherwise appear to be unusual due to their timing, size, or nature.
Required procedures include specific inquiry of management, those charged with governance, and others (such as predecessor auditors) who may bring previously undisclosed relationships and transactions to light. Auditors should test the accuracy and completeness of a list of already disclosed matters. Auditors should also evaluate the valid business purpose or economic substance behind these matters and adequacy of accounting and disclosure in the financial statements. Sufficient appropriate evidence includes enhanced relevant written management representations.
In addition, required communications with those charged with governance has been expanded. For example, auditors should communicate matters that are difficult or contentious for which there was consultation outside the engagement team and that are, in the auditor’s professional judgment, significant and relevant to overseeing the financial reporting process.
Another new communication is an acknowledgment that uncorrected misstatements (or matters underlying those misstatements) could potentially cause future-period financial statements to be materially misstated, even if uncorrected misstatements are immaterial to the current period audit.
The new standard also clarifies that if management already communicated some or all of matters the auditor is required to communicate, the auditor does not have to communicate these matters in the same level of detail. However, the auditor is still accountable for ensuring complete and accurate communication is made to those charged with governance.
SAS 135 is effective for audits of periods ending on or after December 15, 2020. Early adoption is not permitted.