As accounting continues to evolve, the standards and regulations that guide audit and attestation practices advance along with it. Recent updates from the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB) are reshaping the landscape for CPAs and firms. These changes aim to increase transparency, improve the quality of financial information, and ensure audit practices align with a rapidly changing business environment. Here’s a look at some of the most essential updates and what they mean for auditors in the upcoming year.
1. SAS 145: Understanding the Entity and Its Environment
One of the most significant changes impacting audits is SAS 145, which emphasizes understanding an entity's environment and assessing the risks of material misstatements. Effective for audits of financial statements for periods ending on or after December 15, 2023, SAS 145 guides auditors in a more structured approach to risk assessment, making it critical for current audits. Key updates include:
Enhanced Risk Assessment: SAS 145 introduces a new requirement to separate significant risks from inherent risks. Auditors are now expected to analyze the entity’s environment comprehensively, evaluating external factors that could influence the business.
System of Internal Control: Auditors must take a closer look at how an organization’s internal controls are designed and implemented, which could mean deeper conversations with management and the audit committee.
Impact for CPAs: Expect more emphasis on judgment and skepticism as auditors gain a nuanced understanding of the entity's operations, financial health, and potential risk factors. This enhanced risk assessment may require additional time but will lead to more robust audit findings.
2. SSAE 21: Direct Examination Engagements
SSAE 21 introduced the new type of attestation service called a Direct Examination Engagement, effective for periods ending on or after June 15, 2023. This change responds to the growing demand for specialized attestation services that provide stakeholders with more insightful and independent reports.
Direct vs. Assertion-Based Engagements: Unlike traditional assertion-based engagements, Direct Examination Engagements allow auditors to examine and directly report on subject matters (like compliance, performance, and controls), making this new service highly flexible.
Expanded Use Cases: Direct examination engagements can be used to assess data from ESG (Environmental, Social, and Governance) metrics, cybersecurity, and other non-financial information. These engagements provide assurance to users who may be interested in areas beyond traditional financial performance.
Impact for CPA Firms: Firms offering attestation services should consider expanding their capabilities in line with SSAE 21. With increased stakeholder interest in ESG and cybersecurity metrics, CPAs have an opportunity to diversify service offerings and address broader client needs.
3. FASB’s ASU Updates: Revenue Recognition for Non-Profit Entities and Leases
FASB has introduced recent Accounting Standards Updates (ASUs) that are critical for audits, particularly affecting nonprofit organizations and entities managing leases.
Revenue Recognition for Nonprofits (ASU 2024-05): This update clarifies revenue recognition requirements specifically for nonprofit organizations, addressing contributions and conditional versus unconditional donations. The ASU brings alignment with the existing revenue recognition standard (ASC 606), ensuring consistent application and helping to address issues unique to nonprofit revenues.
Lease Accounting (ASU 2024-03): Changes in lease accounting now allow more straightforward adoption for entities that previously found the transition to the new lease standard challenging. This ASU gives clearer guidance on related-party leases, transition provisions, and presentation on financial statements.
Impact for CPA Firms: Auditors who work with nonprofits will find these updates particularly relevant, as they require a deeper understanding of revenue recognition nuances and lease accounting practices. Given the intricacies involved, CPA firms may need to invest in training or technology to fully comply with these ASUs.
4. Quality Management Standards: SQMS No. 1 and No. 2
In an effort to elevate audit quality, AICPA recently released Statements on Quality Management Standards (SQMS) No. 1 and No. 2, which will become effective for CPA firms by December 15, 2025.
SQMS No. 1: Introduces a risk-based approach to quality management. This involves identifying and assessing risks that could affect audit quality, allowing firms to tailor their quality control practices to their unique environment and services.
SQMS No. 2: Focuses on the role of engagement quality reviews, making it mandatory for certain engagements. The goal is to increase oversight and improve the consistency of audit quality across firms of all sizes.
Impact for CPA Firms: CPA firms must implement a formal quality management system, emphasizing proactive risk assessment and response. SQMS adoption may require adjustments in internal practices and technology investment to meet the AICPA’s quality standards.
5. ESG Reporting and Attestation
Growing investor and public interest in environmental, social, and governance (ESG) reporting has led the AICPA and FASB to consider how CPAs can provide assurance on these disclosures. As of now, there’s no mandatory guidance; however, CPAs and firms specializing in attestation should expect further developments in 2025.
Impact for CPAs: As ESG reporting gains traction, CPA firms can take advantage of this demand by developing expertise in this area. Firms that invest in ESG-related training and credentialing may be well-positioned to capture a portion of this growing market.
Key Takeaways for CPA Firms
Incorporating these updates into your firm’s practices will require commitment and adaptability. Here are some tips to get started:
Prepare for Enhanced Risk Assessment: Make sure your team understands the requirements of SAS 145, as it will likely require adjustments in audit planning and communication with clients.
Consider New Service Offerings: With SSAE 21’s direct examination engagements, firms have a chance to expand into new assurance services, including areas like ESG and cybersecurity.
Stay Ahead of Quality Management: Implementing SQMS No. 1 and No. 2 will require a structured quality management system. Consider developing or acquiring technology to help manage quality controls across engagements.
Invest in Education: Staying updated on FASB’s ASUs, especially those impacting niche areas like nonprofits and leases, is crucial. Provide your team with regular training sessions to ensure they’re equipped with the latest knowledge.
2025 will bring new challenges and opportunities for CPA firms and auditors as these standards shape the future of the profession. By staying informed and adapting to these updates, firms can ensure they provide quality, value-driven audits that meet client and regulatory expectations.
At BryMar CPA, we understand the importance of quality and integrity in audit practices. Our peer review services are designed to help your firm uphold the highest standards, ensuring compliance, accuracy, and excellence in every engagement. With a dedicated team specializing in non-profit and audit engagements, we bring industry insight and a commitment to best practices to every peer review.
Let us help you strengthen your quality management processes and enhance your firm’s reputation for reliable and precise audit work. Contact BryMar today to learn how our peer review services can support your firm’s success.