February 2000

E-commerce Audit Risks Discussed at Society-ASB Meeting

A new audit risk alert on e-commerce might directly result from this year's meeting between the NYSSCPA Auditing Standards and Procedures Committee and the AICPA Auditing Standards Board's (ASB) issues task force. The two groups meet periodically to discuss issues of common concern.

Tom Ray, AICPA audit team director, said that a new audit risk alert is a possibility after hearing a presentation by Society committee member Bruce Nearon. Nearon discussed the risks and complexities that CPA firms of all sizes now face when their clients engage in e-commerce.

"If a client contracts with two young wizards to build and operate a website out of a garage, what attention will be given to building appropriate internal controls or maintaining an audit trail?" Nearon said.

He pointed out that questions concerning accounting procedures also exist when addressing clients' e-commerce functions.

"How much of what is paid for the development of e-commerce capabilities is software, and what is its useful life?" he said.

Legal Fees, Materiality, and Other Issues Raised

Vincent Love, chair of the NYSSCPA committee, opened the meeting with a request that the ASB review the audit guidance available for examining accrued future legal fees for defending against lawsuits when a client has determined that the risk of losing the suit is remote. In such situations the outcome of the suit is not accrued, but some companies accrue anticipated legal fees even though services have not been performed. In addition, the footnotes to the sample set of financial statements on FASB's website disclose an accrual for future legal services.

Although she said that the issue seems more an accounting than an auditing problem, Deborah D. Lambert, chair of the ASB and its issues task force, said an ASB task force is gathering best practices relating to audit evidence for all types of reserves. She also stated that she would raise the issue at the ASB's next meeting with FASB's Emerging Issues Task Force.

NYSSCPA committee member Julian Jacoby discussed the need for audit guidance on materiality considerations for setting audit scope. He cited several practice areas where local firms struggle with materiality when setting the scope of their work: when a business is about to be sold, when engagements involve interim financial information, and when an entity is subject to regulatory capital requirements.

Society committee member Vincent Allocca identified several areas where local practitioners would benefit from revisions to the audit and accounting guide for employee benefit plans.

The meeting included participation from ASB members George Tucker and Andrew Capelli, who joined Lambert in reporting on the status of current board projects. Capelli heads a task force that is exploring whether standards properly address the issues raised by the Securities and Exchange Commission's Staff Accounting Bulletin 99 on materiality. Lambert emphasized the board's determination to finalize changes to attestation standards that have been under consideration for more than a year. The revised standards will permit attestation reporting without an assertion where the responsibility for the data or information is with a third party.

Lambert and Ray also reported that the AICPA no longer sends paper copies of exposure drafts to its distribution list but instead posts the documents on its website (http://www.aicpa.org) for interested parties to download.

"This will speed up the process by eliminating the time it takes to print and mail the paper copies," Lambert said. She also expressed her support for the new AICPA structure for identifying practice issues. She said expert panels, rather than industry committees, now identify problems and refer them to the pertinent AICPA task force or senior committee for consideration. *