The ASB issued Statement on Auditing Standards no. 92, Auditing Derivative Instruments, Hedging Activities, and Investments in Securities in the fall (see Official Releases, JofA, Nov.00, page 130). It supersedes SAS no. 81, Auditing Investments.
The new guidance applies to
* Derivative instruments as defined in FASB statement no. 133, Accounting for Derivative Instruments and Hedging Activities.
* Hedging activities in which the entity designates a derivative or a nonderivative financial instrument as a hedge of exposure for which FASB statement no. 133 permits hedge accounting.
* Debt and equity securities as defined in FASB statement no. 115, Accounting for Certain Investments in Debt and Equity Securities.
Judith M. Sherinsky, CPA, a technical manager with the AICPA auditing standards division, said it was issued because of changes in accounting standards related to the SAS. "The issuance of FASB Statement no. 133, as well as the explosion in the number and types of hedging activities and derivative instruments, created the need for revised auditing guidance in this area," she said.
Sherinsky added that the guidance will help practitioners who, with limited knowledge of derivatives and hedging, may be asked by their clients to audit financial statements containing assertions about such products. Derivatives can be difficult to identify, especially if embedded in a contract or agreement. "If auditors do not have the necessary expertise," she said, "they may have to develop it, consult a specialist or perhaps decline such engagements."
Applying the concept of fair value, which the accounting literature increasingly supports as a means of measuring financial instruments, further complicates auditors' work in this context, said Stephen D. Holton, CPA, a partner of Martin, Dolan & Holton in Glen Allen, Virginia, and chairman of the task force that created SAS no. 92. He explained how the new standard addressed this issue.
"Since management has to identify and properly account for all its derivatives, doing so on the basis of fair value can be complicated. For example, if you have a derivative that is measured by estimating future cash flows and then discounting them back to present value, you have to decide what rate to use, and that is a...