Auditors develop practice aid to compare notes on CECL

The American Institute of Certified Public Accountants has developed non-authoritative professional guidance intended to help auditors when communicating with audit committees regarding Accounting Standards Codification Topic 326. That’s the new standard from the Financial Accounting Standards Board requiring companies to use a “current expected credit losses” approach, or CECL, to recognize credit losses in financial statements.

The guide says auditors expect practice to “evolve over time” with expectations of regulators and auditors changing along the way. “As such, questions, examples, and risks listed in this practice aid should not be considered exhaustive,” the report says. “Auditors, management, and those charged with governance need to stay abreast of developments and consider the implications of those developments.”

The practice aid is intended to give auditors information that may help them improve the efficiency and effectiveness of their audits, said Jason Brodmerkel, AICPA senior technical manager, in a statement. The aid is based on existing professional material plus input from the AICPA expert panels on depository institutions and insurance and AICPA member firms.

The guide summarizes the key provisions of the new standard and addresses some key considerations for auditors as they audit allowances companies develop for credit losses following the new guidance. It walks auditors through obtaining an understanding of the entity, assessing risks, identifying controls relevant to the audit, designing an audit response, performing audit procedures, and evaluating the audit and disclosure considerations.

Mike Lundberg, a partner at audit firm RSM and chair of the AICPA’s CECL auditing subgroup, says the guidance is primarily written for auditors, but lenders might want to have a look at it. “We believe this practice aid will be directly beneficial to lenders preparing to implement the new standard,” he said.

The controversial CECL standard takes effect for public companies beginning Jan. 1, 2020, although FASB has signaled it plans to give smaller reporting companies and other non-public entities more time to prepare for the new standard.