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Preface

(Updated as of July 1, 2017)

About AICPA Audit and Accounting Guides

This AICPA Audit and Accounting Guide has been developed by the AICPA Investment Companies Guide Task Force to assist management in the preparation of their financial statements in conformity with U.S. generally accepted accounting principles (GAAP) and to assist practitioners in performing and reporting on their audit and attestation engagements.

This guide describes operating conditions and auditing procedures unique to the investment company industry and illustrates the form and content of investment company financial statements and related disclosures.

Because many investment companies are subject to regulation under the Investment Company Act of 1940, rules under that act are discussed extensively in this guide. However, the rules, regulations, practices, and procedures of the investment company industry have changed frequently and extensively in recent years. The independent practitioner should keep abreast of those changes as they occur.

AICPA Guides may include certain content presented as “Supplement,” “Appendix,” or “Exhibit.” A supplement is a reproduction, in whole or in part, of authoritative guidance originally issued by a standard setting body (including regulatory bodies) and applicable to entities or engagements within the purview of that standard setter, independent of the authoritative status of the applicable AICPA Guide. Both appendixes and exhibits are included for informational purposes and have no authoritative status.

The Financial Reporting Executive Committee (FinREC) is the designated senior committee of the AICPA authorized to speak for the AICPA in the areas of financial accounting and reporting. Conforming changes made to the financial accounting and reporting guidance contained in this guide are approved by the FinREC Chair (or his or her designee). Updates made to the financial accounting and reporting guidance in this guide exceeding that of conforming changes are approved by the affirmative vote of at least two-thirds of the members of FinREC.

This guide does the following:

Accounting guidance for nongovernmental entities included in an AICPA Guide is a source of nonauthoritative accounting guidance. As discussed later in this preface, FASB ASC is the authoritative source of U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the SEC. Accounting guidance for governmental entities included in an AICPA Guide, and cleared by GASB, is a source of authoritative GAAP described in category B of the hierarchy of GAAP for state and local governmental entities, as defined in GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. AICPA members should be prepared to justify departures from GAAP, as discussed in the “Accounting Principles Rule” (AICPA, Professional Standards, ET sec. 1.320.001).

AICPA Audit and Accounting Guides also include guidance from AICPA Technical Questions and Answers. These questions and answers are not sources of established authoritative accounting principles as described in FASB ASC, the authoritative source of GAAP for nongovernmental entities. This material is based on selected practice matters identified by the staff of the AICPA's Technical Hotline and various other bodies within the AICPA and has not been approved, disapproved, or otherwise acted upon by any senior technical committee of the AICPA.

An AICPA Guide containing auditing guidance related to generally accepted auditing standards (GAAS) is recognized as an interpretive publication as defined in AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards (AICPA, Professional Standards). Interpretive publications are recommendations on the application of GAAS in specific circumstances, including engagements for entities in specialized industries.

Interpretive publications are issued under the authority of the AICPA Auditing Standards Board (ASB) after all ASB members have been provided an opportunity to consider and comment on whether the proposed interpretive publication is consistent with GAAS. The members of the ASB have found the auditing guidance in this guide to be consistent with existing GAAS.

Although interpretive publications are not auditing standards, AU-C section 200 requires the auditor to consider applicable interpretive publications in planning and performing the audit because interpretive publications are relevant to the proper application of GAAS in specific circumstances. If the auditor does not apply the auditing guidance in an applicable interpretive publication, the auditor should document how the requirements of GAAS were complied with in the circumstances addressed by such auditing guidance.

The ASB is the designated senior committee of the AICPA authorized to speak for the AICPA on all matters related to auditing. Conforming changes made to the auditing guidance contained in this guide are approved by the ASB Chair (or his or her designee) and the Director of the AICPA Audit and Attest Standards Staff. Updates made to the auditing guidance in this guide exceeding that of conforming changes are issued after all ASB members have been provided an opportunity to consider and comment on whether the guide is consistent with the Statements on Auditing Standards (SASs).

Any auditing guidance in a guide appendix or chapter appendix in a guide, or in an exhibit, while not authoritative, is considered an “other auditing publication.” In applying such guidance, the auditor should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the audit. Although the auditor determines the relevance of other auditing guidance, auditing guidance in a guide appendix or exhibit has been reviewed by the AICPA Audit and Attest Standards staff and the auditor may presume that it is appropriate.

An AICPA Guide containing attestation guidance is recognized as an attestation interpretation as defined in AT-C section 105, Concepts Common to All Attestation Engagements (AICPA, Professional Standards). Interpretative publications are recommendations on the application of Statements on Standards for Attestation Engagements (SSAEs) in specific circumstances, including engagements for entities in specialized industries. Interpretative publications are issued under the authority of the ASB. The members of the ASB have found the attestation guidance in this guide to be consistent with existing SSAEs.

A practitioner should be aware of and consider attestation interpretations applicable to his or her attestation engagement. If the practitioner does not apply the attestation guidance included in an applicable AICPA Guide, the practitioner should be prepared to explain how he or she complied with the SSAE provisions addressed by such attestation guidance.

Any attestation guidance in a guide appendix or chapter appendix in a guide, or in an exhibit, while not authoritative, is considered an “other attestation publication.” In applying such guidance, the practitioner should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the engagement. Although the practitioner determines the relevance of other attestation guidance, such guidance in a guide appendix or exhibit has been reviewed by the AICPA Audit and Attest Standards staff and the practitioner may presume that it is appropriate.

The ASB is the designated senior committee of the AICPA authorized to speak for the AICPA on all matters related to attestation. Conforming changes made to the attestation guidance contained in this guide are approved by the ASB Chair (or his or her designee) and the Director of the AICPA Audit and Attest Standards Staff. Updates made to the attestation guidance in this guide exceeding that of conforming changes are issued after all ASB members have been provided an opportunity to consider and comment on whether the guide is consistent with the SSAEs.

Purpose and Applicability

Limitations

This guide does not discuss the application of all GAAP, GAAS, and PCAOB standards that are relevant to the preparation and audit of financial statements of investment companies. This guide is directed primarily to those aspects of the preparation and audit of financial statements that are unique to investment companies or those aspects that are considered particularly significant to them.

Recognition

AICPA Senior Committees

Auditing Standards Board

Jay Brodish, Member
Mike Santay, Chair

Financial Reporting Executive Committee

Jay Seliber, Member
Jim Dolinar, Chair

The AICPA gratefully acknowledges those members of the AICPA Investment Companies Expert Panel (2016–2017) who reviewed or otherwise contributed to the development of this edition of the guide:

Mike Barkman, Chair
Elizabeth Bayston
Craig Brown
Rajan Chari
Quintin I. Kevin
Chris May
Peggy McCaffrey
Nir Messafi
Brent Oswald
Brian H. Oswald
Ari Samuel
Jason Andrew Sibley
Robert Sidoti

In addition to the senior committee members and 2016–2017 expert panel members listed previously, the AICPA gratefully acknowledges those who reviewed and otherwise contributed to the development of this guide: Jason Bell, Christina Catalina, Alexis Cunningham, Jaime Eichen, Richard Grueter, Kathleen Healy, Timothy Jinks, and Irina Khouade.

AICPA Staff

Robert Booth
Technical Manager
Accounting and Auditing Content Development

Teresa Brenan
Technical Manager
Accounting and Auditing Content Development

Irina Portnoy
Senior Technical Manager
Accounting Standards
and
Staff Liaison
AICPA Investment Companies Expert Panel

Guidance Considered in This Edition

This edition of the guide has been modified by the AICPA staff to include certain changes necessary due to the issuance of authoritative guidance since the guide was originally issued, and other revisions as deemed appropriate. Authoritative guidance issued through July 1, 2017, has been considered in the development of this edition of the guide. However, this guide does not include all audit, accounting, reporting, and other requirements applicable to an entity or a particular engagement. This guide is intended to be used in conjunction with all applicable sources of authoritative guidance.

Authoritative guidance that is issued and effective on or before July 1, 2017, is incorporated directly in the text of this guide. Authoritative guidance issued but not yet effective as of July 1, 2017, but becoming effective on or before December 31, 2017, is also presented directly in the text of the guide, but shaded gray and accompanied by a footnote indicating the effective date of the new guidance. The distinct presentation of this content is intended to aid the reader in differentiating content that may not be effective for the reader’s purposes.

Authoritative guidance issued but not yet effective as of the date of the guide and not becoming effective until after December 31, 2017, is referenced in a “guidance update” box; that is, a gray shaded box that contains summary information on the guidance issued but not yet effective.

In updating this guide, all guidance issued up to and including the following was considered, but not necessarily incorporated, as determined based on applicability:

Users of this guide should consider guidance issued subsequent to those items listed previously to determine their effect on entities covered by this guide. In determining the applicability of recently issued guidance, its effective date should also be considered.

The changes made to this edition of the guide are identified in the Schedule of Changes appendix. The changes do not include all those that might be considered necessary if the guide were subjected to a comprehensive review and revision.

FASB ASC Pending Content

Presentation of Pending Content in FASB ASC

Amendments to FASB ASC (issued in the form of ASUs) are initially incorporated into FASB ASC in “pending content” boxes that follow the paragraphs being amended with links to the transition information. The pending content boxes are meant to provide users with information about how the guidance in a paragraph will change as a result of the new guidance.

Pending content applies to different entities at different times due to varying fiscal year-ends, and because certain guidance may be effective on different dates for public and nonpublic entities. As such, FASB maintains amended guidance in pending content boxes within FASB ASC until the roll-off date. Generally, the roll-off date is six months following the latest fiscal year end for which the original guidance being amended could still be applied.

Presentation of FASB ASC Pending Content in AICPA Audit and Accounting Guides

Amended FASB ASC guidance that is included in pending content boxes in FASB ASC on July 1, 2017, is referenced as “Pending Content” in this guide. Readers should be aware that “Pending Content” referenced in this guide will eventually be subjected to FASB’s roll-off process and no longer be labeled as “Pending Content” in FASB ASC (as discussed in the previous paragraph).

Terms Used to Define Professional Requirements in This AICPA Audit and Accounting Guide

Any requirements described in this guide are normally referenced to the applicable standards or regulations from which they are derived. Generally, the terms used in this guide describing the professional requirements of the referenced standard setter (for example, the ASB) are the same as those used in the applicable standards or regulations (for example, “must” or “should”). However, where the accounting requirements are derived from FASB ASC, this guide uses “should,” whereas FASB uses “shall.” The Notice to Constituents in FASB ASC states that FASB considers the terms “should” and “shall” to be comparable terms.

Readers should refer to the applicable standards and regulations for more information on the requirements imposed by the use of the various terms used to define professional requirements in the context of the standards and regulations in which they appear.

Certain exceptions apply to these general rules, particularly in those circumstances where the guide describes prevailing or preferred industry practices for the application of a standard or regulation. In these circumstances, the applicable senior committee responsible for reviewing the guide’s content believes the guidance contained herein is appropriate for the circumstances.

Applicability of Generally Accepted Auditing Standards and PCAOB Standards

Appendix A, “Council Resolution Designating Bodies to Promulgate Technical Standards,” of the AICPA Code of Professional Conduct recognizes both the ASB and the PCAOB as standard setting bodies designated to promulgate auditing, attestation, and quality control standards. Paragraph .01 of the “Compliance With Standards Rule” (AICPA, Professional Standards, ET sec. 1.310.001 and 2.310.001) requires an AICPA member who performs an audit to comply with the applicable standards.

Audits of the financial statements of those entities subject to the oversight authority of the PCAOB (that is, those audit reports within the PCAOB’s jurisdiction as defined by the Sarbanes-Oxley Act of 2002, as amended) are to be conducted in accordance with standards established by the PCAOB, a private sector, nonprofit corporation created by the Sarbanes-Oxley Act of 2002. The SEC has oversight authority over the PCAOB, including the approval of its rules, standards, and budget. In citing the auditing standards of the PCAOB, references generally use section numbers within the reorganized PCAOB auditing standards and not the original standard number, as appropriate.

Audits of the financial statements of those entities not subject to the oversight authority of the PCAOB (that is, those audit reports not within the PCAOB’s jurisdiction as defined by the Sarbanes-Oxley Act of 2002, as amended)—hereinafter referred to as nonissuers1—are to be conducted in accordance with GAAS as issued by the ASB.

The ASB develops and issues standards in the form of SASs through a due process that includes deliberation in meetings open to the public, public exposure of proposed SASs, and a formal vote. The SASs and their related interpretations are codified in AICPA Professional Standards. In citing GAAS and their related interpretations, references generally use section numbers within the codification of currently effective SASs and not the original statement number, as appropriate.

The auditing content in this guide primarily discusses GAAS issued by the ASB and is applicable to audits of nonissuers. Users of this guide may find the tool developed by the PCAOB’s Office of the Chief Auditor helpful in identifying comparable PCAOB standards. The tool is available at http://pcaobus.org/standards/auditing/pages/findanalogousstandards.aspx.

Considerations for audits of entities in accordance with PCAOB standards may also be discussed within this guide’s chapter text. When such discussion is provided, the related paragraphs are designated with the following title: Considerations for Audits Performed in Accordance With PCAOB Standards. PCAOB guidance included in an AICPA Guide has not been reviewed, approved, disapproved, or otherwise acted upon by the PCAOB and has no official or authoritative status.

Guidance for Issuers

Management Assessment of Internal Control

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted final rules requiring companies subject to the reporting requirements of the 1934 Act, other than registered investment companies and certain other entities, to include in their annual reports a report from management on the company’s internal control over financial reporting. Business development companies do not fall within the scope exception contained in Section 405 and are required to include a report from management on the company’s internal control over financial reporting. However, see paragraphs 1.62–.64 of this guide for discussion of the Jumpstart Our Business Startups Act of 2012, which explains that certain business development companies may be temporarily exempt from certain financial reporting disclosures and regulatory requirements, including Section 404 of the Sarbanes-Oxley Act of 2002.

The SEC rules clarify that management’s assessment and report is limited to internal control over financial reporting.

As established by Rule 12b-2 of the 1934 Act, the auditor’s attestation for large accelerated and accelerated filers is required. However, Section 404(c) of the Sarbanes-Oxley Act of 2002 provides that an attestation report of a registered public accounting firm on internal control over financial reporting is not required for an issuer that is neither an accelerated filer nor a large accelerated filer.

Applicability of Quality Control Standards

QC section 10, A Firm’s System of Quality Control (AICPA, Professional Standards), addresses a CPA firm’s responsibilities for its system of quality control for its accounting and auditing practice. A system of quality control consists of policies that a firm establishes and maintains to provide it with reasonable assurance that the firm and its personnel comply with professional standards, as well as applicable legal and regulatory requirements. The policies also provide the firm with reasonable assurance that reports issued by the firm are appropriate in the circumstances.

QC section 10 applies to all CPA firms with respect to engagements in their accounting and auditing practice. In paragraph .13 of QC section 10, an accounting and auditing practice is defined as “a practice that performs engagements covered by this section, which are audit, attestation, compilation, review, and any other services for which standards have been promulgated by the AICPA Auditing Standards Board (ASB) or the AICPA Accounting and Review Services Committee (ARSC) under the “General Standards Rule” (ET sec.1.300.001) or the “Compliance With Standards Rule” (ET sec. 1.310.001) of the AICPA Code of Professional Conduct. Although standards for other engagements may be promulgated by other AICPA technical committees, engagements performed in accordance with those standards are not encompassed in the definition of an accounting and auditing practice.”

In addition to the provisions of QC section 10, readers should be aware of other sections within AICPA Professional Standards that address quality control considerations, including the following provisions that address engagement level quality control matters for various types of engagements that an accounting and auditing practice might perform:

Because of the importance of audit quality, we have included appendix A, “Overview of Statements on Quality Control Standards,” in this guide. Appendix A summarizes key aspects of the quality control standard. This summarization should be read in conjunction with QC section 10, AU-C section 220, AT-C section 105, AR-C section 60, and the quality control standards issued by the PCAOB, as applicable.

Alternatives Within U.S. Generally Accepted Accounting Principles

The Private Company Council (PCC), established by the Financial Accounting Foundation’s Board of Trustees in 2012, and FASB, working jointly, will mutually agree on a set of criteria to decide whether and when alternatives within U.S. GAAP are warranted for private companies. Based on those criteria, the PCC reviews and proposes alternatives within U.S. GAAP to address the needs of users of private company financial statements. These U.S. GAAP alternatives may be applied to those entities that are not public business entities, not-for-profits, or employee benefit plans.

The FASB ASC Master Glossary defines a public business entity as

A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.

  1. a. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
  2. b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
  3. c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
  4. d. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
  5. e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

Considerations related to alternatives for private companies have not been discussed within this guide’s chapter text as of July 1, 2017.

AICPA.org Website

The AICPA encourages you to visit the website at www.aicpa.org and the Financial Reporting Center at www.aicpa.org/frc. The Financial Reporting Center supports members in the execution of high quality financial reporting. Whether you are a financial statement preparer or a member in public practice, this center provides exclusive member-only resources for the entire financial reporting process, and provides timely and relevant news, guidance and examples supporting the financial reporting process, including accounting, preparing financial statements and performing compilation, review, audit, attest or assurance and advisory engagements. Certain content on the AICPA’s websites referenced in this guide may be restricted to AICPA members only.

Select Developments Significant to Readers of This Guide

AICPA’s Ethics Codification Project

AICPA’s Professional Ethics Executive Committee (PEEC) restructured and codified the AICPA Code of Professional Conduct so that members and other users of the code can apply the rules and reach appropriate conclusions more easily and intuitively. This is referred to as the AICPA Ethics Codification Project.

Although PEEC believes it was able to maintain the substance of the existing AICPA ethics standards through this process and limited substantive changes to certain specific areas that were in need of revision, the numeric citations and titles of interpretations have all changed. In addition, the ethics rulings are no longer in a question and answer format but rather, have been drafted as interpretations, incorporated into interpretations as examples, or deleted where deemed appropriate. For example

The revised code was effective December 15, 2014 and is available at http://pub.aicpa.org/codeofconduct. References to the code have be updated in this guide. To assist users in locating in the revised code content from the prior code, PEEC created a mapping document. The mapping document is available in Excel format in appendix D, “Mapping Document,” in the revised code.

Attestation Clarity Project

To address concerns over the clarity, length, and complexity of its standards, the ASB established clarity drafting conventions and undertook a project to redraft all the standards it issues in clarity format. The redrafting of SSAEs (or attestation standards) in SSAE No. 18, Attestation Standards: Clarification and Recodification (AICPA, Professional Standards), represents the culmination of that process.

The attestation standards are developed and issued in the form of SSAEs and are codified into sections. SSAE No. 18 recodifies the “AT” section numbers designated by SSAE Nos. 10–17 using the identifier “AT-C” to differentiate the sections of the clarified attestation standards (AT-C sections) from the attestation standards that are superseded by SSAE No. 18 (AT sections).

The AT sections in AICPA Professional Standards remained effective through April 2017, which is the time by which substantially all engagements for which the AT sections are still effective are expected to be completed. The clarified attestation standards found in AT-C sections are effective for practitioners’ reports dated on or after May 1, 2017.

Note

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Chapter 1
Overview of the Investment Company Industry