Audit Risk
New standards have been issued for assessing and responding to audit risk in financial statement audits. The new standards became effective on or after December 15, 2006. These new standards are intended to make sure that auditors have “sufficient knowledge of internal control to plan the audit. In addition, auditors need to understand how financial statement assertions should be linked to risks, internal controls, and application of audit procedures and conclusions.
The Audit Risk Standards:
- SAS no. 104, Amendment to Statement on Auditing Standards No. 1 Codification of Auditing Standards and Procedures (“Due Professional Care in Performance of Work”)
- SAS no. 105, Amendment to Statement on Auditing Standards No. 95, Generally Accepted Auditing Standards
- SAS no. 106, Audit Evidence
- SAS no. 107, Audit Risk and Materiality in Conducting an Audit
- SAS no. 108, Planning and Supervision
- SAS no. 109, Understanding the Entity and Its Environment and the Risks of Material Misstatement
- SAS no. 110, Performing Audit Procedures in Response to Assesses Risks and Evaluating the Audit Evidence Obtained
- SAS no. 111, Amendment to Statement on Auditing Standards No. 39, Audit Sampling
- SAS no. 112 Communication of Internal Control Related Matters Identified in an Audit
- SAS no. 115 Communication of Internal Control Related Maters Identified in an Audit (New)
More information on the Statements on Audit Standards is available from AICPA.org.
Financial Statement Assertions means that account balances:
- Have to Exist
- The Rights and Obligations need to be documented
- The Transactions must be complete and Accurate
- Valuations and Allocation must be documented and reasonable
- Balances must be properly presented and disclosed in the financial statements
Some conditions and events may have higher risk. These conditions are spelled out in a couple of places. Appendix C of Risk Assessment Standards: SAS No. 109 contains a list of conditions and events that indicate areas of potential material misstatement. A summary of Appendix C is available as a downloaded.
Understanding the Entity and Its Environment is critical. This is documented in SAS No. 109. Appendix A lists the factors that need to be considered in evaluating the control environment of an entity. SAS No. 109 is available as a download.
Finally the PCAOB (Public Company Accounting Oversight Board) issued a bulletin entitled Staff Audit Practice Alert No. 3 dealing with audit considerations in the current economic environment. While some of you may not be auditing publicly traded companies, the advice contained in this alert is sound and is applicable to audits of non-publicly traded companies.
Of particular importance is the elevated risk of fraud which is heightened due incentive and pressure to commit a fraudulent act. Also, if internal controls are weak, there is greater opportunity because of turbulence in the economy. This makes evaluation of audit risks even more important. The alert is full of guidance on audit risk, internal control weaknesses, auditing accounting estimates, auditing accounting disclosures, fair market accounting and other issues. Practice Alert No. 3 is available as a download.
The current economic environment is placing greater focus on the ability of business to operate as a going concern. This issue is currently covered in AU 341. SAS No. 59 provides directions on to currently assess going concern issues in financial statement audits. One of the key considerations was the ability to continue operating for a period of 12 months. The FASB has issued an exposure draft which will require management disclosures if there is substantial doubt as to a company’s ability to continue as a going concern. The bright-line time horizon of 12 months from the end of the reporting period would be extended and not be limited to 12 months.
When management is aware in making its assessment, of material uncertainties that could cast substantial doubt on the ability of the company to continue as a going concern, they would be required to disclose these uncertainties. This issue is no longer going be an auditor’s responsibility; it is being shifted to management and a component of FASB’s Codification on accounting standards. This exposure draft is an element of the move toward adopting international financial reporting standards (IFRS). The exposure draft is available as a download.
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