Be Prepared! What Management Accountants Need to Know about the New Audit Risk Assessment Standards

By Colbert, Janet L. | Strategic Finance, April 2007 | Go to article overview

Be Prepared! What Management Accountants Need to Know about the New Audit Risk Assessment Standards


Colbert, Janet L., Strategic Finance


Management accountants develop and contribute information critical to financial statements, which outside auditors then use to conduct their independent examination. The American Institute of CPAs (AICPA) recently issued a package of Statements on Auditing Standards (SASs) that dramatically impact how CPAs plan and perform audits. Known as the Risk Assessment Standards, these eight standards address the concept of audit risk and provide extensive guidance on how the independent auditor should assess risk and apply the audit risk model. They also discuss audit procedures for responding to the assessed risks.

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To help in planning their own work and in anticipating detailed queries from external auditors, management accountants should understand the requirements of the new standards. Since management accountants prepare information that their external colleagues use, these internal experts have a critical impact on the financial statements and the audit engagement. In response to the new standards, management accountants might choose to adjust their own work and might elect to alter and enhance documentation of the work they perform.

The requirements in the new standards enhance the assessment of risks the external auditor makes on every audit engagement. To begin the assessment process, the auditor first obtains an understanding of the client by analyzing the environment that the entity operates in, including its internal controls. Management accountants may be called on to provide information as the auditor performs these steps. Armed with comprehension of the entity, the external auditor makes a rigorous assessment of the material misstatement risks in the financial statements.

After assessing the risks of material misstatements, the auditor develops a response to the risks. That is, the auditor plans procedures that address the risks of material misstatements, explicitly linking those procedures back to the assessed risks.

RISK ASSESSMENT STANDARDS

Here's a closer look at each of the eight standards.

1. Reasonable Assurance, Evidence

SAS No. 104, "Amendment to SAS No. 1, Codification of Auditing Standards and Procedures," discusses the attributes of audit evidence and the concept of reasonable assurance. According to SAS No. 104, the auditor is to obtain sufficient appropriate audit evidence when performing the engagement. The auditor gathers evidence to restrict audit risk to an appropriately low level to support the audit opinion. The low level of audit risk relates to the concept of reasonable assurance. Reasonable implies that the auditor provides a high, although not absolute, level of assurance.

2. Internal Control, Evidence

The second Risk Assessment Standard, SAS No. 105, "Amendment to SAS No. 95, Generally Accepted Auditing Standards," impacts the auditor's work on internal control and, like the previous standard, also addresses audit evidence.

Prior to the Risk Assessment Standards, the auditor was required to gain an understanding of internal control on every audit. The new SAS mandates a broader understanding in which the auditor must gain an understanding of the entity and its environment, as well as the system of internal control. Introduced in SAS No. 105, this point is emphasized in several other SASs in the Risk Assessment group.

Having gained an enhanced understanding of the entity, the auditor uses it for two purposes. First, the understanding aids in the assessment of the risks of material misstatement. Second, the auditor employs the increased understanding to design audit procedures that address those risks.

As auditors perform procedures, they obtain evidence that supports the audit opinion. Before SAS Nos. 104 and 105 were issued, previous guidance required sufficient, competent evidential matter to support the opinion. The new standard amends the terminology, noting that the auditor is to gather sufficient appropriate audit evidence. …

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