Implementing the New ASB Risk Assessment Audit Standards

By McConnell, Donald K., Jr.; Schweiger, Charles H. | The CPA Journal, June 2007 | Go to article overview

Implementing the New ASB Risk Assessment Audit Standards


McConnell, Donald K., Jr., Schweiger, Charles H., The CPA Journal


The Auditing Standards Board (ASB) issued its long-anticipated risk assessment audit standards in March 2006: Statements on Auditing Standards (SAS) 104 through 111, which bring sweeping changes and provide definitive guidance for the conduct of audits of nonpublic companies. The primary objective of these standards is to enhance auditors' application of the audit risk model by requiring auditors to obtain a more in-depth understanding of a company in order to better identify risks of material misstatement of financial statements. This, in turn, should lead to an improved linkage between assessed risks and the nature, timing, and extent of audit procedures performed in response to those risks. These standards are effective for periods beginning on or after December 15, 2006 (earlier application is permitted), to allow auditors adequate lead time to revise their audit strategies, where necessary, and to assimilate the breadth and magnitude of these new standards.

The following is an overview of the new risk assessment standards, focusing on the new provisions of SAS 109, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, and SAS 110, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained.

Overview of the New Provisions

The new standards bring myriad changes in terminology, materiality considerations, evidence concepts, the audit assertions framework, and audit planning issues. Even the focus of the audit process has changed, based upon revisions to the second standard of fieldwork. The following are some of the more significant changes and revisions.

A number of changes in terminology are intended to resolve differences between the standards of the ASB, the International Auditing and Assurance Standards Board's International Standards on Auditing (ISA), and the Public Company Accounting Oversight Board (PCAOB). Audit evidence is the new term for evidential matter. The term audit procedures replaces auditing procedures', substantive tests are now called substantive procedures', and reliability replaces validity in the context of audit evidence. The term reduce replaces limit or restrict in the context of the audit risk model, while implemented replaces placed in operation in the context of internal controls analysis. The term significant deficiencies replaces reportable conditions. The new standards also clarify that the auditor addresses relevant assertions (those having meaningful bearing on transactions, accounts, and disclosures), as opposed to just assertions. For example, valuation assertion would ordinarily not be relevant to the audit of cash, absent foreign currency translation circumstances.

SAS 106 replaces the term sufficient, competent evidence with sufficient, appropriate audit evidence. The five management assertions are now replaced by 13 assertions (see Exhibit 1) in three categories: assertions about classes of transactions and events for the period under audit, assertions about account balances at period end, and assertions about presentation and disclosure. Audit procedures have been reclassified as follows:

* Inspection of records or documents

* Inspection of tangible assets

* Observation

* Inquiry

* Confirmation

* Recalculation

* Reperformance

* Analytical procedures.

SAS 107 makes the consideration of audit risk and materiality for financial statement purposes an unconditional requirement, as that term is newly defined in SAS 102, rather than merely presumptively mandatory. An auditor must consider audit risk and materiality for the purposes of:

* Determining the nature and extent of risk assessment procedures;

* Identifying and assessing the risks of material misstatement;

* Determining the nature, timing, and extent of further audit procedures; and

* Evaluating whether the financial statements are fairly presented. …

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