New Audit Standards on Risk Assessment
audits, reviews and compilations; risk services
By: Bhavna Negandhi
For audits of Fiscal Years beginning on or after December 15, 2010, the PCAOB (Public Company Accounting Oversight Board) 1 adopted eight new standards, Auditing Standards (AS) Nos. 8 through 15. These standards provide directives for auditors on how to conduct risk-based audits. The standards are based on a similar set of standards issued in 2007 by the AICPA for private companies and cover audit procedures performed throughout the audit from planning to evaluation of audit results:
- Components of audit risk
- Auditor’s responsibility in considering audit risk
- Planning the audit with risk in mind and considering materiality at that time
- Supervising the audit effectively
- The process of identifying, information gathering, and assessing risk of material misstatement
- Responding to those risks
- Evaluating audit evidence with risk in mind
- Evaluating results of entire audit process
The following are also specifically addressed:
- Guidance on how to address risk of material misstatements in financial statements
- How to respond to identified risks
- How to evaluate related audit conclusions
Auditors must inquire into what the effect of the prior period uncorrected misstatement would be on the current risk assessment. The scope of materiality has been expanded to subsidiaries, branches, and overseas locations as well. Noteworthy is the fact that the guidance in these new standards is closely aligned to AS 5 – Internal Control Over Financial Reporting.
Noteworthy is the fact that the guidance in these new standards is closely aligned to AS 5 – Internal Control Over Financial Reporting.
Such quality audits that promote significant risk assessment will minimize the risk that the auditor will fail to detect material misstatements and would thus increase investor confidence in the financial statements. Stay tuned for the next article on Risk Assessment that will focus on the fraud aspect of audits addressed in the new Auditing Standards and what specific questions an auditor must ask to ascertain the likely sources of potential misstatements of a given significant account or disclosure.
1. Link to the PCAOB site where the standards are published: http://pcaobus.org/Standards/Auditing/Pages/default.aspx