Guidance for Audit Standards for Nonissuers That Took Effect on or after December 15, 2006

EXECUTIVE SUMMARY * The Auditing Standards Board issued eight standards with new guidance for assessing risks and controls in financial statement audits. Auditors consider risk and also determine a materiality level for the financial statements taken as a * Auditors are required to obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material * Auditors develop audit plans in which they document the audit procedures that are expected to reduce the audit risks to acceptably low levels. * To rely on the effectiveness of company internal controls, the auditor should test the controls, but only after assessing that the design is effective. * The auditor may rely on control tests and other evidence from prior audits when the audit evidence and related subject matter have not changed. * At the end of an audit, the auditor evaluate whether the financial statements taken as a whole are free of material misstatements. The auditor accumulate all the known and likely misstatements, other than trivial ones, and communicate them to the appropriate level of management. * In assessing deficiencies of internal controls to identify the severity, the auditor should focus on issues such as inadequate documentation and unqualified employees who lack the skills to make the required GAAP accounting computations, accruals or estimates, or to prepare the company financial statements. ********** This is the second of two articles describing the requirements of new guidance from the Auditing Standards Board (ASB). The first article discussed the process of assessing risks and controls leading to the concept of the risk of material misstatement (see Assessing and Responding to Risks in a Financial Statement Audit, JofA, Jul. 06, page 43). This article discusses how the auditor responds to the risk of material misstatement in designing and performing audit procedures. The eight standards listed here are designed to help plan and perform audit procedures that will address assessed risks, enhance the auditor's response to audit risk and materiality, facilitate planning and supervision and clarify the concept of audit evidence. As noted in the new standards, auditors consider audit risk and determine a materiality level for the financial statements taken as a whole. Auditors also must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement. DESIGNING FURTHER AUDIT PROCEDURES Once the risk of material misstatement has been assessed for major accounts, transaction streams and disclosures, the auditor develop an audit plan in which he or she documents the audit procedures that, when performed, are expected to reduce audit risk to an acceptably low level. As the auditor is assessing risk and the design and implementation of internal controls, he or she should determine any overall responses to address risks of material misstatement at the financial statement level, and tailor audit plans (that is, audit programs) to be responsive to the identified risks of material misstatement at the relevant assertion level. The application of a standard audit program of procedures on all engagements will generally not be responsive to the risks of material misstatement, and is not an appropriate response under the new standards. Because the auditor should document the linkage of the risks, controls and further audit procedures by assertion, the audit plan also should consider the risk of material misstatement at the assertion level. The auditor should design auditing procedures to achieve the objective of a high level of assurance that the financial statements are free of material Those further auditing procedures consist of either tests of controls or substantive procedures. …