Auditors are being held to new standards: the AICPA Statement on Auditing Standards (SAS) Nos. 104-111. These standards, collectively called the risk assessment standards, go into effect for financial statement audit periods beginning on or after December 15, 2006.
To help minimize fee increases for our audit clients, LarsonAllen revised our audit process to be as efficient as possible while still complying with professional standards. You can help by being prepared for your auditors.
What the new
standards mean |
What you can do |
How LarsonAllen
can help |
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Expanded audit procedure requirements
SAS 104-111 establish standards and provide guidance concerning the auditor’s assessment of the risks of material misstatement (whether caused from error or fraud) in a non-issuer (e.g. an entity that does not issue securities in the public markets) financial statement audit. In summary, auditors are required to:
- Gain a more in-depth understanding of the entity and its environment, including its internal control, to identify the risks of material misstatement in the financial statements and what the entity is doing to mitigate such risks
- Make a more rigorous assessment of the risks of where and how the financial statements could be materially misstated based on the more in-depth understanding of the entity and its environment
- Improve the linkage between the assessed risks and the nature, timing, and extent of audit procedures performed in response to the identified risks
Though less in scope than the rules for public companies, the risk assessment standards for non-issuer financial statement audits parallel many of the key themes of the Sarbanes-Oxley Act of 2002 (SOX 404). There are approximately 25 new unconditional or “must” requirements and more than 350 presumptively mandatory or “should” requirements in the risk assessment standards.
Changes in the audit approach
Because the risk assessment standards demand a higher level of performance, there will be changes in the way audits are performed. The implementation of these standards will result in an overall increase in the effort by both your organization and the audit team. Your team can assist in making the engagement as efficient as possible.
Additional corroborating procedures, including inquiry, observation, and inspection, as well as additional documentation requirements are included in the risk assessment standards. Auditors are required to document their understanding of the five components of your internal control:
- Control environment
- Risk assessment
- Information and communication
- Monitoring
- Control activities
Due to the increased importance of internal control, you will likely experience the following changes in the audit process:
- Auditors will request information and documentation you were not required to provide in the past
- Auditors may request you make adjustments to the financial statements that you have not made in the past
- Auditors may formally report internal control deficiencies that were not reported in the past
Performance of more extensive procedures will take additional time, and your audit fees will increase. Being prepared will help minimize the increase.
Understand your responsibilities
Client management including CEOs, CFOs, and other financial leaders are responsible for:
- Preparing accurate, complete, and fairly stated financial information and financial statements
- Designing, implementing, and maintaining internal control to manage risk and prevent and detect fraud
Those charged with governance, such as audit committees and boards have fiduciary responsibilities:
- Overseeing the financial reporting process
- Ensuring the appropriate governance policies and procedures are established
- Evaluating management’s efforts to comply with policies
What you can do to make your audit more efficient
Develop or enhance existing internal control documentation and identify the key controls to help assess the appropriateness, effectiveness, and cost-benefits of your internal control. You’ll gain an increased understanding of your entity’s risks and how your internal control reduces those risks. This documentation will also better prepare you for your auditors.
Complete this documentation as soon as possible (before year-end).
How can LarsonAllen help?
Assurance clients
LarsonAllen offers best practice tools and services to help entities prepare for their audit. Experienced auditors can assist our assurance clients:
- Determine those areas in which to start documentation efforts
- Create flowcharts to identify the flow of transactions, risk areas, and key controls
- Document internal control processes and procedures
Non-assurance clients
For non-assurance clients, we offer consulting services including risk assessments, identification of key controls, and assistance in the preparation of documentation for their auditors. To remain independent, we cannot offer these services to our assurance clients.
Best practice tools
Download samples of our best practice tools for documenting transaction flows and key controls for accounts payable:
AP Control Matrix
Industry-specific tools are also available.
Contact us for more information.
Auditors are being held to new standards: the 
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