E. Statements on Auditing Standards, Risk Assessment

A. Statements on Auditing Standards, Risk Assessment

1. This section covers the following SASs:

a) SAS, Audit Evidence (Redrafted)

b) SAS, Materiality in Planning and Performing an Audit (Redrafted)

c) SAS, Evaluation of Misstatements Identified During the Audit (Redrafted)

d) SAS, Planning an Audit (Redrafted)

e) SAS, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (Redrafted)

f) SAS, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (Redrafted)

2. Supersedes the following:

a) SAS No. 106, Audit Evidence (AICPA, Professional Standards, vol. 1, AU sec. 326)

b) SAS No. 107, Audit Risk and Materiality in Conducting an Audit (AICPA, Professional Standards, vol. 1, AU sec. 312)

c) SAS No. 108, Planning and Supervision (AICPA, Professional Standards, vol. 1, AU sec. 311)

d) SAS No. 109, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (AICPA, Professional Standards, vol. 1, AU sec. 314)

e) SAS No. 110, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (AICPA, Professional Standards, vol. 1, AU sec. 318)

3. Represents the redrafting of SAS Nos. 106–110 to apply the ASB’s clarity drafting conventions and to converge with ISAs.

4. Convergence – The SASs were drafted using the following ISAs as a base:

a) ISA 300 (Redrafted), Planning an Audit of Financial Statements;

b) ISA 315 (Redrafted), Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment;

c) ISA 320 (Revised), Materiality in Planning and Performing an Audit;

d) ISA 330 (Redrafted), The Auditor’s Responses to Assessed Risks;

e) ISA 450, Evaluation of Misstatements Identified during the Audit; and

f) ISA 500 (Redrafted), Considering the Relevance and Reliability of Audit Evidence

5. Effective Date – Effective for audits of financial statements for periods ending on or after December 15, 2012.

6. Background of ASB Risk Assessment Standards

a) Eight SASs (Nos. 104 – 111) known as the Risk Assessment Standards were issued by the ASB in March 2006. They were issued

(1) To provide extensive guidance concerning the auditor’s assessment of the risks of material misstatement in a financial statement audit, and the design and performance of audit procedures whose nature, timing, and extent are responsive to the assessed risks.

(2) Establish standards and provided guidance on planning and supervision, the nature of audit evidence, and evaluating whether the audit evidence obtained affords a reasonable basis for an opinion regarding the financial statements under audit.

b) They

(1) Emphasized the link between understanding the entity (its control, financial, operational and business environment) assessing risks, and designing further audit procedures.

(2) Introduced the concept of risk assessment procedures, which are considered necessary to provide a basis for assessing the risk of material misstatement.

(3) Risk assessment procedures are tests of controls and substantive procedures. With further audit procedures, they provide the audit evidence to support the auditor’s opinion on the financial statements.

c) The auditor should perform risk assessment procedures to gather information and gain an understanding of the entity and its environment, including inquiries, analytical procedures, and inspection and observation.

d) The auditor should document during the planning and performance phases:

(1) Assessed risks and the basis for those assessments and may no longer default to maximum control risk without documenting the basis for that assessment.

(2) How the risk of material misstatement at the financial statement level affects individual financial statement assertions, so that auditors may tailor the nature, timing, and extent of their audit procedures to be responsive to their risk assessment and findings.

The next few blogs will cover the significant changes to each of these new SASs. If you'd like a copy of a modified ASB roadmap that links existing auditing standards with the new redrafted SASs, please send your request to larry@cpafirmsupport.com.