|
ASB Update as of February 1,
2002
Ray Whittington,
DePaul University
Academic Member of the Auditing Standards Board
In
this update, I will focus on two significant proposed standards:
the revision of SAS No. 82, Consideration of Fraud in a Financial
Statement Audit, and a new proposed standard on “Auditing
Fair Value Measurements and Disclosures.” As always, please
contact me if you have any questions, comments, or suggestions.
Revision
of SAS No. 82
At its February meeting the ASB will likely approve the issuance
of an exposure draft of a proposed standard to replace SAS No. 82.
The major requirements of this proposed standard are as follows:
| 1. |
As a part
of audit planning, have an engagement personnel discussion regarding
the risks of material misstatement due to fraud. Arising out
of a recommendation of the Panel on Audit Effectiveness, the
purpose of this requirement is for the audit team to consider
how and where the entity’s financial statements might be
susceptible to material misstatement due to fraud and to reinforce
the importance of adopting an appropriate mindset of professional
skepticism. For practical reasons, the discussion is not required
to be face-to-face—it may take place by conference call
or electronically. However, clearly it should be designed to
be interactive. |
| 2. |
Obtain
information needed to identify the risks of material misstatement
due to fraud by:
| •
|
Making
inquiries of management and others within the entity about
the risks of fraud. |
| •
|
Considering
the results of analytical procedures performed in planning
the audit. |
| •
|
Considering
fraud risk factors. The proposed standards reclassify
the fraud risk factors based on the three conditions necessary
for fraud to exist: an incentive/pressure to perpetrate
fraud, an opportunity to carry out the fraud, and
an attitude/rationalization to justify the fraudulent
action. |
| • |
Considering
certain other information, such as the discussion among
team members in planning the audit and information from
the results of procedures relating to the acceptance and
continuance of clients. |
|
| 3. |
Identify
fraud risks. |
| 4. |
Assess
the identified risks after taking into account an evaluation
of the entity’s related controls and programs. |
| 5. |
Respond
to the results of the assessment in the following ways:
| • |
An
overall response, such as assigning individuals with specialized
skill and knowledge to the engagement, or adding an element
of unpredictability to the performance of audit procedures. |
| • |
A
response to identified risks that involve modification
of the nature, timing, and extent of the procedures to
be performed. |
| • |
Perform
certain procedures to further address the risk of material
misstatement due to fraud involving management override
of controls. These represent the forensic-type procedures
that arose from the recommendations of the Panel on Audit
Effectiveness. The proposed standard states that such
procedures are performed on audits of all public entities
and would be performed on nonpublic companies unless the
auditor concludes that there is little or no incentive
for management to override controls. The procedures include
examining journal entries and other financial statement
adjustments, performing a retrospective review of significant
accounting estimates for evidence of biases, and evaluating
the business rationale for significant unusual transactions
that come to the auditor’s attention. The ASB will
also consider at its February meeting requiring the performance
of analytical procedures related to revenue. These procedures
were selected based on consideration of the ways in which
management fraud has been perpetrated in prior cases. |
|
| 6. |
Evaluate
the results of audit tests to identify indications of fraud.
This section emphasizes the need to consider events and circumstances
that may be indicative of fraud throughout the audit. |
| 7. |
The standard
also includes a series of new documentation requirements related
to the above requirements. |
This is a significant proposed standard that has greatly benefited
from academic research on fraudulent financial reporting. I encourage
your comments on the Exposure Draft.
Auditing
Fair Value Measurements and Disclosures
In January of this year the ASB posted on the AICPA web site an
invitation to comment on a proposed standard being exposed by the
International Auditing Practices Committee. The proposed standard
titled “Auditing Fair Value Measurements and Disclosures”
provides general auditing guidance in situations in which the accounting
basis for measurement or disclosure of a financial statement item
is some form of fair value. After receiving input from the invitation
to comment, the ASB intends to develop the document into a proposed
Statement on Auditing Standards. It is expected that the new standard
would become an umbrella standard for auditing fair value measurements
and disclosures, and would be supported by specific standards for
certain financial statement elements such as SAS No. 92, Auditing
Derivative Instruments, Hedging Activities, and Investments in Securities.
This
represents the first time that the ASB has developed a standard
in this manner. However, it will probably not be the last as the
ASB attempts to move toward harmonization of auditing standards.
The standard is clearly important given the shift in the accounting
model in the United States and other countries to fair values, and
I encourage your comments at this stage of the process where you
are in a position to influence both sets of standards.
Back to Contents Page
|
