Audit Standards Change This Year

by

Jackie H. White, CPA

Member of the Firm

The trickle down effect of the Enron scandal and related Sarbanes-Oxley legislation has inevitably made its way to the world of privately-held companies, non-profits, condominiums and homeowners associations, and government audits.  As a result, the American Institute of Certified Public Accountants (AICPA) issued eight new auditing standards – the Audit Risk Suite of Standards commonly referred to as SAS 104-111. 

The Audit Risk Suite of Standards was effective for years beginning after December 15, 2006, or 2007 calendar year end audits.  These standards are the most comprehensive set of new audit standards released in the last 20 years.  Though less in scope than the rules impacting public company audits, these new standards parallel many of the key themes of the Sarbanes-Oxley Act, including new requirements that auditors, amongst other items, are required to:

• Obtain a more in-depth understanding of the company, its control environment, key internal controls over significant classes of transactions, and upper management’s oversight role of financial reporting;
• Perform more rigorous assessment of the risks of where and how the financial statements could be materially misstated;
• Improve the linkage between the risk assessment process and the specific audit procedures performed; and
• Increase communications with management and governing bodies before, during, and after the audit;

The primary objective of these standards is to strengthen and enhance the quality of the audit, an objective that Witt Mares fully supports, and their implementation is mandatory.  These standards are also expected to allow auditors to provide more thorough input to organizations related to business operations, internal controls, and fraud risks.  We believe these standards benefit all stakeholders in the financial reporting process, especially those who rely on audited financial statements in making decisions about a company or organization.

Following are some key areas in which you can expect to see auditors paying more attention in making their risk assessments this year:

• Key controls over significant classes of transactions;
• Assessments of the risks of fraud within the company and the controls the company has in place to identify and respond to such risks;
• Understanding management’s process and controls for reporting financial results;
• Assessing management’s attitude conveyed to people throughout the organization with respect to internal control and financial reporting;
• Understanding how management monitors the effectiveness of their systems of internal controls and how they determine when and what changes are needed to enhance the effectiveness of those systems.

The impact of these standards on management and leaders of the organization is expected to be felt primarily through increased time from company personnel and increased time from the auditors.  Industry experts are estimating an increase in annual audit fees, dependent on the size of the organization, and other factors.  Specifically, the new standards may require the auditors to:

• Request information and documentation from their clients that they did not ask for in the past;
• Formally report to their clients’ internal control deficiencies and other matters that they did not formally report in the past.
• Ask their clients to make adjustments to the financial statements that they may not have made in the past.

Ways in which companies’ staff can assist in making the audit process as efficient as possible in an effort to minimize the impact include:

• Ensure that your documentation of internal controls is updated and thorough; and
• Provide as much information in usable electronic formats (for example Excel and Word)

Witt Mares has devoted and continues to devote substantial internal and external resources to redesigning our audit process.  Our engagement teams will work to ensure that more details are provided about how that approach will specifically affect our clients’ company or organization.