Brown Smith Wallace

Overview of New Standards and Key Auditing Changes

The Auditing Standards Board, which is the standards-setting body that governs auditors on non-public entities, has passed a sweeping set of new standards that rewrite many of the fundamental principles of a financial statement audit for non-public entities.

Though not as extensive as the rules for public companies, these new standards parallel many of the key aspects of the Sarbanes-Oxley legislation that public companies have had to comply with in recent years. As a direct result of Enron and other recent corporate scandals, the main objective of the new standards is to strengthen and maintain the integrity of the independent financial statement audit.

We support this objective. We also believe that the new standards will benefit all stakeholders in the financial reporting process -- those who prepare financial information, those of us who provide assurance on the reliability of that information and those who use the information to make decisions about your business.

These new rules are intended to enhance the auditors’ application of the audit risk model and will require a more in-depth understanding and documentation of your overall operations, business objectives and strategies and the risks associated with achieving these objectives. Additionally, the new standards require us to perform a more thorough evaluation of, and testing related to, your key internal processes and related internal controls.

SAS No. 104 – Due Professional Care in the Performance of Work

Requires the auditor to plan and perform the audit to obtain sufficient appropriate audit evidence in an attempt to reduce overall audit risk to a low level.

KEY CHANGE

Auditors can no longer assess risk at a high level and then automatically turn to substantive procedures to conduct the audit without appropriate documentation and testing of the entity level controls and key processes within your organization.

SAS No. 105 – Generally Accepted Auditing Standards

Expands the scope of the audit primarily to recognize that audit procedures are performed to obtain the understanding on which the auditor's risk assessments are based.

KEY CHANGE

Generic audit work programs will no longer be appropriate for most engagements.

SAS No. 106 – Audit Evidence

Provides the auditor with expanded guidance, concepts and definitions for audit evidence and relevant assertions; discusses qualitative aspects related to sufficiency and appropriateness of audit evidence and describes various additional audit procedures and discusses why they should be performed.

KEY CHANGE

Greatly reduces the auditor’s ability to rely upon representations from management. Increases the auditor’s responsibility to observe and test information supporting management representations.

SAS No. 107 – Audit Risk and Materiality in Conducting an Audit

Provides the auditor with guidance on how to consider audit risk and materiality when performing an audit of financial statements in accordance with generally accepted accounting principles.

KEY CHANGE

Similar to SAS No. 104, auditors can no longer automatically turn to a substantive based audit; they must assess control risk and test the effectiveness of internal controls, where appropriate.

SAS No. 108 – Planning and Supervision

Establishes standards and provides guidance applicable to auditor planning and supervision. Planning should begin with engagement acceptance and continue throughout the audit. An overall audit strategy should be developed encompassing nature, timing and extent, with an understanding of the entity environment, including its internal controls.

KEY CHANGE

This will require an increase in our planning and documentation time prior to your actual year end, essentially requiring us to be on-site for interim work before your year end.

SAS No. 109 – Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement

Pertains to the auditor obtaining sufficient understanding of the entity and its environment, including its internal control and the assessment of risk as it pertains to the financial statements.

Provides that the auditor should:

1. Assess risk procedures and sources of information about the entity and its environment, including internal control
2. Understand the entity and its environment, including its internal control
3. Assess the risks of material misstatement
4. Provide adequate documentation to support conclusions.

The auditor should consider the following aspects in the overall assessment:

1. Industry, regulatory and other external factors
2. Nature of the entity
3. Objectives and strategies and the related business risks that may result in a material misstatement
4. Measurement and review of the entity's financial performance
5. Internal control, which includes the selection and application of accounting policies.

KEY CHANGE

Auditors should perform increased inquiries of management and others within the entity, analytical procedures and/or observation and inspection. Auditors are also required to have an internal brainstorming session to discuss the risk of financial statement misstatements. In addition, auditors must evaluate the design of internal controls and determine whether these controls have been implemented, which will require more planning time and related testing of controls.

SAS No. 110 – Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained

Design and perform audit procedures so the nature, timing and extent are responsive to the assessed risks of material misstatement at the relevant assertion level. Provides a clear linkage between the auditor's procedures and the overall risk assessments.

KEY CHANGE

Essentially, results in each financial statement audit requiring tailored audit programs and procedures, specific to each client.

SAS No. 111 – Audit Sampling

Provides the auditor with amended and enhanced guidance surrounding audit sampling and auditor judgment in planning a sample for tests of details.

KEY CHANGE

Will likely increase the amount of testing performed on audit engagements.

SAS No. 114 – Auditor's Communication with Those Charged with Governance

This encompasses "person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity," including overseeing the financial reporting process...and encompasses the term "board of directors" or "audit committee". Relates to all of the entity’s governance bodies, including trustees, partners, board of directors. Addresses information to be obtained from those governance bodies. Also clarifies auditor responsibilities, including scope and timing of audit, communication of significant audit findings and the communication process.

KEY CHANGE

Supersedes SAS No. 61 and addresses all specified matters to be addressed to individuals charged with an entity’s governance.