Major auditing iniatives coming to fruition; new risk model, standard on fraud among them.

A major effort has been under way to enhance and update the fraud standard and the framework for the audit process, and results of that labor are about to be unveiled. The Auditing Standards Board took on the challenge to adapt the audit to today's business environment, to improve the audit's effectiveness for investors and other users, and to promote greater convergence between U.S. and international auditing standards.

More specifically, the ASB's Risk Assessments Task Force, a joint task force with the International Auditing Practices Committee, set out to review the auditor's consideration of the risk assessment process in the auditing standards, including the necessary understanding of a client's business and the relationships among inherent, control, fraud and other risks. Simultaneously, the ASB is reviewing Statement on Auditing Standards No. 82, Consideration of Fraud in a Financial Statement Audit. Some participants in the process expect the final standards to have an effect on the conduct of audits that has not been seen since the "Expectation Gap" standards were issued in 1988.

Analyzing Risks in a Financial Statement Audit

Based on different research studies, it was found that an important trend in the evolution of audit methodologies is a more explicit consideration of the various risks that may give rise to a material misstatement of the financial statements. The risk of a material mis-statement depends upon the nature and circumtances of the entity, its environment, its internal controls as well as other factors that the audit is designed to consider. The characteristics of specific risks and how effectively management mitigates those risks through appropriate responses or controls determines the nature, timing and extent of auditing procedures. This project will provide standards and guidance to auditors to help them better identify and analyze risks of material mis-statements, whether caused by error or fraud, as well as procedures for obtaining sufficient and appropriate audit evidence in light of the auditor's risk assessments. The ASB hopes to vote out exposure drafts of these new standards later this summer and fall.

Improved Fraud Guidance

On the fraud front, the ASB sponsored four academic research projects to study the impact of SAS No. 82 on practice, and to determine whether further enhancements would be appropriate. Simultaneously, the Public Oversight Board's Panel on Audit Effectiveness was conducting its own review and evaluation of the way independent audits are conducted. In its highly publicized report issued in Aug. 2000, the Panel concluded the audit risk model is appropriate but needs enhancing and updating.

The Panel also studied the effectiveness of audits in detecting fraud. Consistent with the findings of ASB researchers, the Panel found, among other things, that the response process called for by SAS No. 82 falls short in providing guidance on directing the auditor to the types of procedures that respond to fraud risk factors.

Thus, the fraud task force has carefully considered these recommendations and is revising the fraud standard to be responsive to the research findings and the Panel's recommendations. At its Feb. meeting, the ASB is expected to vote out an exposure draft that would revise SAS No. 82. The ED will be posted to www.aicpa.org upon issuance.

Other ASB Projects

A project dealing with reviews of quarterly financial statements is also in process and an exposure draft modifying SAS No. 71, Interim Financial Information, will be released later this year. Additionally, two standards in response to the report of the Panel on Audit Effectiveness, SAS No. 95, Generally Accepted Auditing Standards, and SAS No. 96, Audit Documentation, were completed and issued in Dec. 2001 and Jan. 2002, respectively.

Continue to watch The CPA Letter for much more on these important auditing initiatives in the coming months.