Auditing Special Purpose Frameworks: Tests of Balances

Read more from Larry Perry here and in the Today's World of Audits archive.

AU-C Section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks, paragraph .A13, states: "An AU-C section is relevant to the audit [of special purpose frameworks] when the AU-C section is in effect and the circumstances addressed by the AU-C section exist."

In previous articles I discussed AU-C sections relevant to engagement planning activities. Future articles will focus on how to perform tests-of-balances procedures and prepare audit documentation as required by the applicable Clarified Auditing Standards. As auditing procedures are discussed for each major financial statement classification, the policies and procedures of the AICPA's Financial Reporting Framework for Small and Medium-Size Entities that differ from U.S. GAAP will be considered.

Auditing Standards
In previous articles in this series I discussed understanding and formulating audit strategies. Audit strategies are based on the Clarified Auditing Standards issued by the Auditing Standards Board of the AICPA, specifically the risk assessment standards. These standards indicate that all risk assessment procedures, tests of controls, systems walk-through procedures, analytical procedures, and tests-of-balances procedures produce substantive evidence that enables an auditor to evaluate relevant financial statement assertions. Risk assessment, based on an auditor's professional judgment and professional skepticism, is required on all audits to indentify potential risks of material misstatement due to error or fraud. Effective risk assessment enables an auditor to design audit responses (procedures) that will mitigate significant risks due to error or fraud.

Auditing Financial Statement Classifications
Learning "how" to audit each major financial statement classification is mainly learning which auditing procedures should be performed. and to what extent they should be applied. The amount of audit work necessary will depend on the assessed levels of risk of material misstatement (RMM) at both the financial statement and classification (assertion) levels. These assessments were discussed in previous articles in this series.

The Impact of Risk at the Financial Statement and Assertion Levels
The subjective level of risk at the financial statement level and the assertion or account classification level—best described as high, moderate, or low—will affect the audit strategy, including the nature, extent, and timing of tests-of-balances procedures and the staffing and supervision of the engagement.

Procedures: High risk at the financial statement and assertion levels calls for more reliable procedures, increased sample sizes, or greater audit coverage of the dollar amount of account balances and performing procedures as of the client's fiscal yearend. Low risk will permit less reliable procedures, smaller sample sizes or lesser audit coverage of account balances and performing some procedures before yearend.

Staffing and supervision: Responses to high risk at the financial statement and assertion levels may include assigning more experienced engagement personnel and/or increased engagement leader supervision. Low risk will permit less experienced personnel and/or less leader supervision.

Assigning personnel to engagements that have experience commensurate with assessed levels of risk is a requirement of both auditing standards and quality control standards. Audit engagement files should include documentation of these assignment decisions during planning.

In future articles, I'll discuss the accounting principles under the FRF for SMEs, illustrative test of balances audit programs, the effects of assessed levels of risk on audit procedures, illustrative audit documentation, and key auditing issues related to these material financial statement classifications:

  • Cash
  • Accounts receivable
  • Inventories
  • Investments
  • Fixed assets
  • Goodwill and intangibles
  • Accounts payable and accrued expenses
  • Income taxes
  • Long-term debt, commitments, and contingencies
  • Revenues
  • Payroll and operating expenses

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