The American Institute of CPAs (AICPA) released an exposure draft of seven proposed Statements on Auditing Standards (SASs) related to audit risk. The proposed standards are designed to enhance the auditor's use of the audit risk model and improve the effectiveness of audits. They are also likely to increase the overall work effort by the audit team, particularly for new engagements and when first implemented on continuing engagements.
The proposed standards would require:
- More in-depth understanding of the entity and its environment, including its internal control, to identify the risks of material misstatement in the financial statements and what the entity is doing to mitigate them.
- More rigorous assessment of the risks of a material misstatement of the financial statements based on the above understanding.
- Improved linkage between the assessed risks and the nature, timing, and extent of audit procedures performed in response to those risks.
The proposals were developed jointly with the International Auditing and Assurance Standards Board of the International Federation of Accountants. Key changes in audit practice that the proposed standards are expected to achieve are summarized in the document. Among other things, the key changes include greater emphasis on the entity's risk assessment process and on the testing of disclosures. Documentation requirements are also significantly expanded.
The proposed effective date is for audits of financial statements for periods beginning on or after December 15, 2004.