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March 2012 PCAOB Risk Assessment Standards

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Public Companies: March 2012 Brief on PCAOB Risk Assessment Standards

The Public Company Accounting Oversight Board (PCAOB) has issued, and the SEC has approved, eight Risk Assessment Standards related to audits of financial statements. The effective date is for audits of fiscal years beginning on or after December 15, 2010, and will impact all audit reports issued in 2012.

The standards cover the entire audit process, from initial planning activities to forming opinions for the auditor’s report, and apply to both integrated audits and audits of financial statements only. The standards also establish guidance on audit risk, planning and supervision, consideration of materiality, identification of risks of material misstatement, and responses to those risks.

The primary objective of these standards is as follows:

  • Audit Risk – In order to form an opinion on the financial statements, the auditor must obtain reasonable assurance that the financial statements are free of material misstatements due to error or fraud. In order to obtain reasonable assurance, the auditor must reduce audit risk to an appropriately low level by applying due professional care in performing the audit and obtaining sufficient appropriate audit evidence.
  • Audit Planning – In planning the audit, the auditor is required to establish an overall strategy for the engagement and develop an audit plan, which includes planned risk assessment procedures and planned responses to the risks of material misstatement. This is required to be conducted in an effective manner and does not end at a particular point in time, but rather changes and evolves with the audit.
  • Supervision of the Audit Engagement – The engagement partner is responsible for all aspects of the audit. This includes supervision of engagement team members and also extends to the work of specialists, other auditors, internal auditors and others who are involved in testing controls. This supervision is required to ensure that the audit is performed as directed, supports the conclusions reached and is in accordance with PCAOB standards.
  • Consideration of Materiality in Planning and Performing an Audit – The concept of materiality shall be appropriately applied in planning and performing audit procedures. If there are certain accounts or disclosures, which have a substantial likelihood that misstatements of amounts less than the materiality level established for the financial statements as a whole would influence the judgment of a reasonable investor, the auditor should evaluate whether distinct materiality levels for those accounts or disclosures would be appropriate. Those materiality levels should be used to plan the nature, timing and extent of the audit procedures for those accounts or disclosures.
  • Identifying and Assessing Risks of Material Misstatement – The auditor is required to identify and appropriately assess the risks of material misstatement, thereby providing a basis for designing and implementing responses to the risks of material misstatement. The risk assessment procedures should provide a reasonable basis for identifying and assessing the risks of material misstatement, whether due to error or fraud, and designing further audit procedures.
  • The Auditor’s Response to Material Misstatement – The auditor’s objective is to address the risks of material misstatement through appropriate overall audit procedures. The responses to those risks will include, but are not limited to, the use of professional skepticism, modification of audit strategy during the audit, providing the appropriate supervision, and incorporating an element of unpredictability of audit procedures.
  • Evaluating Audit Reports – The auditor is to evaluate the results of the audit to determine whether the audit evidence obtained is sufficient and appropriate to support the opinion to be expressed in the auditor’s report. When evaluating the results of an audit, the auditor should consider whether the accumulated results of audit procedures and other observations affect the assessment of the fraud risks made throughout the audit, and whether the audit procedures need to be modified to respond to those risks.
  • Audit Evidence – The auditor is required to obtain appropriate, relevant and reliable audit evidence in planning and performing the audit, to sufficiently support the opinion expressed in the auditor’s report.

If you are interested in discussing any part of these standards, or want to further understand their impact, please contact:

Harry DeVerter, Managing Partner, at 215- 979-8802; or Karen Vento, Partner, at 215-797-8813.

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