The Proposed Changes to Sarbanes Oxley

March 12, 2013

Accounting & Finance, Business

Currently in the market crisis, the US Public Company Accounting Oversight Board is requesting changes to its auditing standards that describe the rules of any Sarbanes Oxley audit. These new challenges for the auditors are to assess and respond to risks during an financial statement audit.

The audit risk is the material that the auditors express in an inappropriate opinion when the financial statements are misstated. The goal of the audits is not to zero out this risk, but to limit the audit risk to a low level, so that the auditor can provide true reasonable assurance that the financial statements are presented fairly, in all material respects, the financial position, results of operations, and cash flows of a firm.

The proposed changes are:

1st Proposed Auditing Standard (AS) from the PCAOB: Audit Risk in an Audit of Financial Statements
The auditors must plan and perform the audit to obtain reasonable assurance about whether there is material mistatement in the financial statements due to error or fraud. The auditors must applying due professional care and obtaining sufficient appropriate audit evidence

2nd Proposed AS: Audit Planning and Supervision
Planning an audit includes planned risk assessment procedures and responses to the risks of material misstatement. Planning is a continual and iterative process that begins shortly after (or in connection with) the completion of the previous audit.
The auditors should develop a written audit plan that should include a description of the nature, timing and extent of the risk assessment, tests of controls, and procedures that are required to be carried out.

3rd Proposed AS: Identifying and Assessing Risks of Material Misstatement
The auditor’s assessment procedures apply to both the audit of internal control over financial reporting and the audit of the financial statements. Auditors must obtain an understanding of the company and its environment to find the activities that could have a significant effect on the risks of material misstatement.

4th Proposed AS: The Auditor’s Responses to the Risks of Material Misstatement
The auditors should apply professional skepticism in gathering and evaluating audit evidence.
Professional skepticism includes a questioning mind and a critical assessment of the appropriateness and sufficiency of audit evidence.

5th Proposed AS: Evaluating Audit Results
Some definitions here are interesting:
Error is an unintentional misstatement in the financial statements.
Misstatement is anything that causes the financial statements not to be presented fairly in conformity with the applicable financial reporting framework.
Uncorrected misstatements are misstatements accumulated during the audit hat management has not corrected.

6th Proposed AS: Consideration of Materiality in Planning and Performing an Audit
The auditors must establish a materiality level for the financial statements as a whole that is appropriate especially in light of the surrounding circumstances. In order to determine the nature, timing, and extent of audit procedures, the materiality level as a whole needs to be expressed as a specified amount.

7th Proposed Auditing Standard from the PCAOB: Audit Evidence
There are some important changes here, and surprises. Some of the principles of computer forensics can be found in this auditing standard. For example, evidence provided by original documents is more reliable than evidence provided by photocopies or facsimiles, or filmed and digitized documents. Documents converted into electronic form are not reliable. In fact their reliability depends on the controls over the conversion and maintenance of those documents.

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