Breakthrough Analysis Helps Auditors Better Assess Risk of Non-Public Companies

Auditors have had to grapple with the AICPA risk assessment standards since they were introduced in 2006. But what is the audit process required to implement these standards to which auditors must adhere? BNA’s latest analysis, Audit Risk Assessment in Audits of Non-Issuers, (Portfolio in the Accounting Policy and Practice Series) examines both the standards’ objectives and approaches in detail and provides auditors with expert guidance for assessing the risks of material misstatement — intentional and unintentional — in an entity’s financial statements.

“This Portfolio will prove to be a very valuable tool for auditors in conducting high quality audits and to keep current on changes in the audit process,” said George Farrah, Executive Editor – Accounting Policy & Practice Series.

This new Portfolio focuses on the audit process — not specific audit procedures. The primary objectives of the 2006 auditing standards are to develop a more in-depth understanding of the audited 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; to provide a more rigorous assessment of the risk based on that understanding; and to improve the linkage between the assessed risks and the nature, timing, and extent of the audit procedures performed in response to those risks.

Audit Risk Assessment in Audits of Non-Issuers provides detailed analysis on gathering information about the entity and its environment and using that information to gain an understanding of the entity. It specifies considerations, risks, and situations to identify in assessing the risk of material misstatement and offers additional procedures and tests to explore when responding to an assessed risk.

The authors, both CPAs, examine key concepts of audit risk assessment and outline the relationship between the overall audit strategy and the audit plan. They discuss how to establish an understanding with the client, determine preliminary engagement activities, demonstrate planning materiality and tolerable misstatement, supervise assistants, communicate with management and those charged with governance, and document the audit planning. This Portfolio also explains how to evaluate audit findings, identify and evaluate control deficiencies, and document audit findings.

 J. Russell Madray, CPA, is president of The Madray Group Inc., which helps businesses, accounting firms, and other organizations understand and implement technical accounting and auditing issues. He is a senior lecturer at Clemson University’s School of Accountancy and Legal Studies, a published author, and a former member of both the AICPA Accounting and Review Services Committee and the Board of Directors for the South Carolina Association of CPAs.

Carrie Benedict, CPA and former assurance manager for Grant Thornton LLP, is currently pursuing a J.D. from Ohio State University.