The Auditors Are Coming!

Last week, the Public Company Accounting Oversight Board ("PCAOB") released proposed standards for auditors to examine and utilize risk assessments in their upcoming audits of major corporations.  These standards could prove to be significant in the evolving audit approaches for internal control over financial reporting (i.e. Sarbanes-Oxley Section 404).  Mark Olson, PCAOB Chairman commented on the purpose of these new standards,

“An appropriate assessment of risk is the foundation of a high quality audit. Today’s proposals are intended to strengthen that foundation, which should result in improvements throughout the audit.”

In performing their assessment of risk, auditors are guided first to examine the company's own assessment of risk.  For those companies that do not have a solid framework and/or understanding of their risks, this new standard could be problematic.   The standard states,

The auditor should obtain an understanding of management's process for:

a. Identifying risks relevant to financial reporting objectives, including risks of material misstatement due to fraud ("fraud risks"), b. Assessing the likelihood and significance of misstatements resulting from those risks, and c. Deciding about actions to address those risks.

Factors that should be evaluated in determining which risks are significant risks include:

a. Whether the risk is a fraud risk; Note: A fraud risk is a significant risk. b. Whether the risk is related to recent significant economic, accounting, or other developments; c. The complexity of transactions; d. Whether the risk involves significant transactions with related parties; e. The degree of complexity or judgment in the recognition or measurement of financial information related to the risk, especially those measurements involving a wide range of measurement uncertainty; and f. Whether the risk involves significant transactions that are outside the normal course of business for the company, or that otherwise appear to be unusual due to their size or nature.

If your company is looking to strengthen its risk assessment process or build a new risk assessment framework to prepare for the new proposed standard, then click here to contact us and learn more about how our firm can help your company Navigate Successfully™.