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AUDITING

Under previous standards, the definition of signifi-
New risk assessment standard has cant risk focused on risks that require special audit
focus on clarity considerations (see the sidebar “6 High-Risk Areas
That May Merit Extra Auditor Attention”).
SAS 145 addresses definitions and internal control Under SAS 145, significant risk is defined to
responsibilities. encompass identified risks that lie on the upper end
of the spectrum of inherent risks. Although the new
The critically important process of risk assessment in audits was changed in definition provides more clarity for practitioners to
October when the AICPA Auditing Standards Board (ASB) issued Statement help them identify significant risks, one thing does
on Auditing Standards No. 145, Understanding the Entity and Its Environment not change: Significant risks still require special
and Assessing the Risks of Material Misstatement. audit considerations.
The new standard, which takes effect for audits of financial statements “I’m not sure if the standard will result in new
for periods ending on or after Dec. 15, 2023, is designed to provide significant risks being identified or fewer significant
additional clarity for practitioners while considering changes in technology risks being identified by some firms,” Manasses
and other areas of the business environment. The new standard: said. “I believe that it’s just clarifying the definition
■ Revises the definition of significant risk, indicating that those risks lie on in the context of what it’s intended to be, linking it
the upper end of the spectrum of inherent risks. to some of the new terminology like inherent risk
■ Provides guidance that is intended to enhance the auditor’s application factors, and then giving a bit more comfort to audit
of professional skepticism in performing risk assessment procedures. teams so they know if they are identifying them as
■ Includes a new requirement to separately assess inherent risk and control intended.”
risk.
■ Addresses the auditor’s responsibilities related to the entity’s system of PANDEMIC CONSIDERATIONS
internal control. There’s a lot to consider in risk assessment related
■ Includes extensive new guidance on information technology (IT) and the to the pandemic.
consideration of general IT controls. Client-focused concerns include going concern
■ Includes a new “stand-back” requirement that is intended to drive an evaluations; changes to processes and controls
evaluation of the completeness of the identification of significant classes related to the pandemic due to personnel working
of transactions, account balances, and disclosures by the auditor. from home; availability of skilled labor; and an
ASB Chair Tracy Harding said some firms may not see a major impact in altered business environment and new customer
their procedures as a result of the standard, but everyone can benefit from demands that may create hazards but also can
the improved clarity in the standard. provide opportunities.
“While drafting the standard, we kept coming back to, ‘This is how we Auditors also need to be conscious of the
do it at our firm, but some people may not take the current standard that changes to their own processes that have occurred
way, so let’s improve the clarity,’” Harding said. “That was a big part of as a result of the pandemic, especially with regard
the effort.” to remote auditing. Interviews by videoconference,
video inventory checks, and remote document veri-
fication processes may all work to provide sufficient
appropriate audit evidence. But these methods need
to be considered carefully for potential risks.

IN BRIEF will challenge firm leaders to take a related changes in procedures have led
careful look at their methodologies, to changes in audit risk that will need
■ The objective of a new Auditing processes, and procedures. to be scrutinized carefully by auditors
Standards Board standard on ■ An understanding of internal control even as some of their own procedures
risk assessment is to ensure that is fundamental to a successful risk have gone remote. In some cases,
practitioners are spending adequate assessment process. Gaps in internal processes that traditionally have been
time auditing areas of high risk. Along control can provide auditors with a handled by junior audit team members
with changes to the environment view of potential fraud risks that could might need extra supervision from
caused by the coronavirus pandemic, lead to a material misstatement. more experienced personnel.
implementation of the new standard ■ Economic upheaval and pandemic-

18 | Journal of Accountancy January 2022