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AUDITING

6 high-risk areas that may merit extra auditor attention

Items that require significant management judgment may need careful scrutiny.
Determining the significant risks in an audit requires substantial understanding of processes and controls across all components
auditor judgment, and certain areas often merit close scrutiny in of internal control to develop an effective and efficient audit
that evaluation. Here are a few: approach.”
Valuation of assets Revenue recognition
Valuation requires a great deal of judgment, and auditors For many clients, FASB’s new standard requires changes
need to understand the methodology behind it. Challenging in processes for measuring and recording one of the most
judgments include difficult-to-value financial instruments, important numbers in the financial statements.
long-lived assets with indicators of impairment, related-party
receivables, and obsolete inventory. Going concern
The pandemic environment has increased going concern risk.
Complex estimates Auditors need to consider the adequacy of management’s
This is another area in which the auditor needs to understand going concern evaluation about whether substantial doubt has
how management developed the information it is reporting. arisen and, if so, whether it has been alleviated, and determine
There are many ways to arrive at an estimate; is management’s whether to include in the auditor’s report a communication
method reasonable? about substantial doubt.

Control testing Automated transactions
“The ability to test the operating effectiveness of controls to There’s no “paper trail” anymore for many transactions, and
reduce or otherwise modify substantive testing in response that requires a different focus for auditors. “You have a highly
to a risk hasn’t changed,” said Maria Manasses, CPA, chair of automated environment,” Manasses said. “Transactions
the AICPA Auditing Standards Board’s Risk Assessment Task might only exist in electronic form. In order to audit that, an
Force. “Even when the auditor does not test controls, the auditor has to obtain a deeper understanding of the controls
[new risk assessment] standard guides an auditor’s required surrounding information processing.”

the context of a broad understanding of an audit some of the aspects within the standard,” Manasses
engagement. Auditors can’t just sign the engage- said. “And there are definitions and requirements
ment letter, check off all the boxes on a checklist, that have been clarified through SAS 145 that may
and then issue their report. result in some differences in methodologies. But it
“Service providers develop material for a may have a greater impact on some audit firms and
broad set of users, and those materials are being a lesser impact on some others.”
developed so auditors can comply with the profes-
sional standards,” Manasses said. “You need to be FOCUS ON QUALITY
able to take those materials and understand the Ultimately, the new risk assessment standard is
methodology that’s embedded within them to be intended to help auditors set the focus of their
able to appropriately apply them in your particular procedures properly while planning the engagement
circumstances.” and keep them on track until the very end.
“You have to meet deadlines, but more
IMPACT DEPENDS ON EXISTING METHODOLOGY importantly, you have to perform a quality audit,”
SAS 145 is principles-based and agnostic with Manasses said. “And in order to do that you
respect to methodology because there are different, have to introduce a risk-based methodology to
perfectly valid ways to assess risks and respond to appropriately apply the timing and assign the
them. Nonetheless, the number of changes that resources necessary on the audit areas that require
SAS 145 will require a given firm to make may more audit effort. A risk-based methodology
vary depending on the audit methodology the firm also facilitates effective supervision and review
already is using. by adequately directing and reviewing areas of
“Audit methodologies may already encompass greater risk.” ■

20 | Journal of Accountancy January 2022