Summary of New Audit Standards and their Impact on Nonprofits

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• Publié par: Fupip
• Nombre de lectures: 32
• Langue: English

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Summary of New Audit Standards and their Impact on Nonprofits

The AICPA's Auditing Standards Board recently established a number

of new auditing standards.

As discussed in our February newsletter

issue, two of the standards, SAS 103 and 112, are already in effect for

December 31, 2006 year end audits.

The remaining eight, SAS 104-

111 and collectively referred to as the "risk assessment standards,"

are required to be implemented for December 31, 2007 year end

audits.

In summary, these eight standards provide guidance to auditors concerning their assessment of

the risks of material misstatements, whether caused by error or fraud.

With respect to internal

controls, the risk assessment standards require auditors to perform their risk assessment around

the five elements of internal control outlined by the Committee of Sponsoring Organizations of the

Treadway Commission (COSO) Integrated Framework.

These

five elements

include the

control

environment, the risk assessment process, communication and information, monitoring,

and control activities

.

Intended to enhance the auditor's assessment of risks, the new standards require auditors to:

1.

Develop a more in-depth understanding of the entity and its environment

, including

its internal control, to identify and asses the risks of material misstatement in the financial

statements

2.

Make more rigorous assessments of risks

regarding where and how financial

statements could be materially misstated based on the auditor's expanded understanding

of controls and other risk assessment procedures

3.

Establish a stronger linkage between the assessed risks and the audit procedures

performed in response to those assessed risks.

The changes mandated by these new standards will nonetheless, affect

both audit firms and their clients.

Accordingly, organizations need to have a

clear expectation of how these new standards may affect their individual

audit and should begin making preparations as soon as possible to minimize

any negative repercussions resulting from implementation of these new

procedures.

See the table on the next page for a brief summary of each

new standard and its potential impact on nonprofit organizations.

In preparing for next year’s audit, we recommend that organizations have clear and concise

documentation of the internal control structure in place, which should include how COSO’s five

elements of internal control are being addressed within the control structure.

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103

Audit Documentation

Increases audit firm's responsibility for subsequent

events. Must document what audit evidence you

have and its source (inquiry alone is not sufficient

but can enhance other audit evidence).

More inquiries of non-financial personnel. Date of

auditor’s report will occur only after management

has accepted responsibility for the financial

statements.

104

Reasonable Assurance

Reasonable assurance means a high, but not

absolute level of assurance.

More audit evidence is required so that risk is

limited to a low level.

105

Auditing Standards

Must understand the entity and its environment,

including its internal control to assess the risk of

material misstatement.

Audit firm must understand the nonprofit industry

as well as the specific organization’s particular

internal controls.

106

Audit Evidence/Risk

Assessment

Risk assessment procedures must be performed as

a basis for assessing the risk of material

misstatement and tests of controls may now

required.

Accounting records must be internally consistent,

and consistent with non-accounting information.

Reliable internal controls will generate more reliable

information.

107

Audit Risk & Materiality

The concept of

reasonable

assurance is clarified

to mean a

high level

of audit assurance. Assessed

risks and the basis for those assessments must be

documented. Materiality is based not only on

dollar amount but also on other facts and

circumstances.

Management should respond appropriately when

misstatements are identified and must consider

misstatements from prior year’s uncorrected

misstatements. Risk & materiality are considered

based on the needs of users as a group not

individually.

108

Planning & Supervision

Preliminary engagement activities, including audit

plan strategy and planning should include a

description of the nature, timing, and extent of

planned risk assessment procedures.

Early appointment of auditor is preferable so that

audit strategy, timing, and limitations can be

discussed with management and the audit

committee, without making procedures too

predictable.

109

Understanding the Entity and

its Environment and

Assessing the Risks of

Material Misstatement

Describes risk assessment procedures, including

the determination of the audit approach.

Auditor will expand documentation of internal

controls including identification of key control

activities. The auditor will no longer be able to

accept inquiry regarding controls; documentation of

controls should be present in order to pass a test of

controls.

110

Performing Audit Procedures

in Response to Assessed

Risks and Evaluating the

Audit Evidence Obtained

Consideration and evaluation of the nature, timing,

and extent of further audit procedures including

tests of controls must be documented. Substantive

procedures alone may no longer sufficient.

Internal controls must be reliable and documented

and should follow the COSO Framework (refer to

the COSO's guidance for small companies).

111

Audit Sampling

Guidance on a tolerable misstatement and on

determining sample size.

Tolerable misstatements will be reviewed

individually and in the aggregate. The threshold for

misstatements will likely be reduced.

112

Communicating Internal

Control Related Matters

Defines the terms "control deficiency", "significant

deficiency" and “material weakness” and provides

structure to auditors for what is required to be

reported in writing to governing bodies.

More “significant deficiencies” and “material

weakness” may be reported to governing bodies.