Proposed Auditing Standard
II. Significant Changes to the Standard (pg 4 - pg34)
A. Focusing the Audit on the Matters Most Important to Internal Control
1. Directing the Auditor's Attention Towards the Most Important Controls
2. Emphasizing the Importance of Risk Assessment
3. Revising the Definitions of Significant Deficiency and Material Weakness
a. Replacement of the term "more than remote likelihood" with the term "reasonable possibility"
(FASB 5)
b. Re-articulation of the definition of material weakness to exclude significant deficiency
The objective of an audit of internal control is to obtain reasonable assurance as to whether material weaknesses exist. The audit of internal control does not require auditors to search for deficiencies that, individually or in combination, are less severe than material weaknesses. To better explain the objective of the audit and minimize confusion, the Board's proposed standard uses the term "a control deficiency, or combination of control deficiencies," in place of the reference to significant deficiencies in the definition of material weakness. (pg10)
c. Replacement of the term "more than inconsequential" with the term "significant"
The proposed standard, therefore, replaces the term "more
than inconsequential" with the term "significant" and defines "significant" as "less than
material yet important enough to merit attention by those responsible for oversight of the
company's financial reporting."
4. Revising the Strong Indicators of a Material Weakness
The proposed standard revises this provision to emphasize its relationship to the auditor's evaluation of the company's control environment. Specifically, significant deficiencies that have been communicated to management and the audit committee and remain uncorrected after a reasonable period of time could indicate that the company's control environment may be ineffective. The auditor would need to evaluate whether the company's control environment is, in fact, ineffective. If so, the ineffective control environment―not the uncorrected significant deficiencies―would be a strong indicator of a material weakness.
5. Clarifying the Role of Materiality in the Audit
6. Clarifying the Role of Interim Materiality in the Audit
B. Eliminating Unnecessary Procedures
1. Removing the Requirement to Evaluate Management's Process
2. Permitting Consideration of Knowledge Obtained During Previous Audits
3. Refocusing the Multi-location Testing Requirements on Risk Rather than Coverage
4. Removing Barriers to Using the Work of Others
Accordingly, the Board's proposed standard on using the work of others does not include the principal evidence provision.32/ Instead, under the proposed standard, auditors would determine how much
of the work of others could be used by evaluating the nature of the subject matter tested by others, and the competence and objectivity of those who performed the work.
In addition, the proposed standard would remind the auditor that the responsibility to report
on the financial statements or management's assessment of internal controls rests solely with the auditor and that the auditor must obtain sufficient competent evidence to support his or her opinion.
5. Recalibrating the Walkthrough Requirements
The proposed standard on auditing internal control would, therefore, require a walkthrough only for each significant process rather than for each major class of transactions within each significant process.
As the auditor walks a transaction through the process, he or she should consider whether different risks are present for varying transaction types and determine how the company's internal control addresses those risks.
Permitting direct assistance in walkthroughs should, however, afford opportunities to reduce cost and increase efficiency.
C. Scaling the Audit for Smaller Companies
D. Simplifying the Requirements
