New Auditing Standards Impacting 2023 Audits
Reading time: 4 minutes Three new auditing standards are in effect for fiscal year-end 2023 audits that will fundamentally change the way certain audit procedures are carried out. Company management will need to prepare documentation with greater detail ahead of the audit, and the audit itself will likely take more time and effort to satisfy … ContinuedThe post New Auditing Standards Impacting 2023 Audits first appeared on JLK Rosenberger.
Reading time: 4 minutes
Three new auditing standards are in effect for fiscal year-end 2023 audits that will fundamentally change the way certain audit procedures are carried out. Company management will need to prepare documentation with greater detail ahead of the audit, and the audit itself will likely take more time and effort to satisfy these new requirements.
These new audit standards will change the approach to several key components of the audit process that are considered critical. Following is a brief summary of each change and how it may impact preparations for your company’s 2023 audit:
Statement on Auditing Standards (SAS) No. 143 – Auditing Accounting Estimates and Related Disclosures
This standard addresses the auditor’s responsibilities relating to accounting estimates, including fair value accounting estimates and related disclosures in an audit of financial statements.
Below are some aspects of SAS 143 that modify the auditing standards relating to auditing accounting estimates:
- Requires a separate assessment of inherent risk and control risk at the assertion level
- Includes an enhanced risk assessment to address the challenges auditors face when auditing accounting estimates by providing risk assessment requirements that are more specific to estimates and address the increasingly complex business environment and complexity in financial reporting frameworks
- Requires the auditor to evaluate, based on the audit procedures performed and the audit evidence obtained, whether the accounting estimates and related disclosures are reasonable in the context of the applicable financial reporting framework
Impact: Management will need to explain clearly to auditors how they have arrived at all estimates, impacting almost every part of the balance sheet that deals with estimates. This may add to the pre-audit preparation time for management and will increase risk assessment and potentially the audit procedures performed on various balances.
How management should prepare:
- Take a top-down approach to the financial statements. Review balance sheet estimates and ensure a written policy, adequate support, and documentation are ready to provide during the audit. For example, if you’re maintaining a $200,000 reserve for inventory, make sure you can support that amount with historical data points, an evaluation of current conditions, and consideration of updated forecasts.
SAS No. 144 Amendments to AU-C Sections 501, 540, and 620 Related to the Use of Specialists and the Use of Pricing Information Obtained from External Information
SAS 144 enhances guidance about evaluating the work performed by a specialist and provides additional guidance on the use of specialists by both auditors and management.
Impact: Many businesses use outside consultants who provide specialized calculations, appraisals, and other information included in financial statements. SAS 144 enhances guidance on the use of pricing information from external information sources related to fair value estimates and emphasizes additional scrutiny of sources of information.
How management should prepare:
The changes from SAS 144 primarily impact the auditor’s procedures. However, management should expect more detailed inquiries from the auditors and ensure they have procedures in place to evaluate the competency of its specialists and the quality of source data provided to them. Furthermore, entities with more complex investment portfolios (i.e., entities for which all investments are not Level 1 in the fair value hierarchy) can expect increased procedures to comply with the guidance surrounding the use of pricing services.
SAS No. 145 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
This standard does not change the key concepts of audit risk, which is the function of the risk of material misstatement and detection risk. However, it does clarify and enhance certain aspects of identifying and assessing risks of material misstatement. Its goal is to develop better risk assessments and enhanced audit quality. This is a very long standard, so we will only touch on the key changes in this article.
Below are some of the key modifications to risk assessment from SAS 145:
- Modifications to requirements for evaluating the design of certain controls, including IT controls, within the control activities component and whether the controls have been implemented
- Requirement for the separate assessment of inherent risk and control risk
- Modification to the definition of significant risk
- A new “stand-back” requirement is designed to cause the auditor to evaluate the completeness of their identification of significant classes of transactions, account balances, and disclosures
- Modifications to requirements for audit documentation
- New conforming amendment for the performance of substantive procedures for each relevant assertion of each significant class of transactions account balance, and disclosure regardless of the assessed level of control risk
Impact: SAS 145 will have the most significant impact of all these changes, as it will modify how auditors identify and assess risks. As a result, new risks may be identified, which may impact planned audit procedures.
How management should prepare:
- Prepare for more discussion and involvement at the front end of an audit when the auditors are gathering information on the organization’s internal controls, including controls over information technology. The auditors may have to go deeper with questions, asking for narratives on items where it’s never been needed before. The auditors will also need more information on the IT function, such as a description of how systems interface with each other.
- Prepare for potential changes in the audit procedures done at the substantive testing level.
- Prepare updated documentation of internal controls, policies, and procedures over the business cycle and accounting processes. Make sure everything is documented and that management has verified that all controls mentioned in the documentation are in place.
These auditing standard changes will collectively present challenges for company management and auditors alike. However, becoming familiar with the standards and building more time for audit preparation should help the process go more smoothly.
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If you have any questions about these auditing standard changes, JLK Rosenberger can help. For more information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.The post New Auditing Standards Impacting 2023 Audits first appeared on JLK Rosenberger.