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IAASB Seeks Comments on Audit Risk Guidance

(New York/Oct. 29, 2002) — Contributing to the improvement of audit quality worldwide, the International Federation of Accountant's (IFAC) International Auditing and Assurance Standards Board (IAASB) has proposed new standards to help auditors identify and address audit risks. On an international level, the proposed new guidance represents significant changes to the standards governing audits of financial statements.

Three International Standards on Auditing (ISAs) are exposed for comment:

– Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement;
– The Auditors Procedures in Response to Assessed Risks; and
– Audit Evidence.

In addition, the IAASB is proposing an Amendment to ISA 200, Objective and General Principles Governing an Audit of Financial Statements. The deadline for comments on all four documents is March 31, 2003.

It is anticipated that the proposed ISAs will increase audit quality as a result of better risk assessments and improved design and performance of audit procedures to respond to risk. Because implementation of the new standards will result in improved linkage of audit procedures and assessed risks, ultimately this should enable auditors to more clearly focus on areas where there is a greater risk of misstatement of the financial statements.

“The guidance has been developed for auditors, but the public will be a significant beneficiary,” emphasizes Dietz Mertin, IAASB chair. “The proposed standards require auditors to have a deeper understanding of an entity's business environment, to make risk assessments in all audits, and to link the nature, timing and extent of the procedures to the assessed risk. These changes will help to raise standards of audit practice and contribute to building public confidence in audited financial statements.”

The ISAs have been drafted for all entities. The requirement to consider the entity's risk assessment process, the importance of governance arrangements and monitoring of control are equally relevant to large and small entities. The IAASB will be considering whether any additional guidance is necessary for auditors of small entities.

The proposed ISAs are the product of the Audit Risk Project, jointly conducted with the American Institute of Certified Public Accountants Auditing Standards Board (ASB). By partnering with the ASB, the IAASB is furthering its goal of integrating the international standards setting process with national standard setters in order to promote the convergence and acceptance of an internal set of auditing standards.

The exposure drafts may be downloaded at no charge from IFAC's web site (http://www.ifac.org). An explanatory memorandum providing background on the development of this guidance and highlighting key changes is available with the EDs. Questions and answers regarding the audit risk project follow this press release.

The IAASB welcomes comments from all interested parties. Comments may be submitted online to EDComments@ifac.org or sent to the IAASB Technical Director via fax (+1-212-286-9570) or by mail to 535 Fifth Ave., 26th Floor, New York, NY 10017.

IFAC is the worldwide organization for the accountancy profession. Its mission is to develop and enhance the profession to enable it to provide services of consistently high quality in the public interest. Current membership consists of 156 professional accountancy bodies in 114 countries representing more than two million accountants in public practice, education, government service, industry and commerce. Within IFAC, the IAASB works to improve auditing and assurance standards and the quality and uniformity of practice throughout the world.

International Auditing And Assurance Standards Board
Audit Risk: Proposed International Standards On Auditing And
Proposed Amendment To ISA 200, “Objective And Principles
Governing An Audit Of Financial Statements”

Questions and Answers

1) What prompted the IAASB to develop new guidance on audit risk?

The IAASB continuously reviews International Standards on Auditing (ISAs) to consider both their relevance and appropriateness. Changes in the business environment — including the way entities are organized and conduct their businesses, the effects of globalization and technology, and significantly increased pressures that may lead to fraudulent financial reporting — prompted the IAASB to review ISAs that address the core of the audit. These are the standards that deal with the auditor's assessment of the risk that the financial statements could be wrong, and the way in which the auditor designs the rest of the audit to provide an effective audit response to the identified risk.

2) Was this project initiated as a result of recent corporate failures?

No. The project was initiated before recent major corporate failures and the resulting crisis in public confidence in the effectiveness of audits. Although the proposed ISAs were not conceived as a direct response to these events, the project's proposals to improve the overall audit process have been influenced by them and therefore represent part of the IAASB's contribution to raising standards of audit practice and the consistency of their application around the world.

3) What is the nature of the new guidance proposed by the IAASB?

The IAASB has released for comment the following new ISAs:

“Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement;”

“The Auditor's Procedures in Response to Assessed Risks;” and

“Audit Evidence.”
In addition, the IAASB is proposing an amendment to ISA 200, “Objective and General Principles Governing an Audit of Financial Statements.”

When approved, the proposed ISAs will replace certain existing ISAs that currently address the auditor's required knowledge of business, internal control and audit risk assessments.

The new proposed ISAs and expanded guidance are designed to enhance the auditor's implementation of the audit risk model and ultimately improve auditor performance. On an international level, they represent significant changes to the standards governing audits of financial statements.

4) What are the overall implications of the proposed standards?

The IAASB believes the proposed ISAs will —

Improve audit quality as a result of better risk assessments and improved design and performance of audit procedures to respond to the risks.

Improve linkage of audit procedures and assessed risks, resulting in a greater concentration of effort on areas where there is a greater risk of misstatement of the financial statement.

Result in an overall increased work effort by the audit team, particularly for new engagements or when first implemented on continuing engagements.

Require new skills and competencies to implement.

Impact the education needed by auditors and thus the training professional bodies provide to auditors.

5) How will the proposed standards affect the work of the auditor?

The proposed standards are expected to have the most effect on the auditors' assessment of the risks of material misstatement in the financial statements, and the way in which the auditor designs the rest of the audit to provide an effective audit response to the identified risk. In summary, the proposed standards will impact the auditor's work in four key ways:

The auditor is required to obtain an enhanced understanding of the entity's business.

The auditor is required to make risk assessments in all cases in a more rigorous manner.

The auditor is required to link the identified risks to audit procedures.

The auditor is required to document additional specific matters.

6) Do the proposed standards equally apply as well to the audit of small entities?

Yes. These new ISAs – as with all IAASB standards — are developed to apply to all entities. In fact, while some aspects may seem more applicable to larger entities, the underlying considerations and objectives are equally relevant to smaller entities.

The IAASB is, however, interested in whether additional guidance may be necessary for audits of small entities. It also has approved a project to consider the effect of the proposed ISAs on International Auditing Practice Statement (IAPS) 1005, “The Special Considerations in the Audit of Small Entities” and to make proposals about whether to incorporate relevant guidance in the ISAs or a revision of the IAPS.

7) Where can the proposed standards be found and how can the public access and comment on them?

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