by Diane M. Zimmerman, CPA, Director, Baden, Gage & Schroeder, LLC
In 2006, policy makers for auditors of non-public companies set new standards that introduced a comprehensive audit methodology that differs significantly from the way audits have been performed for the past three decades.
Companies may be challenged to examine the reasons they have had an audit in the past and whether an audit is the best choice of service from the entity's accounting firm. The impact the new rules will have on individual audit engagements will vary depending on the procedures the audit engagement teams have performed in the past. However, in general:
Evaluation of Internal Control Design
Auditors will evaluate the design effectiveness of an entity's internal control by analyzing its five component parts for all key areas of the entity:
- Identifying "what can go wrong"
- Implementing controls to manage risk
- Monitoring control performance
- Communicating information
- Establishing an effective control environment
Communication
As a result of the evaluation of the design of internal control, control deficiencies may be identified. Any control deficiencies that are of a likelihood or magnitude to be classified as "significant" deficiencies or "material weaknesses" will be communicated in writing. This communication will continue each year, even if management has made a conscious decision to accept the risk posed by that deficiency because of cost or other considerations.
Audit Timing
Because the new audit standards now require auditors to perform more extensive procedures to evaluate internal control design, and use this knowledge to develop customized risk-based audit procedures, more audit work may be conducted well before the end of the entity's year. Additionally, management and other applicable personnel may be asked to contribute to the information gathered by the auditors in a much more involved way.
As a result, for many audits, the additional procedures required under the new standards will result in increased audit costs that will extend beyond the initial year of implementation. However, more effective audits are expected to result from better risk assessments and improved design of audit procedures to respond to those risks. The goal of the new standards, to maintain the integrity of the audit process by responding to the evolving needs of financial statement users, will be furthered by these comprehensive audit changes.
