I am working on an article for the January issue of Practical Accountant on the risk assessment standards that apply to all non-public company audits. They are effective for audits of financial statements for periods beginning on or after Dec. 15, 2006.
The standards are fascinating for a number of reasons. The first is their breadth, as they apply to every audit, forcing firms to change the audit procedures that they must follow. This will mean extensive retraining of auditors.
Equally important, what each member of the audit team will be doing has to be re-evaluated. Senior members will now be even more very actively involved in the initial stages of an audit. Primarily using checklists and relying solely on substantive testing will no longer be possible. There will also be greater and more detailed documentation.
Complexity will be added for many audits, and they probably will take longer, especially during the initial learning curve. Auditors will be looking to raise their fees for audits under the new standards. Internal controls and risk assessment have moved to the forefront. The list goes on, including how the standards’ requirements will be utilized against auditors who are sued.
In some ways, I expect these standards will have a greater impact on more CPA firms then Sarbanes–Oxley did. But both have something very interesting in common. At first glance, the attention is to the regulatory aspects, but in reality the real impact is to the business model of the CPA firm.
With both, many firms are forced to change how they operate, what clients they accept, and the suitability of the existing staff, their interaction with clients, and the nature of the work done. Some firms have already figured this out, and others will as they complete engagements applying the new standards.
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