Auditing Standards and Continuous Auditing Lynford Graham Member
Auditing Standards and Continuous Auditing Lynford Graham Member, Auditing Standards Board BDO Seidman LLP
Auditing Standards • SAS 97 (Amends #50) • Fraud (Amends #82) – Revenue Procedures – Management Override • Risk and Materiality – Business Risk Focus • Interim (Amends #71) • Sarbanes-Oxley Act – Reporting on Controls
Top 5 New Accounting Terms • • • CEO CFO EPS EBITA
Traditional Audit • Periodic Reporting • Periodic Auditing Continuous Auditing • Periodic Reporting • Monitoring Continuous Assurance • Continuous Reporting • Continuous Monitoring
CICA / AICPA “A continuous audit is a methodology that enables independent auditors to provide written assurance on a subject matter, for which an entity’s management is responsible, using a series of auditors’ reports issued virtually simultaneously with, or a short period of time after, the occurrence of events underlying the subject matter. ” Not Practical
Continuous Assurance • • Demand ? ? ? Costs Limitations of Accounting’s Period Concept Standards Implications – ‘Should Not Rely Exclusively on Controls’ (Risk Assessment) “Regardless of the assessed level of control risk of material misstatement, the auditor should plan And perform some substantive procedures tests for each material class of transactions and account balances” [Draft Risk Assessment Standard]
Audit Approach Comparison Characteristic Traditional Approach Continuous Auditing Approach Timing of Visits 4 th Quarter / Post Year End Frequent Use of Internal Reports Sometimes Key Information Monitored Primary Audit Strategy Detailed Substantive Testing Controls and Analytics throughout the year. Targeted sampling. Resource Needs Post 4 th Quarter Throughout Year Control Risk Completion of tests of controls at Focus on Automated “preliminary. ” Controls
Continuous Auditing Approach Q 1 Q 2 Q 3 Q 4 Monitoring, Planning and Execution Review Planning System Reviews Review Confirmations
Trends Supporting More Continuous Auditing • –“[W]e need to move toward a dynamic model of current disclosure of unquestionably material information. ” Harvey Pitt http: //www. sec. gov/news/speech/spch 523. htm • Audit Resource Management • Quarterly Reporting • SEC shortens 10 K & 10 Q filing date windows (8 -27 -02) • Standards –Fraud (SAS 82) –Risk Assessment (SAS 55, 94) –Interim Reporting (SAS 71) • XBRL –Facilitates Timely Reporting
Language in Draft Standards • …auditing involves a continuous process of gathering, updating and analyzing information throughout the audit. Accordingly, the sequence of the requirements and guidance in this statement may be performed differently among audit engagements. [Proposed Fraud Standard] • …an important management responsibility is to establish and maintain internal control on an ongoing basis. Management’s monitoring of controls includes whether they are operating as intended and that they are modified as appropriate for changes in conditions. [Proposed AU 319 revisions] • The characteristics of routine day-to-day business transactions often permit highly automated processing with little or no manual intervention. In such circumstances, it may not be possible to perform only substantive procedures in relation to the risk. [Proposed Risk Assessment Standard]
Directions • Neither Mandate nor Prohibit Continuous Auditing • Best Practices /Guidance • Periodic Reporting Model • Trends – More Timely Auditing and Reporting • Effectiveness ? ? ?
BDO Seidman • Strategic Risk Assessment Software – 2002 [Compass Version 3] • BDO International Policy and Guidance • Applications / Fieldtests
Example – Real Time Connection • Real Estate • Laplink +MS Access DB 4 Timberline – Prop. Lawson – Cos. • Mathematica, Master View, FAS 66 – Master View • IDEA Script Industry and Asset Info.
Questions / Comments
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