Assessing the risk: new standards mean more time with your CPA.

AuthorHromadka, Erik
PositionPROFESSIONAL SERVICES

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FEW INDIVIDUALS WHO commit fraud set out to do so intentionally However, when faced with financial hardship, some are tempted by poorly designed systems that allow them to "borrow" funds from accounts without being noticed. Identifying and eliminating the potential for such behavior can prevent serious problems from developing.

That's one example of a situation that can be corrected by a new set of assessment standards for private companies. The new rules are leading to more comprehensive audits, as accounting firms seek to better understand the procedures that shape financial reporting and identify potential areas of risk.

The risk assessment standards, which have now been in place for a full year, are an attempt by the accounting profession to avoid the problems that causes the downfall of large public companies and their auditors at the beginning of the decade.

Although less complicated than the Sarbanes-Oxley regulations that followed the Enron and Worldcom scandals, the new rules issued by the American Institute of Certified Public Accountants increase scrutiny of private companies, schools, non-profits and other organizations that have audited financial statements.

"The term 'risk assessment' refers to a focused audit approach in which we consider at a detailed level what can go wrong in your accounting records and in the preparation of your financial statements," explains Doug Hasler, chair of the executive committee at Blue & Co. in Carmel. "The purpose of this risk assessment is to identify areas where material errors or fraud are more likely to occur in your financial statements."

The official purpose of Statements on Auditing Standards No. 104-111 is to establish standards and provide guidance concerning the auditor's assessment of the risks of material misstatement (whether caused by fraud or error) in a non-issuer financial statement audit; design and performance of tailored audit procedures to address assessed risks; audit risk and materiality; planning and supervision; and audit evidence.

In other words, the new procedures require an audit of the business, not just the books.

That process begins with a planning session where audit procedures are designed specifically for the organization that will be reviewed. Such preparation seeks to design an audit process which considers the specific circumstances of an organization and the environment in which it operates, Hasler says.

"For example, one of the...

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