Smooth sailing: Avoid These Mishaps When Implementing New Audit Standards.

• Author: Hein, Marcia J.

Peer review season is in high gear and there are lessons to be learned about implementing the new audit risk standards. Following are some of the hot spots seen in peer reviews so far.

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1. Failure to document observation and inspection procedures.

   SAS 109 tells us that observation and inspection procedures should be performed to support inquiries of management regarding the entity and its environment. These procedures would typically include some or all of the following:

   * Observation of entity operations;

   * Inspection of documents;

   * Reading management reports, interim financial statements and board minutes; and

   * Walk-throughs.

   While firms may be performing these procedures, they often are not documented in the workpapers.

2. Failure to document risk assessment procedures.

   Most firms understand the risks of their audit clients and properly identify significant transaction classes, material balances and significant fraud and other risks. Once the identification process occurs, the new standards require auditors to gain further knowledge of the flow of transactions and controls over these significant areas, and to document the knowledge obtained. This documentation is often missing from working papers.

3. Failure to link risk assessments to actual procedures performed.

   Risk assessments may be properly identified, but some practitioners do not properly link those assessments to procedures performed. For instance, if the risk of material misstatement for accounts receivable is moderate or high, and receivables are a material balance, the "basic" audit procedures from our Practitioners Publishing Company programs should be supplemented by extended procedures.

   Conversely, if the risk of material misstatement for an area is low and the balance is not considered material, then basic procedures (or even analytical review) will suffice.

   Many firms do not understand this link and continue to perform all of the procedures they always have performed. Others just perform the basic procedures for all sections and disregard the extended procedures, even when some of these procedures are necessary.

4. Failure to properly use electronic third-party practice aids.

   our friends at PPG try to make our lives easier. In addition to the normal practice aids for audits of non-public companies, PPG has electronic practice aids that will increase our audit efficiency. Unfortunately, there may be a big learning curve in the first of implementation...