The financial auditor faces a constant battle between keeping the audit fee down while performing adequate procedures to attain necessary audit quality. Time needs to be trimmed where possible, but without eliminating essential steps required to gain reasonable assurance as to balances and accounting principles.
Materiality plays a significant role. A new auditor needs to develop the ability to overcome the desire to correct even the smallest variance when the adjustment does not warrant the time required to analyze and calculate the immaterial amount. With time and experience, judgement is acquired that helps with decision making.
At the other extreme, the auditor must avoid the temptation to cut corners just to avoid going over the budget for an audit. Such an action would be considered improper at the very least, warranting severe consequences. In 2005, the Public Company Accounting Oversight Board (PCAOB) issued PCAOB Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations, to officially prohibit a registered accounting firm’s individual auditors from committing “reckless” acts.
To remove any doubt as to the auditor’s responsibility, the PCAOB on June 12, 2024, issued Release No. 2024-008, which changed from “recklessness” to “negligence” the accountant’s contributory liability to an accounting firm’s violation of Rule 3502. The United States Securities and Exchange Commission quickly approved of the rule in Press Release 2024-100, released on August 20, 2024. Commenting on the matter, SEC Chief Accountant Paul Munter stated, “The amendments to Rule 3502 are critical because moving the PCAOB contributory liability standard from recklessness to negligence aligns the rule with other negligence-based professional conduct standards, including the standard for sanctions by the Commission for individuals negligently contributing to firm violations as well as certain state professional licensing requirements, that have long governed the accounting profession, and aligns the rule with the same standard of reasonable care that auditors are required to exercise when executing their professional duties. The PCAOB’s new standard regarding auditor responsibilities and the amendments to other PCAOB audit standards related to the use of technology will support high-quality audits and protect investors.”
Technology developments can help by pulling together all aspects of the audit process. One new approach, created through an alliance including the AICPA, software developer Caseware, CPA.com, and leading audit practitioners, is Dynamic Audit Solution (DAS), a fully integrated, cloud-based product that is “designed to enable greater efficiency, improved quality, and enhanced client value through data-driven AICPA methodology and guided workflows, real-time collaboration, and robust data analytics.”
DAS covers the complete audit process from beginning to end through a single platform. Risk assessment is continual throughout the audit utilizing integrated analytics applied to client data. DAS will be helpful for meeting the requirements of Statement on Auditing Standards 145, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (SAS 145), which is now in effect.
SAS 145 supersedes SAS 122, and amends various other AICPA Professional Standards with the overall goal of enhancing “Requirements and guidance related to the auditor’s risk assessment, in particular, obtaining an understanding of the entity’s system of internal control and assessing control risk” and “Guidance that addresses the economic, technological, and regulatory aspects of the markets and environment in which entities and audit firms operate.” Other aspects of the standard further address the design, assessment and documentation of risk.
Further details can be found at Dynamic Audit Solution (DAS) and Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
