by Diane M. Zimmerman, CPA, Director, Baden, Gage & Schroeder, LLC
In 2006, policy makers for auditors of non-public companies set new standards that introduced a comprehensive audit methodology that differs significantly from the way audits have been performed for the past three decades. Without question the changes mandated by the new standards will affect not just audit firms, but their clients as well.
New Standards Strengthen the Audit Process
The Enron scandal combined with other high-profile business frauds and failures forced the auditing profession to re-examine the methodologies used to audit financial statements. In 2002, Congress passed the Sarbanes-Oxley Act, which resulted in a greatly expanded set of audit procedures for publicly traded companies, especially with regard to internal controls.
Now, some of the best ideas of Sarbanes-Oxley have been incorporated into the auditing standards applicable to all other entities. The new auditing standards will affect audits of privately-held companies, not-for-profit organizations and state and local governments.
The goal of the new standards is simple: to maintain the integrity of the audit process by responding to the evolving needs of financial statement users.
What the New Rules Mean for Audit Clients
The impact the new rules will have on individual audit engagements will vary depending on the procedures the audit engagement teams have performed in the past. Many organizations will see a dramatic change in the work performed by their auditors. In general, audit clients should expect their auditors to:
- Perform more work to gather information and form an understanding of the business and its environment.
- Perform more extensive procedures to evaluate internal control design.
- Shift portions of the work relating to understanding the business, its environment, and its internal control to a period of time well in advance of the organization's fiscal year-end.
- Involve more experienced audit personnel in gathering information about the company and its internal control.
- Clarify the organization's responsibilities with regard to performing accounting functions, preparing the financial statements and overseeing the financial reporting process.
In many audits, the additional procedures required under the new standards will result in increased audit costs that will extend beyond the initial year of implementation.
The new standards are the most significant change to auditing in the last thirty years, affecting auditors and clients alike. Businesses are evolving. The needs of financial statement users are evolving. The audit process must evolve as well.
