PCAOB 8: Audit Risk
by Joanne M. Flood
Wiley Practitioner's Guide to GAAS 2013: Covering all SASs, SSAEs, SSARSs, and Interpretations
- Cover
- Contents
- Title
- Copyright
- Preface
- About the Author
- Organization and Key Changes
- AU 100–230: The Auditor’s Responsibilities and Functions, Introduction to GAAS, and the General Standards (Including the Quality Control Standards)
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- AU Definitions of Terms
- AU-C 200 Definitions of Terms
- AU-C 220 Definitions of Terms
- Objectives of AU Sections 100–230
- Objectives of AU-C Section 200
- Objectives of AU-C Section 220
- Fundamental Requirements
- Defining Professional Requirements in Statements on Auditing Standards
- Interpretations
- Techniques for Application
- AU Illustrations
- AU 311: Planning and Supervision
- AU 312: Audit Risk and Materiality in Conducting an Audit
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- AU Definitions of Terms
- AU-C Definitions of Terms
- Objectives of AU Section 312
- Objective of AU-C Section 320
- Objectives of AU-C Section 450
- Fundamental Requirements
- Interpretations
- Professional Issues Task Force Practice Alerts
- Techniques for Application
- AU 314: Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
- AU 315: Communications Between Predecessor and Successor Auditors
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- Applicability
- AU Definitions of Terms
- AU-C Section 510 Definitions of Terms
- Objectives of AU Section 315
- Objectives of AU-C Section 510
- Fundamental Requirements
- Interpretations
- Professional Issues Task Force Practice Alerts
- Techniques for Application
- AU Illustrations
- AU-C 510 Illustrations
- AU 316: Consideration of Fraud in a Financial Statement Audit
- AU 317: Illegal Acts by Clients
- AU 318: Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained
- AU 322: The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements
- AU 324: Service Organizations
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- AU Definitions of Terms
- AU-C Definitions of Terms
- Objectives of AU Section 324
- Objectives of AU-C Section 402
- Fundamental Requirements: User Auditors
- Fundamental Requirements: Service Auditors
- AU Interpretations
- Professional Issues Task Force Practice Alert
- Techniques for Application: User Auditors
- Techniques for Application: Service Auditors
- AU Illustrations
- AU 325: Communicating Internal Control Related Matters Identified in an Audit
- AU 326: Audit Evidence
- AU 328: Auditing Fair Value Measurements and Disclosures
- AU 329: Analytical Procedures
- AU 330: The Confirmation Process
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- AU Definitions of Terms
- AU-C Definitions of Terms
- Objectives of AU Section 330
- Objective of AU-C Section 505
- Fundamental Requirements
- Interpretations
- Professional Issues Task Force Practice Alert
- Techniques for Application
- AU Illustrations
- AU 331: Inventories
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- AU Definitions of Terms
- AU-C Definitions of Terms
- Objectives of AU Section 331
- Objectives of AU-C Section 501
- Fundamental Requirements: Observation
- Fundamental Requirements: Reporting
- Interpretations
- Professional Issues Task Force Practice Alert
- Techniques for Application
- AU Illustrations
- AU 332: Auditing Derivative Instruments, Hedging Activities, and Investments in Securities
- AU 333: Management Representations
- AU 334: Related Parties
- AU 336: Using the Work of a Specialist
- AU 337: Inquiry of a Client’s Lawyer Concerning Litigation, Claims, and Assessments
- AU 339: Audit Documentation
- AU 341: The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern
- AU 342: Auditing Accounting Estimates
- AU 350: Audit Sampling
- AU Effective Date and Applicability
- AU-C Effective Date
- AU Definitions of Terms
- AU-C Definitions of Terms
- Objectives of AU Section 350
- Objectives of AU-C Section 530
- Fundamental Requirements
- Interpretations
- Techniques for Application: Nonsampling
- Techniques for Application: Nonstatistical Audit Sampling
- Techniques for Application: Statistical Audit Sampling
- References
- AU 380: The Auditor’s Communication with Those Charged with Governance
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- AU Definitions of Terms
- AU-C Definitions of Terms
- Objectives of AU Section 380
- Objectives of AU-C Section 260
- Fundamental Requirements
- Interpretations
- Professional Issues Task Force Practice Alerts
- Techniques for Application
- AU 390: Consideration of Omitted Procedures After the Report Date
- AU 410: Adherence to GAAP
- AU 420: Consistency of Application of Generally Accepted Accounting Principles
- AU 431: Adequacy of Disclosure in Financial Statements
- AU 504: Association with Financial Statements
- AU 508: Reports on Audited Financial Statements
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- AU Definitions of Terms
- AU-C Definitions of Terms
- Objectives of AU Section 508
- Objectives of AU-C Sections
- Fundamental Requirements: Auditor’s Standard Report
- Fundamental Requirements: Explanatory Language Added to the Auditor’s Standard Report
- Fundamental Requirements: Departures from Unqualified Opinions
- Fundamental Requirements: Reports on Comparative Financial Statements
- Interpretations
- Professional Issues Task Force Practice Alerts
- Techniques for Application
- AU Illustrations
- AU-C 700 Illustrations
- AU-C 705 Illustrations
- AU-C 706 Illustrations
- List of AU-C Sections Containing Requirements for Emphasis-of-Matter Paragraphs
- List of AU-C Sections Containing Requirements for Other-Matter Paragraphs
- AU 530: Dating of the Independent Auditor’s Report
- AU 532: Restricting the Use of an Auditor’s Report
- AU 534: Reporting on Financial Statements Prepared for Use in Other Countries
- AU 543: Part of Audit Performed by Other Independent Auditors
- AU-C 600: Special Considerations—Audits of group financial statements (including the work of component auditors)
- AU 544: Lack of Conformity with Generally Accepted Accounting Principles
- AU 550: Other Information in Documents Containing Audited Financial Statements
- AU 551: Supplementary Information in Relation to the Financial Statements as a Whole
- AU 552: Reporting on Condensed Financial Statements and Selected Financial Data
- AU 558: Required Supplementary Information
- AU 560: Subsequent Events
- AU 561: Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report
- AU 623: Special Reports
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- AU Definitions of Terms
- AU-C Definitions of Terms
- Objectives of AU Section 623
- Objectives of AU-C 623
- Fundamental Requirements: Financial Statements Prepared in Conformity with an Ocboa
- Fundamental Requirements: Specified Elements, Accounts, or Items of a Financial Statement
- Fundamental Requirements: Compliance with Contractual or Regulatory Requirements Related to Audited Financial Statement
- Fundamental Requirements: Special-Purpose Financial Presentations to Comply with Contractual Agreements or Regulatory Provisions
- Fundamental Requirements: Circumstances Requiring Explanatory Language in an Auditor’s Special Report
- Fundamental Requirements: Financial Information Presented in Prescribed Forms or Schedules
- AU Interpretations
- AU Illustrations
- AU-C Illustrations
- AU 625: Reports on the Application of Accounting Principles
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- Applicability
- AU Definitions of Terms
- AU-C Definitions of Terms
- Objectives of AU Section 625
- Objectives of AU-C Section 915
- Fundamental Requirements
- Interpretations
- Techniques for Application
- AU Illustration
- AU-C 915 Illustration
- AU 634: Letters for Underwriters and Certain Other Requesting Parties
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- Applicability
- AU Definitions of Terms
- AU-C Definitions of Terms
- Objectives of AU Section 634
- Objectives of AU-C Section 920
- Fundamental Requirements: General
- Fundamental Requirements: Format and Contents of Comfort Letters
- Fundamental Requirements: Commenting in a Comfort Letter on Information other than Audited Financial Statements
- Fundamental Requirements: Other Matters
- Interpretations
- Techniques for Application
- AU Illustrations
- AU-C 920 Illustrations
- AU 711: Filings under Federal Securities Statutes
- AU 722: Interim Financial Information
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- AU Definitions of Terms
- AU-C Definition of Term
- Objectives of AU Section 722
- Objective of AU-C Section 930
- Fundamental Requirements: Review Procedures
- Fundamental Requirements: Communication with Audit Committees
- Fundamental Requirements: Communication with Management and Audit Committees
- Fundamental Requirements: Accountant’s Report
- Fundamental Requirements: Interim Financial Information Accompanying Audited Financial Statements
- Interpretations
- Techniques for Application
- AU Illustrations
- AU-C 930 Illustrations
- AU 801: Compliance Auditing
- AU 901: Public Warehouses: Controls and Auditing Procedures for Goods Held
- AU Effective Date and Applicability
- AU-C Effective Date and Summary of Changes
- AU Definitions of Terms
- AU-C Definitions of Terms
- Objectives of AU Section 901
- Objective of AU-C Section 501
- Fundamental Requirements: Controls for Warehouseman
- Fundamental Requirements: Warehouseman’s Auditor
- Fundamental Requirements: Owner of Goods
- Fundamental Requirements: Owner’s Auditor
- Interpretations
- AT 101: Attest Engagements
- Effective Date and Applicability
- Definitions of Terms
- Defining Professional Requirements in Statements on Standards for Attestation Engagements
- Objectives of Section 101
- Fundamental Requirements
- Comparison of Attestation Standards with GAAS
- Interpretations
- Illustrations: Examination Reports
- Illustrations: Review Reports
- AT 201: Agreed-Upon Procedures Engagements
- AT 301: Financial Forecasts and Projections
- Effective Date and Applicability
- Applicability
- Definitions of Terms
- Objectives of at Section 301
- Fundamental Requirements: General
- Fundamental Requirements: Compilation of Prospective Financial Statements
- Fundamental Requirements: Examination of Prospective Financial Statements
- Fundamental Requirements: Applying Agreed-Upon Procedures to Prospective Financial Statements (See Also at Section 201)
- Fundamental Requirements: Other
- Interpretations
- Illustrations
- Appendices
- AT 401: Reporting on Pro Forma Financial Information
- AT 501: an Examination of an Entity’s Internal Control Over Financial Reporting That Is Integrated with an Audit of Its Financial Statements
- AT 601: Compliance Attestation
- Effective Date and Applicability
- Definitions of Terms
- Objectives of at Section 601
- Fundamental Requirements: General (Applicable to Both Agreed-Upon Procedures and Examination Engagements)
- Fundamental Requirements: Agreed-Upon Procedures Engagement
- Fundamental Requirements: Examination Engagement
- Interpretations
- Techniques for Application
- Illustrations
- AT 701: Management’s Discussion and Analysis (MD&A)—A Summary
- AT 801: Reporting on Controls at a Service Organization
- AR 60–90: Compilation and Review of Financial Statements
- AR 110: Compilation of Specified Elements, Accounts, or Items of a Financial Statement
- AR 120: Compilation of Pro Forma Financial Information
- AR 200: Reporting on Comparative Financial Statements
- AR 300: Compilation Reports on Financial Statements Included in Certain Prescribed Forms
- AR 400: Communications between Predecessor and Successor Accountants
- AR 600: Reporting on Personal Financial Statements Included in Written Personal Financial Plans
- PCAOB 1: References in Auditors’ Reports to the Standards of the Public Company Accounting Oversight Board
- PCAOB 3: Audit Documentation
- PCAOB 4: Reporting on Whether a Previously Reported Material Weakness Continues to Exist
- PCAOB 5: an Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial Statements
- PCAOB 6: Evaluating Consistency of Financial Statements
- PCAOB 7: Engagement Quality Review
- PCAOB 8: Audit Risk
- PCAOB 9: Audit Planning
- PCAOB 10: Supervision of the Audit Engagement
- PCAOB 11: Consideration of Materiality in Planning and Performing an Audit
- PCAOB 12: Identifying and Assessing Risks of Material Misstatement
- PCAOB 13: The Auditor’s Responses to the Risks of Material Misstatement
- PCAOB 14: Evaluating Audit Results
- PCAOB 15: Audit Evidence
- Appendix A: ASB Clarity Project: Extant AU Sections Mapped to the Clarified AU-C Sections
- Appendix B: Cross-References to SASs, SSAEs, and SSARSs
- Appendix C: List of AICPA Audit and Accounting Guides
- Appendix D: Other Auditing Publications in the GAAS Hierarchy
- Index
PCAOB 8: Audit Risk1
EFFECTIVE DATE AND APPLICABILITY
| Effective Date | This standard currently is effective. |
| Applicability | Audits of financial statements as part of an integrated audit or an audit of financial statements only. |
DEFINITIONS OF TERMS
Audit risk. The risk that an auditor expresses an inappropriate opinion when the financial statements are materially misstated. It is a function of the risk of material misstatement and detection risk.
Control risk. The risk that a misstatement due to error or fraud that could occur in an assertion and that could be material, individually or in combination with other misstatements, will not be prevented or detected on a timely basis by internal controls. Thus, it is a function of the effectiveness of the design and operation of internal control.
Detection risk. The risk that the procedures performed by the auditor will not detect a misstatement that exists and that could be material, either individually or in combination with other misstatements.
Inherent risk. The susceptibility of an assertion to a misstatement, due to error or fraud, that could be material, individually or in combination with other misstatements, before consideration of any related controls.
OBJECTIVES OF PCAOB STANDARD 8
Public Company Accounting Oversight Board (PCAOB) Auditing Standard 8 sets the objective of conducting an audit of financial statements in a manner that reduces audit risk to an appropriately low level.
FUNDAMENTAL REQUIREMENTS
Audit Risk
To express an opinion on financial statements, an auditor must plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement due to error or fraud. The auditor obtains reasonable assurance by reducing audit risk through the application of due professional care, which includes obtaining sufficient appropriate audit evidence.
Risk of Material Misstatement
The auditor should assess the risk of material misstatement at the level of the financial statements and at the assertion level.
The risk of material misstatement at the level of the financial statements relate to the financial statements as a whole. This risk may be especially relevant due to fraud. As an example, the combination of an ineffective control environment, insufficient capital to continue operations, and a declining industry might create pressure on management to manipulate the financial statements, which therefore leads to a higher risk of material misstatement.
The risk of material misstatement at the assertion level is comprised of inherent risk and control risk. These risks are related to the company, its environment, and its internal controls. The auditor assesses these risks based on the evidence obtained. The assessment of inherent risk uses information obtained from performing risk assessment procedures, and by considering the characteristics of the accounts and disclosures in the financial statements. The assessment of control risk uses evidence obtained from tests of controls, if there is to be reliance on those controls to assess control risk at less than maximum, and from other sources.
Detection Risk
Detection risk is affected by the effectiveness of the substantive procedures and their application by the auditor. To determine the appropriate level of detection risk for a financial statement assertion, the auditor uses the assessed risk of material misstatement. The higher the risk of material misstatement, the lower the level of detection risk in order to reduce audit risk to a level considered appropriate.
An auditor reduces the level of detection risk through the nature, timing, and extent of the substantive procedures performed. As the appropriate level of detection risk declines, the evidence from substantive procedures that the auditor should obtain increases.
1 Practitioners should reference the additional guidance listed in the section “Other PCAOB Guidance” in this volume’s chapter PCAOB 1.
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