Determining Risk Assessment in a Financial Statement Audit
By Ira M. Talbi, Prager Metis International LLC
The American Institute of Certified Public Accountants (AICPA) issues, as necessary, Statements on Auditing Standards (“SAS”). Of the current total of 130+ SAS, numbers 104 to 111 are collectively referred to as the Risk Assessment Standards (“RAS”) and have been in effect since December 2006.
Of course, levels of risk vary among businesses: for example, a mostly cash business versus a corporation. But here, following RAS standards, we will outline steps to take when determining risk assessment in a financial statement audit. They are existence/occurrence, completeness, rights/obligations, classification, valuation, cut off, and overall risk.
Existence/Occurrence: Simply put, this is an assertion that assets are real and the transaction actually happened. Example: An apartment building listed as an asset does exist.
Completeness: Do the records being audited represent a complete listing of all assets? Example: All stocks in a portfolio are included.
Rights/Obligations: Does the company have full rights to own an asset or does someone else? Example: Obligations may have to be fulfilled by the firm to secure full ownership of the patent.
Classification: As it implies, this is a system for assigning assets into groups based on common characteristics: e.g. cash, receivables, inventory, or fixed assets.
Valuation: Simply put, is an asset worth what the owner thinks it is? Values of assets can change, sometimes drastically, from one year to the next.
Cut-Off: Refers to the date an asset was acquired. Example: An audit is for December 2019, but an owner wants to include an asset purchased in 2020.
Overall Risk – Management Override of Controls: The risk here is that even if a company has all its controls in place, management can circumvent the controls and change the outcome.
IT Risk: As hacking proliferates, assessing a company’s vulnerability has become part of an auditor’s job. Example: Is there a backup system and is procedure followed?
Ira M. TalbiGGI member firm
Prager Metis International LLC
Advisory, Auditing and Accounting, Corporate Finance, Fiduciary and Estate Planning, Tax
With 17 offices, mostly throughout the USA
T: +1 212 643 0099
Prager Metis International LLC is a top accounting firm providing a full range of accounting, audit, tax, and advisory services to domestic and international clientele in a wide range of industries. With 17 offices worldwide, they have a level of expertise and a unique global presence that makes their clients’ world, worth more.
Ira M. Talbi is a Partner in the Audit Department of Prager Metis. He specialises in a full range of audit and accounting with more than 30 years of experience in various industries, including investment companies and real estate. Ira is the partner in charge of quality control for the firm.
Published: Auditing, Reporting & Compliance Newsletter, No. 03, Spring 2020 l Photo: Michal Ludwiczak - stock.adobe.com