Business continually evolves, as it should. Things change over time, and at some point, you need to step back and reexamine what that all means. Does what you are doing — and how you are doing it — make the most sense now? Such introspection led to a modernization of the AICPA’s standard on audit evidence.
Through a comprehensive, multiyear effort, the AICPA’s Auditing Standards Board (ASB) explored enhancing the relevance of the audit evidence standard, which was last updated when AU-C Section 500, Audit Evidence, was issued more than 10 years ago. The board recognized that technological advancements alone would greatly affect business transactions and processes. It seemed obvious that how the audit profession performed financial statement audits would need to evolve for stakeholders to get more meaningful information.
So in July the ASB issued Statement on Auditing Standards (SAS) No. 142, Audit Evidence. SAS No. 142 is effective for audits of private company financial statements for periods ending on or after Dec. 15, 2022, with early implementation permitted.
According to Bob Dohrer, CPA, CGMA, the AICPA’s chief auditor during the project and when the new standard was issued, the prior standard was developed when audit evidence primarily was obtained from the audit client’s internal sources. It mostly consisted of paper documents. Looking at the past 10 years, and even just the past two, auditors could easily see how rapidly and significantly their clients have evolved how they conduct business. And what could be considered audit evidence might also come from third parties or other external sources.
Of course, technologies have driven significant business innovations in recent years, and that value is important to accurately portraying a company’s financial picture. “Social media, big data, and the internet are just some of the transformational aspects of business that need to be considered as part of an audit,” Dohrer said. “Auditors availing themselves of these sources of information is essential to perform high-quality, relevant financial statement audits.”
What’s different or new?
Modernizing the standard led to substantial changes. For example, SAS No. 142 recognizes the use of automated tools and techniques, such as audit data analytics, artificial intelligence, and remote observation tools to obtain audit evidence. Those facets also will enhance audit quality, another goal of the new standard.
“The biggest benefit to audit quality in the near term will simply be getting auditors to focus on some of the fundamentals of sufficient appropriate audit evidence — the accuracy, the completeness, susceptibility to bias, and authenticity of information to be used as audit evidence, and whether that information contradicts or corroborates management assertions,” Dohrer said. “And it’s all very critical to audit quality now and in the future.”
Auditors will not see prescribed step-by-step procedures, as the standard is principles-based. Still, auditors will get a lot of implementation support in the standard. Its requirements take up about three pages, with the remaining 40-plus pages being application materials, guidance, a nonauthoritative exhibit, and examples around audit evidence reflecting the realities of current business processes, data, and financial situations.
The lead time until the effective date is part of the AICPA’s commitment to helping auditors understand and comply with the new standard. Third-party methodology providers and firms with their own methodologies, tools, and guidance will be incorporating the standard into their materials. Training opportunities and AICPA CPE will be developed for auditors.
Firms will likely work on their audit evidence policies and training during calendar 2020 and into 2021 so that they are ready in the early part of 2022 for a calendar 2022 effective date. This time frame would enable firms to apply the standard as they gather evidence at any point throughout 2022 or if they start interim testing earlier in the year.
Finally, the standard was written in a way that allows it to be as robust and meaningful tomorrow as it is today. The use of principles-based requirements allows auditors to innovate and evolve with business, while retaining the ability to meet the fundamental requirements.
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— Ellen Goldstein is the Association’s director–Communications & Special Projects. To comment on this article or to suggest an idea for another article, contact her at Ellen.Goldstein@aicpa-cima.com.