Navigating the New Auditing Standards

A Guide for Business Owners and CFOs

As fiscal year-end 2023 audits approach, it's imperative for business leaders to grasp the implications of three new auditing standards. Effective for periods ending on or after December 15, 2023, these standards herald significant shifts in audit procedures, demanding greater precision and detail from both management and auditors.

Understanding the Changes

1. SAS 143 – Auditing Accounting Estimates and Related Disclosures

SAS 143 focuses on auditing accounting estimates, including fair value estimates. It necessitates a more thorough evaluation of inherent and control risks, demanding clearer documentation from management regarding the rationale behind these estimates. This standard requires a separate assessment of inherent and control risks at the assertion level, which may impact almost every part of the balance sheet dealing with estimates.

Moreover, SAS 143 includes an enhanced risk assessment to address the challenges auditors face when auditing accounting estimates in today's increasingly complex business environment. This means management will need to explain clearly to auditors how they have arrived at all estimates, impacting almost every part of the balance sheet that deals with estimates.

To prepare for SAS 143, business leaders should ensure a top-down review of financial statements, ensuring clear documentation of all estimates and their underlying methodologies. Historical data, current market insights, and evaluation of forecasts should be adequately supported to withstand audit scrutiny.

2. SAS 144 – Use of Specialists and Pricing Information

Enhancing guidance on the use of external specialists and pricing information, SAS 144 calls for heightened scrutiny of sources and increased collaboration between auditors and management's specialists. Many businesses use outside consultants who provide specialized calculations, appraisals, and other information included in financial statements.

Expect detailed inquiries and ensure specialists' competency and the quality of data provided. Entities with more complex investment portfolios may expect increased procedures to comply with the guidance surrounding the use of pricing services. In such cases, the auditor may need to rely on an auditor specialist to provide independent fair value estimates.

Business leaders should review key controls in place related to significant accounts in preparation for the annual audit. Ensuring comprehensive documentation and understanding of pricing sources used by investment managers or custodians is crucial.

3. SAS 145 – Understanding the Entity and Its Environment

This standard underscores the importance of risk assessment, particularly in identifying and assessing risks of material misstatement. Auditors will delve deeper into understanding internal controls, including IT systems, requiring comprehensive documentation from management.

SAS 145 supersedes AU-C 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. It focuses on enhanced risk assessments as a driver of audit quality and defines the auditor’s responsibilities for understanding the entity’s system of internal control, including general information technology (IT) controls, and determining risks of material misstatement, including significant risks.

Preparing for the Audit

To navigate these changes effectively, business leaders should take a proactive approach:

1.??? Review and Documentation: Conduct a top-down review of financial statements, ensuring clear documentation of all estimates and their underlying methodologies.

2.??? Enhanced Collaboration: Foster open communication channels between management and auditors, particularly regarding the complexities of accounting estimates and the use of external specialists.

3.??? Internal Control Evaluation: Assess the robustness of internal controls, especially in areas prone to significant estimates or where specialists are involved.

Final Thoughts

Executives can also expect auditors to exercise a higher degree of professional skepticism when evaluating management's assumptions and estimates. The updated standards require auditors to test management's processes thoroughly, leading to a more detailed and potentially more time-consuming audit process.

To prepare, executives should ensure their financial teams are equipped to handle the increased scrutiny on accounting estimates and risk assessments. By understanding these new standards, business leaders can better navigate the evolving landscape of financial audits and maintain compliance with industry requirements.

For more information on these new auditing standards and their impact on your business, consult with the professionals at Sol Schwartz & Associates. If you’d like to discuss your organization’s audit needs with us, contact us at 210.384.8000 or [email protected].