Audit Standards Update with Focus on Risk Suite and Impact on IT Audit Anne Skorija and Mike Billo Commonwealth of Pennsylvania Department of the Auditor.

Audit Standards Update with Focus on Risk Suite

and Impact on IT Audit

Anne Skorija and Mike BilloCommonwealth of Pennsylvania

Department of the Auditor General

Objectives• Risk Assessment Standards (SAS 104-111)– What lessons have we learned during

implementation and External Quality Control Reviews

• Other AICPA Standards including:– Communicating Internal Control Related Matters

Identified in an Audit (SAS 112 vs. 115)– Communication with Those Charged with

Governance (SAS 114)

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Objectives• GAO Standards:– Government Auditing Standards – 2007 revisions

impacting IT Audit (Financial and Performance Audits)

– Federal Information System Controls Audit Manual (FISCAM) – updated February 2009

– Assessing the Reliability of Computer Processed Data – updated July 2009

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SAS 104 - 111

“Risk Assessment Standards”

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Risk Assessment Audit Standards

• All issued March 2006• Effective for audits of Financial Statements for

periods beginning after December 15, 2006 (some audits already through External QCR)

• These standards stress improving the quality and depth of understanding and effectiveness of financial statements being audited

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What Risk Assessment Means

• When planning and conducting an audit, the main focus should be on those areas of higher risk for material misstatement

• Step 1 – think about where material misstatements can occur

• Step 2 – design audit procedures responsive to those risks

• Step 3 – evaluate audit findings and assess impact on audit opinion

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SAS 104

• Amendment to SAS 1, Codification of Auditing Standards and Procedures (“Due Professional Care in the Performance of Work”)

• Reasonable assurance is a key concept that underlies all aspects of auditing

• Clarifies that the term reasonable means a high level of assurance

• Auditors need reasonable assurance that the Financial Statements are not materially misstated

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SAS 105

Amendment to SAS 95, Generally Accepted Auditing Standards

Cleans up language throughout SASsmust be performed by persons having adequate

technical training and proficiency as an auditormust obtain sufficient understanding of the

entity, environment, including Internal control…must obtain sufficient appropriate audit evidence

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SAS 106

• Audit Evidence• Sufficient appropriate audit evidence is basis

for audit opinions – Evidence must be gathered for each of the

relevant F/S assertions• Defines the term “appropriate” – measure

of quality• Auditors should evaluate the nature and

complexity of the use of IT

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SAS 107

• Audit Risk and Materiality in Conducting an Audit

• Risk of Material Misstatement (RMM)• Inherent Risk• Control Risk

• Determining Materiality • What would users consider material?

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SAS 108

• Planning and Supervision• Auditor may assign a professional possessing

IT skills to inquire– How data and transactions are initiated,

authorized, recorded, processed and reported– How IT controls are designed; inspecting systems

documentation, observing operation of IT controls; and planning and performing tests of IT controls

• Consider changes in IT systems when planningOctober 1, 2009 Pennsylvania Department of the Auditor

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SAS 109

• Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement

• SAS 109 and 110 together supersede SAS 55, 78 and 94

• Includes consideration of the entity’s use of information technology

• More on this later…

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SAS 110

• Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained

• Design further audit procedures in response to risks of material misstatement at the relevant assertion level.

• Make a clear connection between risks/controls over IT and the extent of testing

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SAS 111

• Amendment to Statement on Auditing Standards No. 39, Audit Sampling

• Cleans up Audit Sampling (AU Section 350 – SAS 39) to include the Risk Assessment Standards

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SAS 109Greatest Impact on IT Audits

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Key Steps in a Financial Statement Audit

• Assess Risk – by performing Risk Assessment Procedures (SAS 109)– Every financial statement audit you are required

to assess the risks that individual financial statement assertions are materially misstated.

– Including risks associated by IT

• Respond to Risk – by designing audit tests that address those risks (SAS 110)

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Emphasis is on Transactions

• Information technology encompasses automated means of originating, processing, storing and communicating information

• An entity’s use of IT may be extensive, however, the auditor is primarily interested in the entity's’ use of IT to initiate, authorize, record, process, and report transactions or other financial data

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Audit Risk

• Risk that the financial statements are materially misstated – and the auditor fails to detect such a

misstatement or appropriately modify the audit opinion

• Reduce audit risk by:– Assessing the risk of material misstatement– Based on that assessment, design and perform

overall responses and further audit procedures that reduce audit risk to a low level.

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Significant Classes of Transactions

• Transactions that are important to our assessment of the risk of material misstatement– Therefore, we need to design audit procedures to

test these transactions by assertion (Occurrence; Completeness; Accuracy; Cutoff; Classification )

• For example: Personal Income Tax transactions may be a significant class of transactions to a State

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Material Account Balances

• Account balance on the balance sheet is important to our assessment of the risk of material misstatement– Therefore we need to design audit procedures to

test the F/S assertions relevant to this account balance (Existence; Rights and Obligations; Completeness; Valuation and Allocation)

• Example: Long-term Debt may be a material balance to a state’s balance sheet

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Internal Control Components• Control Environment – sets the tone

• Entity’s risk assessment– identification and analysis of relevant risks

• Information and Communication systems– support the identification, capture and exchange of

information• Control activities– policies and procedures that help ensure that

management directives are carried out• Monitoring– Asses quality of internal controls over time

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Obtain an Understanding

• The auditor should understand the five components of internal control in order to assess the risk of material misstatement which will assist in the following:– Identifying potential misstatements– Considering issues that affect the risks of material

misstatement– Assisting in the design tests of controls and

substantive procedures

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What’s New in SAS 109

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Computer Controls

• General Controls– Access (logical and physical)– Change management– Operations

• Application Controls

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Goal of Computer Control Reviews

• Gain an adequate understanding of the computer controls; document that understanding so that a clear link exists between the controls that have been implemented to the significant financial statement assertions, i.e., significant account balances and significant classes of transactions

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SAS 109Steps to Implementation

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Implementing the Risk Assessment Standards

• Training:– IT Auditors trained to think like financial auditors:

• Risk, material balances, significant classes of transactions– Financial Auditors learning to better identify the

applications/systems that are the sources of the Financial Statements

• Communications:– IT Auditors and Financial Auditors meeting to

compare applications vs. transactions/balances• Lesson learned: Do Not Assume

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Assess the Situation

• New staff with IT backgrounds• First year back involved with statewide

financial audit• Simultaneous implementation with financial

auditors

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Training of our staff

• Review of the CAFR and Basic Financial Statements

• Interplay of opinion units and materiality• Significant Classes of Transactions• Material Balances• Audit Risk – Risk of Material Misstatement

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Training of our staff

• Risk Assessment Standards– Risk and materiality in a financial statement audit– How a financial statement audit differs from a

performance audit

• Focus on SAS 109– Five components of internal control

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Agency Entrance Conferences

• “Training” auditees – providing background information on risk assessment standards and new reporting requirements (SAS 112)

• Focus on services provided by IT to the agency: What do you do? What transactions do your applications create?

• Take away: list of applications and transactions– Start to make the connection between

systems/applications and dollarsOctober 1, 2009 Pennsylvania Department of the Auditor

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Meeting with Financial Audit Team

• Discuss the list of applications and transactions with the Financial Audit Teams (each agency)

• Determine which applications process– Significant classes of transactions, or– Material financial statement balances

• Are we missing any applications?– E.g., a certain educational subsidy was not processed

by the Department of Education but rather processed by another agency on a Unix box across town

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Summary Memo• List of applications and systems included in our

controls review• Strategy for grouping systems to efficiently

review controls– Common control can be reviewed together – i.e.,

common use of Active Directory for user authentication or Endeavor to manage change

• Level of procedures to be performed – Walkthrough of one vs. test of a sample

• Are we missing any applications?– Confirm again with financial auditors

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IT Audit Procedures

• Documenting operational effectiveness of controls placed in operation

• Walkthroughs in four key areas:– Manage change– Logical access– Physical access– Computer operations

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SAS 109 – New Areas of Interest

• Manual controls that depend on IT (paragraph 84)

• Error correction procedures (paragraph 85)• Controls over the financial reporting process

(paragraph 86) – Enter transaction totals into the general ledger (or

equivalent record).– Journal entries and recurring journal entries– Combine into financial statements

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Other New SASs

• SAS 112 – Communicating Internal Control Related Matters Identified in an Audit (updated by SAS 115)

• SAS 113 – Omnibus Statement on Auditing Standards – 2006

• SAS 114 – The Auditor’s Communication With Those Charged With Governance

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Communicating Internal Control Matters Identified in an Audit

• Audit Requirements:– Financial Audits: SAS 112; GAO 5.10-5.14– Performance Audits: GAO 8.18 – 8.20

• SAS 115 – effective for audits of financial statements for periods ending on or after December 31, 2009– OMB Circular A133 still requires SAS 112 language for

FYE 6/30/09 audits– Yellow Book – still uses SAS 112 language

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SAS 112 vs. 115

• New definition of Significant Deficiency– SAS 112• adversely affect the entity’s ability to initiate,

authorize, record, process or report financial data; and• More than a remote likelihood of misstatement

– SAS 115• Deficiency or combination of deficiencies in internal

control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

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SAS 112 vs. 115

• Change to definition of Material Weakness– SAS 112• More than a remote likelihood that a material

misstatement of the financial statements will not be prevented or detected

– SAS 115• Reasonable possibility that a material misstatement of

the financial statements will not be prevented, or detected and corrected on a timely basis

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Those Charged With Governance (TCWG)

• Audit Requirements:– Financial Audits: SAS 114; Communication

requirements in SAS 54, 74, 99, 112 ; GAO 4.06-4.08, 5.44

– Performance Audits: GAO 7.46 -7.49, 8.05, 8.07, 8.43, • Auditors should document – the process used to identify TCWG & the conclusions

reached for the appropriate individuals to receive the required communications and

– evidence that communication with TCWG occurred.

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Recent GAO Guidance

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Government Auditing Standards

• Impact on IT Audits – in 2007 revision:

• Chapter 4 – Fieldwork Standards for Financial Audits – Covered by AICPA Auditing Standards

• Chapter 7 – Standards for Performance Audits– Some new language

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2007 Yellow Book

• IT impacts performance audits in three ways (paragraph 7.27):1. Information systems controls as part of internal

controls2. Information systems as the source of reports and

data files (used as evidence and/or used to support report)

3. Evaluation of information systems controls as a major part of an audit objective

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Categories of General Controls in 2007 Yellow Book

• 2007 Yellow Book lists general controls under the following categories:– Security management– Logical and physical access– Configuration management– Segregation of duties– Contingency planning

• Categories correspond to FISCAM 2009

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FISCAM

• Federal Information System Controls Audit Manual (FISCAM)

• Revised February 2009• Expanded Purpose: provide guidance for

GAGAS Audits• Conforms with 2007 Yellow Book and AICPA

auditing standards

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Business Process Application Controls

• Categories in both 2007 Yellow Book and 2009 FISCAM:– Completeness– Accuracy– Validity– Confidentiality– Availability

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Assessing the Reliability of Computer Processed Data – July 2007

• Designed to be consistent with 2007 Yellow Book

• Replaces the 2002 Assessing the Reliability of Computer-Processed Data

• Key Points:– Conducting only the amount of work necessary to

determine whether the data are reliable enough– Maximizing professional judgment

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Assessing the Reliability of Computer Processed Data – July 2007

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Questions/Comments Thank you!

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