Risk Assessment When Auditing Private Entities

Overview

This study uses difference-in-differences (DiD) analyses to examine the consequences of adopting the U.S. critical audit matter (CAM) disclosure requirement for preparers and users of financial reports. The CAM requirement is one of the largest expansions of the U.S. audit report since the 1940s. We document significant changes to financial statement footnotes referenced by CAMs, which suggests an indirect consequence where management disclosure changes in areas that are expected to be scrutinized following auditor-provided disclosure. Results also suggest that, on average, CAM disclosures do not provide incremental information to the market. To further examine market reaction, we develop well-specified prediction models for the expected number and subject areas of CAMs. We find limited initial evidence that the market reacts negatively when unexpected CAMs are disclosed. Overall, the findings provide insights on the new CAM standard and particularly demonstrate its relevance to management disclosure decisions and to the market.

Highlights

• Review of applicable auditing standards for risk assessment
• Update for SAS #145
• Identification and discussion of high-risk audit areas
• Discussion and analysis of control risk vs. inherent risk
• Practical approach to auditing companies where controls are minimal or not adequately documented
• Detailed discussion and examples of risk assessment procedures and alternative approaches

Prerequisites

None.

Objectives

• Recognize high-risk areas applicable to private companies
• Determine the best approach to deal with private company shortcomings in control activities
• Identify the appropriate risk assessment procedures in the circumstances

Preparation

None.

Notice

This is a self-study/on demand course offered by a 3rd party vendor and will NOT be accessible in the My Upcoming CPE section of the ISCPA website. Course access information will be emailed directly to you by CalCPA. The course expires one year from the purchase date. Format = Online Self-Study.