Auditing Standards Standard: SAS No.

Auditing Standards

Standard: SAS No. 110. Performing audit procedures in response to assessed risks and evaluating audit evidence obtained. AU Section 318

AU section 318 establishes standards for determining overall responses to assessed risks of material misstatement. The auditing role requires a degree of professional skepticism, and this should be reflected in the overall response to the financial statements. This standard focuses on the ways that an appropriate overall response should be achieved. The auditor has a number of control mechanisms that can be used as part of the overall response, for example changing the nature, timing or extent of auditing procedures, providing more supervision or adding elements of unpredictability to the selection of audit procedures performed.

In designing the audit, the auditor should consider the significance of the risk, the likelihood that misstatement will occur, the characteristics of the transaction, the nature of controls used by the entity and whether the auditor expects to obtain evidence of effectiveness with respect to the controls. Essentially, the auditor needs to understand the risk of material misstatement and design the audit based on that risk. The procedures, timing and intensiveness of the audit will be impacted by the auditor's assessment of this risk.

For example, with respect to timing, the auditor should consider the control environment, when relevant information is available, the nature of the risk at hand, and the time period to which the audit evidence relates. With respect to the nature of the audit procedures, the auditor must base this on his or her view of the nature of the risk at hand -- emphasizing some tests over others. There should be a correlation, therefore, between the way the audit is designed and the types of risks that are involved.

This standard essentially gives the auditor permission and authority to design the audit based on his or her evaluation of the risks. The implementation of this standard will give auditors much more control over the audit process. This gives the auditors the tools they need to meet their responsibilities with respect to professional skepticism. Auditors are responsible for the quality of the financial statements, and this standard gives them the mandate to be sufficiently creative in the audit design so as to detect misstatement.