Auditing Standards No. 99
Auditing Standards No. 99 commonly known as SAS 99 is a statement provided by the Audit Standard Board to supersede SAS 82. The report was established as a part response to fraud cases visible in accounting standards in the cases of Tyco, Enron, Adelphia, and WorldCom (Casabona and Grego 16). The standard is mainly active when it comes to auditing a company's financial statement to establish any fraudulent dealings. With the implementation of SAS 99, auditors will be exposed to a wider arena of procedures that can be utilized in detecting fraud. Apparently, with the standard, the auditor's fraud consideration is seamlessly blended into the process of audit and continually updated until the inspection process comes to an end. Incidentally, SAS 99 outlines a process where the auditor collects information required in risk identification regarding misstatement that contributes to fraud. Also, the standard provides a risk assessment procedure to be implemented after considering the evaluation of the controls and programs of the company in question. Additionally, SAS 99 presents an indication of how to respond to the obtained results of the audit process. The presented research outlines a discussion on the benefits and requirements of SAS 99. Additionally, it reveals how the standard ensured changes in the procedure of conducting an audit process.
The Importance of SAS 99
SAS 99 is an important standard as it adheres to professionalism requirements. The standard acts as a reminder to the auditors that all natural tendencies must be overcome during an auditing process. The natural tendencies, in this case, include cases of overreliance on the representations on a client. Additionally, the standard reminds auditors that any biases linked to the audit process including a skeptical attitude should be done away with when conducting the auditing process. Additionally, it is a standard requirement that the auditors should learn how to maintain honesty and do away with any grudges from past relationships when auditing. Furthermore, the standard outlines a set of recommendations that can be adopted by the auditors for them to be more skeptical when it comes to their audit process engagements. The moves are focused on ensuring transparency and accuracy of the data gathered by the auditors. In support of this, Casabona and Grego derives that SAS 99 standard is necessary as it collects the vital information required to material misstatement risks linked to fraud. The standard is known for its transparency in financial procedures (16).
SAS 99 is also vital as it calls for brainstorming on any potential of material misstatement. It is a requirement of the SAS 99 standard for the auditing team members to engage in discussions to establish the potential of misstatement in a company's financial statement as a result of fraud. The reviews are recommended to take place before or during the process of gathering information. The process of brainstorming is focused on promoting a better understanding of the information regarding the fraud. For instance, how the fraud may have found its way into the company's financial statements. Also, the brainstorming sessions seek to establish the level of skepticism implemented by the auditors in reporting material misstatement issues. Furthermore, SAS 99 is important as it directs auditors in efficiently conducting the audit process. With the standard, auditors can combine the presented risks and establish the necessary link to how they came into existence. The association is made possible through the Three Elements Fraud Triangle that includes the auditor, experience and judgment, and intuition.
Also, SAS 99 is important as it expounds on the number of sources that the auditors can consider in identifying potential risk of fraud in a company's financial statements. With the increased number of sources, it is much easier for the auditors to report on accurate information on a fraudulent activity unlike if the sources were limited. Incidentally, with limited sources, generalizations are highly possible hence making it easy to draw inaccurate conclusions on the fraud. SAS 99 issues guidance on how auditors can obtain information from analytical procedures, the organization's management, and other sources. The fact that the standard offers a guide on how to get information from analytical methods forms a basis of other benefits. For example, the fact that auditor always looks at current figures from relevant information on their personal capacity explains the reasons why auditors have failed to note material misstatements in the past. However, with SAS 99, the auditor is directed to consider results obtained from analytical procedures when identifying the risks linked to material misstatement arising from fraudulent activities.
There are several requirements of SAS 99 that are widely accepted as presented under the auditing standards. For instance, outlining a description of the fraud and its characteristics. According to the SAS 99 standards, fraud is defined as an intentional act that results in financial statements and material misstatements. Therefore, the standard requires the features of the present fraud to be reported at this stage before further actions are undertaken during the auditing process. The second requirement of SAS 99 is brainstorming. Through brainstorming, discussions are initiated to outline a discussion on the susceptible areas of material misstatement on the company’s financial statements as a result of fraud. The third requirement on SAS 99 includes having the auditor gather all the requisite information needed to identify material misstatement risks as a result of fraud. With this requirement, the auditors will involve the entity's management in a question and answer session on matters associated with the scam. Subsequently, the auditors will then decide if there is any need of educating the management about the fraud issues including how to detect and control it.
The fourth requirement calls for the identification of risks based on the gathered information by the auditor. The risks identified in this case include those that may result in a material misstatement. At this stage, auditors are challenged to alter how they think when they are assessing the fraud risks. Subsequently, the fifth requirement is an evaluation of the entity's controls and programs. The evaluation is considered as a venue for addressing the presented risks related to material misstatement. Apparently, SAS 99 standard outlines specific examples of controls and programs for businesses irrespective of their size. The choice of identifying the best mitigation control is left solely to the auditor to determine. The sixth fundamental requirement of SAS 99 includes risk assessment of material misstatement linked to fraud. Under this requirement, the auditor will also conduct an evaluation after the audit process is completed to gauge if the collected results from the procedure implemented during the audit process and observations have an effect on assessment.
How did this statement change the way that audits are performed?
SAS 99 made changes to how audits are carried out. With SAS 99, a new requirement was implemented in the auditing process. The presented requirement includes engaging in discussions and engagements with the verification team members to establish to the potential of misstatement within the financial statements as a result of fraud. The statement requires the brainstorming to be carried out twice when it comes to auditing. The first brainstorming session is conducted before the auditors gather information on the potential of the material misstatement. The second session of the brainstorming session is undertaking when the auditors are gathering the information as required by the standard. It is evident that the concept of brainstorming is new in auditing standards literature. Therefore, firms should be educated on how to adopt brainstorming efficiently and implement it during the auditing process. The need for accurate implementation is driven by the fact that it is a mandatory process required by SAS 99 hence it should be applied with the same degree of care as other provided auditing procedures (Casabona and Grego 16).
With the implementation of the new requirement, auditors are implementing brainstorming in different stages of the information gathering process. With this, the experiences and finding of all the members of the auditing teach are considered when it comes to assessments and providing a response. Therefore, constant engagements among the auditing team members have become a commonality with the new standard besides making the process of auditing longer and more accurate. The extended period undertaken by the auditing process comes about as the brainstorming sessions are a process in itself. Incidentally, to establish an active brainstorming process during auditing, the session is first split into two main sections. The primary objective of the session of brainstorming is to generate ideas regarding how fraud took place and how it was concealed by an entity. Therefore, the sessions initiate discussions on how the company in question can respond to the presented risks. The second stage of the structure of an effective brainstorming session includes establishing a workable timeframe for the session. According to Bellovary and Johnstone, a reasonable brainstorming session should be conducted in less than an hour. The third stage is task assignment (A11). At this stage, each member of the team within the brainstorming session is provided with a task to accomplish on the entity’s fraud matters. Gauging from the presented levels of structuring the brainstorming session, it is accurate to derive that the new requirement makes the auditing process overly longer. However, all aspects of the information-gathering procedure are explored therefore making it more likely that the auditors do not miss any information of potential material misstatements in an entity’s financial data.
In summary, SAS 99 is a newly established standard focused on dealing with cases of fraud in entities. The presented standard is beneficial when it comes to the auditing process. The fact that the standard calls for the auditors to maintain a high level of professionalism mean that transparency and accuracy is achieved during reporting of the potential of material misstatements in financial data. Also, the standard is necessary as it calls for brainstorming. Through brainstorming, it is easier to identify the cause of the fraudulent reporting in an entity's financial statements as well as gauge the skepticism levels of the auditor in reporting the presented information. Additionally, SAS 99 is regarded as an important standard since it expands the number of information sources that the account can address to obtain accurate information about fraud. The standard suggests how the auditors can implement the sources for accurate information reporting. There are also various fundamental requirements of SAS 99 such as describing and outlining the features of a fraud. The requirements act as a guide to the auditors on the steps to implement when engaging in an auditing process. SAS 99 has changed the way auditing is being carried out in that it provides a new requirement that includes brainstorming. With this, the auditing process becomes longer with the reported information being more accurate than when SAS 82 is implemented.
Bellovary, Jodi L., and Karla M. Johnstone. "Descriptive Evidence From Audit Practice On SAS No. 99 Brainstorming Activities."Current Issues In Auditing 1.1 (2007): A1-A11. Business Source Complete. Web. 21 Apr. 2016.
Casabona, Patrick A., and Michael J. Grego. "SAS 99 - Consideration Of Fraud In A Financial Statement Audit: A Revision Of Statement On Auditing Standards 82." Review Of Business 24.2 (2003): 16. Business Source Complete. Web. 21 Apr. 2016.