Auditing Standards and Auditing Standards and Continuous AuditingContinuous Auditing

Lynford Graham

Member, Auditing Standards Board

BDO Seidman LLP

Auditing StandardsAuditing Standards

• SAS 97 (Amends #50)

• Fraud (Amends #82)– Revenue Procedures

– Management Override

• Risk and Materiality – Business Risk Focus

• Interim (Amends #71)

• Sarbanes-Oxley Act– Reporting on Controls

Top 5 New Accounting TermsTop 5 New Accounting Terms

• CEO• CFO• EPS• EBIT• EBITA

Traditional Traditional AuditAudit

Continuous Continuous AuditingAuditing

Continuous Continuous AssuranceAssurance

•Periodic Reporting•Periodic Auditing

•Periodic Reporting•Monitoring

•Continuous Reporting•Continuous Monitoring

CICA / AICPACICA / AICPA

“A continuous audit is a methodology that enables independent auditors to provide written assurance on a subject matter, for which an entity’s management is responsible, using a series of auditors’ reports issued virtually simultaneously with, or a short period of time after, the occurrence of events underlying the subject matter.”

Not PracticalNot Practical

Continuous Assurance

• Demand ?????

• Costs

• Limitations of Accounting’s Period Concept

• Standards Implications – ‘Should Not Rely Exclusively on Controls’ (Risk Assessment)

“Regardless of the assessed level of control risk of material misstatement, the auditor should planAnd perform some substantive procedures tests for each material class of transactions and account balances”[Draft Risk Assessment Standard]

Audit Approach ComparisonCharacteristic Traditional Approach Continuous

Auditing Approach

Timing of Visits 4th Quarter / Post Year End Frequent

Use of Internal Reports

Sometimes Key Information Monitored

Primary Audit Strategy

Detailed Substantive Testing Controls and Analytics throughout the year. Targeted sampling.

Resource Needs Post 4th Quarter Throughout Year

Control Risk Completion of tests of controls at “preliminary.”

Focus on Automated Controls

Continuous Auditing Approach

System Reviews

Planning

Q1

Monitoring, Planning and Execution

Review Review Review Review

Q2 Q3 Q4

Confirmations

Trends Supporting More Continuous Trends Supporting More Continuous

AuditingAuditing

• –“[W]e need to move toward a dynamic model of current disclosure of unquestionably material information.” Harvey Pitt http://www.sec.gov/news/speech/spch523.htm

• Audit Resource Management

• Quarterly Reporting

•SEC shortens 10K & 10Q filing date windows (8-27-02)

•Standards–Fraud (SAS 82)

–Risk Assessment (SAS 55, 94)

–Interim Reporting (SAS 71)

•XBRL

–Facilitates Timely Reporting

Language in Draft Standards

• …auditing involves a continuous process of gathering, updating and analyzing information throughout the audit. Accordingly, the sequence of the requirements and guidance in this statement may be performed differently among audit engagements. [Proposed Fraud Standard]

• …an important management responsibility is to establish and maintain internal control on an ongoing basis. Management’s monitoring of controls includes whether they are operating as intended and that they are modified as appropriate for changes in conditions. [Proposed AU 319 revisions]

• The characteristics of routine day-to-day business transactions often permit highly automated processing with little or no manual intervention. In such circumstances, it may not be possible to perform only substantive procedures in relation to the risk. [Proposed Risk Assessment Standard]

DirectionsDirections

• Neither Mandate nor Prohibit Continuous Auditing

• Best Practices /Guidance

• Periodic Reporting Model

• Trends – More Timely Auditing and Reporting

• Effectiveness ??????

??????

BDO SeidmanBDO Seidman

• Strategic Risk Assessment Software –2002 [Compass Version 3]

• BDO International Policy and Guidance

• Applications / Fieldtests

Example – Real Time Example – Real Time ConnectionConnection

•Real Estate

•Laplink +MS Access

•Mathematica, Master View, FAS 66

– Master View Industry and Asset Info.

•IDEA Script

DB4 Timberline – Prop. Lawson – Cos.

Questions / CommentsQuestions / Comments