Title: Head of Audit Effectiveness Panel Speaks Out
Abstract: Former Price Waterhouse LLP Chairman Shaun F. O'Malley found himself with little free time after he became chairman of the Panel on Audit Effectiveness two years ago. despite the fact that the panel completed its massive report on the state of independent corporate audits August, his pace still has not slowed. To balance what he feels has been uneven press coverage of the panel's findings and recommendations, O'Malley sat for a JofA interview to explain their significance and the reasoning behind them. risk model Panel members assessed current auditing practices by examining 126 audits performed by the eight largest firms over a two-year period. This was the raw material upon which the panel based many of its findings and recommendations. Following its review of the firms' audits, the panel concluded that the model for financial statement audits (the audit risk model) generally was appropriate but needed to be updated and enhanced and that auditors should more consistently apply the principles underlying it. model employs a preaudit assessment to identify high-risk areas on which auditors should focus most of their time and effort. O'Malley emphasized the importance of tailoring the to the findings of the risk assessment: First you evaluate risk; then you develop an program to focus on high-risk areas. This is more effective than having auditors focus only on the size of the account or having them go down the balance sheet or the profit and loss statement, account by account, without regard to risk or the control About the time the panel was formed, O'Malley said, SEC Chief Accountant Lynn Turner expressed concern that the profession's reliance on the risk-based model might be impairing effectiveness. O'Malley understood the reason for Turner's apprehension. Using the risk-based model often reduced the amount of substantive work, he said. But its real purpose was to enable auditors to apply their resources more effectively to areas needing special attention, not to perform less-thorough audits. The question is whether the risk-based model can be implemented successfully and consistently today's environment. We believe it can. Auditors who use it and develop a greater knowledge of the business and control environment can design audits that more effectively focus on high risks and weak controls, he said. Even so, the panel found that, on some of the audits it reviewed, the model was out of date and inconsistently implemented. It failed to include the concept of engagement risk, did not clearly include fraud risk within the concepts of inherent risk or control risk and was not specific enough, O'Malley said. panel had noticed instances in relatively identical circumstances, where firm A looked at a sample of several hundred items and firm B looked at a sample of 10, O'Malley said. Such variations application contributed to the panel's finding that auditors did not apply the model consistently. Those critical of the profession say economics drove this, he said. But I don't think so. Even if you had a perfectly executed risk-based audit, misstatements still could have remained. You will never eliminate fraud--a prime source of misstatements--but implementing our recommendations would increase the possibility of detection and help deter How to recognize cooked books panel also recommended auditors use forensic auditing procedures to focus on those aspects of financial reporting with the highest incidence of fraud. That was our way of addressing the issue of fraudulent reporting head-on, O'Malley said. He added that panel members were particularly concerned about the level of auditing performed on nonstandard journal entries, which often can shield questionable items from scrutiny and, therefore, merit auditors' special attention. …
Publication Year: 2000
Publication Date: 2000-12-01
Language: en
Type: article
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Cited By Count: 2
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