AICPA Proposes New Standard to Help Auditors Assess the Risks of Material Misstatement in Financial Statements

August 27, 2020

The proposed SAS also includes guidance for how auditors address the risks arising from the entity’s use of IT and maintain professional skepticism.

NEW YORK, NY (August 27, 2020) – The American Institute of CPAs (AICPA) Auditing Standards Board (ASB) has issued an exposure draft of Proposed Statement on Auditing Standards (SAS) Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement to supersede SAS No. 122, as amended, section 315 of the same title, and amend various AU-C sections in AICPA Professional Standards.

“The way business is conducted and the manner in which entities record, process and summarize financial information has evolved rapidly,” said Bob Dohrer, CPA, CGMA, AICPA Chief Auditor. “This evolution affects the auditor’s assessment of the risks of material misstatement. This proposed SAS, which reflects this ongoing transformation, improves audit quality by enhancing the auditor’s process for identifying and responding to the risks of material misstatement in an entity’s financial statements.”

The proposed SAS is based on the International Standard on Auditing 315, Identifying and Assessing the Risks of Material Misstatement. The overall objectives of this proposed SAS are:

  • To enhance the requirements and guidance on identifying and assessing the risks of material misstatement, in particular the guidance that addresses the entity’s system of internal control and information technology (IT).
  • Revise the definition of significant risks. The current definition focuses on risks that require special audit considerations. The revised definition focuses on where those risks lie on the spectrum of inherent risk and it includes new guidance intended to enhance an auditor’s professional skepticism.

Interested parties are encouraged to submit their feedback to the ASB at by November 25, 2020.

About the Auditing Standards Board

The ASB is the senior technical committee of the AICPA designated to issue auditing, attestation, and quality control standards applicable to the performance and issuance of audit and attestation reports for non-issuers. Its mission is to develop and communicate comprehensive performance, reporting, and quality control standards and practice guidance to enable auditors of non-issuers to provide high quality, objective audit and attestation services at a reasonable cost and in the best interests of the profession and the beneficiaries of those services, with the ultimate purpose of serving the public interest by improving existing and enabling new audit and attestation services.