Risk assessment in auditing of financial statements Research Paper

Risk assessment in auditing of financial statements - Research Paper Example SAS No. 109 was issued in 2006 along with seven other auditing standards. What’s important about these eight (8) auditing standards was their common theme – adherence to risk assessment and the audit response to such an assessment. These eight auditing standards were expected to bring about major changes and to give guidelines and guidance when auditing nonpublic entities (McConnell and Schweiger, 2007). The primary objective of these eight standards was to improve the conduct of audit by the external auditor through requiring the auditors to acquire a deeper understanding of a company’s internal controls so that the auditor is in a better position to â€Å"identify risks of material misstatement of financial statements† (McConnell and Schweiger, 2007). With this primary objective, the issuers hope that there will be better â€Å"linkages between assessed risks and the nature, timing and extent of audit procedures performed in response to those risks† (McConnell and Schweiger, 2007). The first paragraph of SAS No. 109 established the provisions and guidelines for obtaining â€Å"an understanding of the entity and its environment†¦to assess the risk of material misstatement of the financial statements† (AICPA, AU Section 314, 2006). The second paragraph provides brief summaries of the specific sections of the standard. The subsequent paragraphs expound on the summaries provided in the second paragraph. Paragraph 3 lists â€Å"examples of considerations for establishing a sufficient understanding† of the entity (AICPA, AU Section 314, 2006). Paragraph 4 calls on external auditors to â€Å"use professional judgment to determine the extent of the understanding required of the entity and its environment† (AICPA, AU Section 314, 2006). Certain paragraphs of SAS No. 109 outline and explain the risk assessment procedures (i.e, inquiries, analytical procedures and observation) an auditor needs to perform to obtain such an understanding. The