The Stand-Back Assessment Requirement under SAS 145
While Taylor Swift might be the music icon everyone is talking about these days, there’s another American singer-songwriter icon that inspired today’s blog: Stevie Nicks – specifically her song, “Stand Back”. Each time I read the stand-back requirement found in Statement on Auditing Standards (SAS) No. 145, I can’t help but start singing the song in my head! Even if you aren’t a Stevie Nicks fan (or if you don’t know who she is), hopefully this post will help you remember to perform the stand-back assessment on your audits!
Guidance
Statement on Auditing Standards (SAS) No. 145, Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement was issued in October 2021 by the AICPA Auditing Standards Board (ASB). The ASB specifically notes in their “At-a-glance” document overviewing SAS 145 that the SAS “does not fundamentally change the key concepts underpinning audit risk. Rather it clarifies and enhances certain aspects of the identification and assessment of the risks of material misstatement to drive better risk assessments and, therefore, enhance audit quality.” If you want to learn more on the requirements of SAS 145, check out our SAS 145 collection.
Found within the 200+ page document that is SAS 145, there is the stand-back assessment requirement.
Overview of the stand-back assessment
SAS 145, paragraph 40 states:
“For material classes of transactions, account balances, or disclosures that have not been determined to be significant classes of transactions, account balances, or disclosures, the auditor should evaluate whether the auditor’s determination remains appropriate.”
This stand-back requirement focuses on two key words: material and significant. Let’s clarify what those terms mean under U.S. Generally Accepted Auditing Standards (U.S. GAAS).
Material
Materiality is in the context of the financial statements. According to U.S. GAAS, classes of transactions, account balances or disclosures are material “if there is a substantial likelihood that omitting, misstating, or obscuring information about them would influence the judgment made by a reasonable user based on the financial statements.” Keep in mind that materiality is not just a quantitative determination – qualitative factors must also be considered!
Significant
Classes of transactions, account balances or disclosures are determined to be significant when there is “one or more relevant assertions” identified. SAS 145 adds a bit more detail and explains that “significance can be described as the relative importance of a matter and is judged by the auditor in the context in which the matter is being considered. For inherent risk, significance may be considered in the context of how, and the degree to which, inherent risk factors affect the combination of the likelihood of a misstatement occurring and the magnitude of the potential misstatement should that misstatement occur. The determination of significant risks allows for the auditor to focus more attention on those risks that are close to the upper end of the spectrum of inherent risk through the performance of certain required responses.”
Said another way, the requirement involves looking at all of the material transactions, accounts and disclosures that have not been determined to be significant and evaluating if changes need to be made (i.e., if an account should have been determined as significant).
Why SAS 145 added the assessment
The stand-back requirement was added to aid an auditor in evaluating if they have completely identified all the significant classes of transactions, account balances, and disclosures. Think of it as a “double-check” to make sure an account, transaction, or disclosure that is material isn’t overlooked. Remember, the whole point of risk assessment procedures (including the stand-back) is to aid the auditor in the identification and assessment of risks. If risks aren’t properly identified and assessed, then the audit may be ineffective!
Documentation is key. Perhaps you have a material account that, in your professional judgement, isn’t significant? That’s fine! Your logic and reasoning must be documented.
When to perform the assessment
Auditors are required to identify and assess the risks of material misstatement to provide a basis for designing audit procedures to respond to these risks. We aren’t diving into the details of risk assessment procedures in this blog post, but in terms of timing, the stand-back assessment should occur after initial risk assessment procedures are performed but before the response procedures are conducted.
If, when performing the stand-back assessment, an auditor identifies a transaction, account, or disclosure that is significant, the auditor must document the findings of the assessment and adjust risk assessment and any planned audit responses, as necessary.
In summary
Do you or your team need a refresher of foundational audit concepts? Or perhaps you’d like to dive deeper into the world of internal controls. Either way, GAAP Dynamics has you covered.
We also have you covered with a fun fact about Steve Nicks and “Stand Back”! Stevie heard Prince’s “Little Red Corvette” while driving and liked the melody. She stopped and bought a tape recorder and recorded the song on the evening of her wedding day! After telling Prince how she wrote the song, he played synthesizers on it. According to Stevie, “Stand Back” is one of her favorite songs onstage.
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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.