Management’s and auditors’ risk assessment processes play a crucial role in financial reporting decisions and the effectiveness of internal controls over financial reporting (ICFR). In a Statement released by SEC Chief Accountant Paul Munter on Aug. 25, he voices concern over instances in which management and auditors appear to focus narrowly on information and risks that directly impact financial reporting, while disregarding broader, entity-level issues that may also impact financial reporting and internal controls.
Certain issues that affect financial reporting and internal controls manifest as isolated incidents within a company, like non-ICFR data breaches or non-financial regulatory findings. Management and specific auditors might inadvertently assess these incidents individually or rationalize them, leading to a conclusion that they don’t warrant disclosure or communication. The Statement emphasizes the need for management to adopt a holistic view during risk assessment, design responsive processes and controls, and identify necessary information for investor communication. Additionally, the Statement discusses auditors’ role as gatekeepers to hold management accountable in the public interest.
The Statement further delves into management’s duty to assess information comprehensively, design controls aligned with identified risks, and effectively communicate required information to investors. It also addresses auditors’ responsibilities, underlining the importance of professional skepticism during risk assessment and the need to assess consistency in information disclosed by companies. Entity-level controls are highlighted, with an emphasis on considering the root causes of control deficiencies outside financial reporting objectives. The evaluation of control deficiency severity in relation to misstatements is also discussed. Mr. Munter stresses the importance of clear and transparent communication for investors’ benefit. Ultimately, effective risk assessment processes and strong internal controls ensure high-quality financial information, with auditors playing a critical role in transparently communicating with investors.
See SEC Chief Accountant August 25 Statement titled: “The Importance of a Comprehensive Risk Assessment by Auditors and Management.”
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