Choosing significant accounts after AS5

After the Auditing Standard No. 5 with ‘risk based, top down approach’ replaced AS2, companies will change the way of selecting significant accounts from previously ‘whether it exceeds materiality threshold regardless of risks’, to qualitative factors. This ‘qualatative first, quantative second’ approach will allow companies to focus resources on key controls and therefore to reduce the costs.

An article from Compliance week suggested a new way of choosing significant accounts.

Amon the factors, companies should consider following in identifying significant accounts and disclosures:

  • Size and composition of the account;
  • Susceptibility to misstatement due to error or fraud;
  • Transaction volume and complexity;
  • Nature of the account or disclosure;
  • Accounting and reporting complexities associated with the account or disclosure;
  • Exposure to losses in the account, as well as to significant contingent liabilities;
  • Existence of related party transactions affecting the account.

In particular, SEC stresses the risk of management improver override of internal controls.

From a recent KPMG survey found that companies who focus on ‘risk based, top down’ approach, not the coverage as primary driver, ended up with better outcomes. This is exactly how ’80/20′ rule works.

Going forward, companies will gradually identify the key significant accounts by scoping out low impact controls. This is the major reason people think how AS5 can help companies lower the compliance costs.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: