The stand-back requirement and linking risks to responses (AU-C 330)

In this lesson you will

Apply the AU-C 315.40 stand-back to material items not deemed significant.
Design overall and assertion-level responses under AU-C 330.05-.07.
Document the linkage between risks and procedures required by AU-C 330.30.

The stand-back

SAS 145 added a check at the end of the risk assessment. AU-C 315.40 requires you, for material classes of transactions, account balances or disclosures that you did not determine to be significant, to evaluate whether that determination remains appropriate.

It exists because significance depends on identified risks, and you may have missed one. A material balance with no relevant assertion should be unusual. Ask again: Is there any reasonable possibility of a material misstatement? Did anything change? Did management's estimates or processes touch it?

AU-C 315.39 adds that you evaluate whether the evidence from risk assessment procedures provides an appropriate basis for the assessment, considering corroborative and contradictory evidence, and perform more procedures if not. AU-C 315.41 requires revising the assessment when new information is inconsistent with it.

The substantive floor

AU-C 330.18 requires substantive procedures for each relevant assertion of each significant class, balance and disclosure, regardless of the assessed level of control risk. Even with effective controls, every relevant assertion gets some substantive work. A material item that is not significant may need little or no work beyond what AU-C 330 otherwise requires, but the stand-back documents why.

Overall responses

AU-C 330.05 requires overall responses to financial statement level risks. Examples:

More experienced staff or specialists.
More supervision.
More unpredictability in procedures: testing locations or accounts not usually tested, changing timing, using different sampling methods.
More substantive work at year end rather than interim.

AU-C 240.29 requires specific overall responses to fraud risks at the financial statement level: assigning and supervising personnel with appropriate knowledge, evaluating management's selection and application of accounting policies, and incorporating unpredictability.

Assertion-level responses

AU-C 330.06 requires further procedures whose nature, timing and extent are based on and responsive to assessed risks at the relevant assertion level. AU-C 330.07 requires you to:

consider the reasons for the assessed risk, including inherent risk characteristics and whether you plan to rely on controls; and
obtain more persuasive evidence the higher the assessed risk.

More persuasive means changing nature (tests of details over analytics, external confirmation over internal documents), timing (year end over interim) or extent (larger samples). Raising only the sample size while the procedure type stays the same is often the weakest response to a higher risk.

Linkage documentation

AU-C 330.30 requires documentation of the overall responses, the nature, timing and extent of further procedures, the linkage of those procedures with the assessed risks at the relevant assertion level, and the results. In practice:

each risk has a reference to the procedures that address it;
each procedure states which risk and assertion it addresses;
higher-risk assertions show visibly different procedures from lower-risk ones.

A risk assessment matrix by assertion with a "response reference" column does this in one place.

Common findings

Standard audit programs not tied to specific risks.
Identical procedures for low and high risk assertions.
No stand-back documentation for material items.
Fraud risk overall responses missing, especially unpredictability.
Risk ratings revised during fieldwork with no matching change to the programs.

Read the matrix from right to left before sign-off: start with each procedure and confirm it points back to a risk. Procedures with no risk behind them are candidates for removal; risks with no procedure are gaps.

Worked example

Stand-back and linkage at a retailer

Clearview Home Goods, Inc. has materiality of $200,000. During the stand-back the senior lists material items not deemed significant: prepaid rent ($310,000) and other accrued liabilities ($420,000).

Prepaid rent: one landlord, one month paid in advance, unchanged lease. The senior confirms the determination remains appropriate and documents it.

Other accrued liabilities: the senior notices the balance fell from $780,000 to $420,000 while store count grew from 18 to 22. The prior-year balance per store was $780,000 / 18 = $43,333. The expectation at 22 stores is about $953,000, so the recorded balance is $533,000 lower. That contradicts the original assessment. Under AU-C 315.41 the senior revises the assessment: completeness of accrued liabilities is a relevant assertion, and the balance is significant.

Response, linked in the matrix: a search for unrecorded liabilities covering January-February disbursements over $25,000, and a test of details on bonus and utilities accruals. The search finds $290,000 of unrecorded December utilities and maintenance invoices. The team proposes the adjustment and records the revision in the planning memo.

Self-check

Answer each question before you open the answer.

What does the stand-back in AU-C 315.40 require?
Show answer
For material classes, balances and disclosures not determined to be significant, evaluate whether that determination remains appropriate.
Does AU-C 330.18 allow skipping substantive work on a relevant assertion if controls tested effective?
Show answer
No. Substantive procedures are required for each relevant assertion of each significant item regardless of the assessed control risk.
What linkage does AU-C 330.30 require you to document?
Show answer
The linkage of further audit procedures with the assessed risks at the relevant assertion level, along with overall responses, nature, timing and extent of procedures, and results.
Give two ways to obtain more persuasive evidence for a higher assessed risk besides a larger sample.
Show answer
Change the nature, such as using tests of details or external confirmations instead of analytics, or change the timing, such as testing at year end instead of interim (AU-C 330.07).

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error