Auditing Standards and Continuous Auditing

1. Auditing Standards and Continuous Auditing Lynford Graham Member, Auditing Standards Board BDO Seidman LLP

2. Auditing Standards • SAS 97 (Amends #50) • Fraud (Amends #82) • Revenue Procedures • Management Override • Risk and Materiality • Business Risk Focus • Interim (Amends #71) • Sarbanes-Oxley Act • Reporting on Controls

3. Top 5 New Accounting Terms • CEO • CFO • EPS • EBIT • EBITA

5. Continuous Assurance Traditional Audit Continuous Auditing • Periodic Reporting • Periodic Auditing • Periodic Reporting • Monitoring • Continuous Reporting • Continuous Monitoring

6. CICA / AICPA “A continuous audit is a methodology that enables independent auditors to provide written assurance on a subject matter, for which an entity’s management is responsible, using a series of auditors’ reports issued virtually simultaneously with, or a short period of time after, the occurrence of events underlying the subject matter.” Not Practical

7. Continuous Assurance • Demand ????? • Costs • Limitations of Accounting’s Period Concept • Standards Implications – ‘Should Not Rely Exclusively on Controls’ (Risk Assessment) “Regardless of the assessed level of control risk of material misstatement, the auditor should plan And perform some substantive procedures tests for each material class of transactions and account balances” [Draft Risk Assessment Standard]

8. Audit Approach Comparison

9. System Reviews Planning Review Review Review Review Confirmations Continuous Auditing Approach Q1 Q2 Q3 Q4 Monitoring, Planning and Execution

10. Trends Supporting More Continuous Auditing • –“[W]e need to move toward a dynamic model of current disclosure of unquestionably material information.” Harvey Pitthttp://www.sec.gov/news/speech/spch523.htm • Audit Resource Management • Quarterly Reporting • SEC shortens 10K & 10Q filing date windows (8-27-02) • Standards • Fraud (SAS 82) • Risk Assessment (SAS 55, 94) • Interim Reporting (SAS 71) • XBRL • Facilitates Timely Reporting

11. Language in Draft Standards • …auditing involves a continuous process of gathering, updating and analyzing information throughout the audit. Accordingly, the sequence of the requirements and guidance in this statement may be performed differently among audit engagements. [Proposed Fraud Standard] • …an important management responsibility is to establish and maintain internal control on an ongoing basis. Management’smonitoringof controls includes whether they are operating as intended and that they are modified as appropriate for changes in conditions. [Proposed AU 319 revisions] • The characteristics of routine day-to-day business transactions often permit highly automated processing with little or no manual intervention. In such circumstances, it may not be possible to perform only substantive procedures in relation to the risk. [Proposed Risk Assessment Standard]

12. Directions • Neither Mandate nor Prohibit Continuous Auditing • Best Practices /Guidance • Periodic Reporting Model • Trends – More Timely Auditing and Reporting • Effectiveness ?????? ??????

13. BDO Seidman • Strategic Risk Assessment Software –2002 [Compass Version 3] • BDO International Policy and Guidance • Applications / Fieldtests

14. Example – Real Time Connection DB4 Timberline – Prop. Lawson – Cos. Real Estate Laplink +MS Access Mathematica, Master View, FAS 66 Master View Industry and Asset Info. IDEA Script

15. Questions / Comments