Why the auditing standards on evaluating internal control needed to be replaced;

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Why the Auditing Standards on Evaluating Internal Control Needed to be Replaced
Jerry D. Sullivan
Coopers & Lybrand
In February 1988, the Auditing Standards Board (ASB) of the AICPA approved the issuance of nine Statements on Auditing Standards (SASs). The profession developed these statements to narrow what has been referred to as the "expectations gap," the gap between what the public and financial statement users believe auditors are responsible for and what auditors believe they are responsible for. Among the new standards, there is one that dramatically changes the auditor's responsibility for considering internal control in a financial statement audit. Effective for audits of financial statements beginning on or after January 1, 1990, SAS No. 55, Consideration of the Internal Control Structure in a Financial Statement Audit, replaces Section 320, The Auditor's Study and Evaluation of Internal Control, of SAS No. 1.
This new standard is by far the most complex and controversial, at least among academic circles, of the new auditing standards adopted by the profession. This paper discusses the author's perspective on why the new standard was issued.
Should Section 320 Have Been Revised Rather Than Replaced?
The ASB concluded that the minimum study and evaluation of internal control required by Section 320 was insufficient for audit planning. Effective audit planning requires the auditor to identify the types of material misstate­ments
that could occur in the financial statements and to assess the risk that such misstatements will occur. Because an entity's internal control significantly affects the possibility of misstatements in the financial statements, the ASB concluded that the auditor needed a better understanding of internal control when planning an audit.
This is a different notion from that encompassed by the minimum study and evaluation required by Section 320, which stated that the purpose of the review of the system was to obtain sufficient knowledge and understanding about the accounting system and the internal accounting control system "(a) to make a determination of whether there are internal accounting control procedures that may provide a basis for reliance thereon in determining the nature, extent, and timing of substantive tests; or (b) to aid the auditor in designing substantive tests in the absence of such reliance.'' While Section 320 required the auditor to have a general knowledge about the control environment and flow of
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