Auditing Standard No.

14

Evaluating Audit Results

Effective Date: For audits of fiscal years beginning on or after Dec. 15, 2010

Final Rule: PCAOB Release No. 2010-004

Summary Table of Contents

(1) Introduction

(2) Objective

(3 - 36) Evaluating the Results of the Audit of Financial Statements

(37) Evaluating the Results of the Audit of Internal Control Over Financial Reporting

Appendix A Definitions

Appendix B Qualitative Factors Related to the Evaluation of the Materiality of Uncorrected

Misstatements

Appendix C Matters That Might Affect the Assessment of Fraud Risks

Introduction

1. This standard establishes requirements regarding the auditor's evaluation of audit results and
determination of whether he or she has obtained sufficient appropriate audit evidence.

Objective

2. The objective of the auditor is to evaluate the results of the audit to determine whether the audit
evidence obtained is sufficient and appropriate to support the opinion to be expressed in the auditor's
report.
Evaluating the Results of the Audit of Financial
Statements

3. In forming an opinion on whether the financial statements are presented fairly, in all material
respects, in conformity with the applicable financial reporting framework, the auditor should take into
account all relevant audit evidence, regardless of whether it appears to corroborate or to contradict the
assertions in the financial statements.

4. In the audit of financial statements,1/ the auditor's evaluation of audit results should include
evaluation of the following:

The results of analytical procedures performed in the overall review of the financial statements ("overall
review");

Misstatements accumulated during the audit, including, in particular, uncorrected misstatements;2/

The qualitative aspects of the company's accounting practices;

Conditions identified during the audit that relate to the assessment of the risk of material misstatement
due to fraud ("fraud risk");

The presentation of the financial statements, including the disclosures; and

The sufficiency and appropriateness of the audit evidence obtained.

Performing Analytical Procedures in the Overall

Review

5. In the overall review, the auditor should read the financial statements and disclosures and perform
analytical procedures to (a) evaluate the auditor's conclusions formed regarding significant accounts and
disclosures and (b) assist in forming an opinion on whether the financial statements as a whole are free
of material misstatement.

6. As part of the overall review, the auditor should evaluate whether:

The evidence gathered in response to unusual or unexpected transactions, events, amounts, or
relationships previously identified during the audit is sufficient; and

Unusual or unexpected transactions, events, amounts, or relationships3/ indicate risks of material

misstatement that were not identified previously, including, in particular, fraud risks.

Note: If the auditor discovers a previously unidentified risk of material misstatement or concludes that
the evidence gathered is not adequate, he or she should modify his or her audit procedures or perform
additional procedures as necessary in accordance with paragraph 36 of this standard.

7. The nature and extent of the analytical procedures performed during the overall review may be
similar to the analytical procedures performed as risk assessment procedures. The auditor should
perform analytical procedures relating to revenue through the end of the reporting period.4/

8. The auditor should obtain corroboration for management's explanations regarding significant
unusual or unexpected transactions, events, amounts, or relationships. If management's responses to
the auditor's inquiries appear to be implausible, inconsistent with other audit evidence, imprecise, or
not at a sufficient level of detail to be useful, the auditor should perform procedures to address the
matter.

9. Evaluating Whether Analytical Procedures Indicate a Previously Unrecognized Fraud Risk. Whether
an unusual or unexpected transaction, event, amount, or relationship indicates a fraud risk, as discussed
in paragraph 6.b., depends on the relevant facts and circumstances, including the nature of the account
or relationship among the data used in the analytical procedures. For example, certain unusual or
unexpected transactions, events, amounts, or relationships could indicate a fraud risk if a component of
the relationship involves accounts and disclosures that management has incentives or pressures to
manipulate, e.g., significant unusual or unexpected relationships involving revenue and income.

Accumulating and Evaluating Identified

Misstatements

10. Accumulating Identified Misstatements. The auditor should accumulate misstatements identified
during the audit, other than those that are clearly trivial.
Note: "Clearly trivial" is not another expression for "not material." Matters that are clearly trivial will be
of a smaller order of magnitude than the materiality level established in accordance with Auditing
Standard No. 11, Consideration of Materiality in Planning and Performing an Audit, and will be
inconsequential, whether taken individually or in aggregate and whether judged by any criteria of size,
nature, or circumstances. When there is any uncertainty about whether one or more items is clearly
trivial, the matter is not considered trivial.

11. The auditor may designate an amount below which misstatements are clearly trivial and do not
need to be accumulated. In such cases, the amount should be set so that any misstatements below that
amount would not be material to the financial statements, individually or in combination with other
misstatements, considering the possibility of undetected misstatement.

12. The auditor's accumulation of misstatements should include the auditor's best estimate of the
total misstatement in the accounts and disclosures that he or she has tested, not just the amount of
misstatements specifically identified. This includes misstatements related to accounting estimates, as
determined in accordance with paragraph 13 of this standard, and projected misstatements from
substantive procedures that involve audit sampling, as determined in accordance with AU sec. 350,
Audit Sampling.5/

13. Misstatements Relating to Accounting Estimates. If the auditor concludes that the amount of an
accounting estimate included in the financial statements is unreasonable or was not determined in
conformity with the relevant requirements of the applicable financial reporting framework, he or she
should treat the difference between that estimate and a reasonable estimate determined in conformity
with the applicable accounting principles as a misstatement. If a range of reasonable estimates is
supported by sufficient appropriate audit evidence and the recorded estimate is outside of the range of
reasonable estimates, the auditor should treat the difference between the recorded accounting
estimate and the closest reasonable estimate as a misstatement.

Note: If an accounting estimate is determined in conformity with the relevant requirements of the
applicable financial reporting framework and the amount of the estimate is reasonable, a difference
between an estimated amount best supported by the audit evidence and the recorded amount of the
accounting estimate ordinarily would not be considered to be a misstatement. Paragraph 27 discusses
evaluating accounting estimates for bias.
14. Considerations as the Audit Progresses. The auditor should determine whether the overall audit
strategy and audit plan need to be modified if :

The nature of accumulated misstatements and the circumstances of their occurrence indicate that other
misstatements might exist that, in combination with accumulated misstatements, could be material; or

The aggregate of misstatements accumulated during the audit approaches the materiality level or levels
used in planning and performing the audit.6/

Note: When the aggregate of accumulated misstatements approaches the materiality level or levels
used in planning and performing the audit, there likely will be greater than an appropriately low level of
risk that possible undetected misstatements, when combined with the aggregate of misstatements
accumulated during the audit that remain uncorrected, could be material to the financial statements. If
the auditor's assessment of this risk is unacceptably high, he or she should perform additional audit
procedures or determine that management has adjusted the financial statements so that the risk that
the financial statements are materially misstated has been reduced to an appropriately low level.

15. The auditor should communicate accumulated misstatements to management on a timely basis to
provide management with an opportunity to correct them.

16. If management has examined an account or a disclosure in response to misstatements detected by

the auditor and has made corrections to the account or disclosure, the auditor should evaluate
management's work to determine whether the corrections have been recorded properly and whether
uncorrected misstatements remain.

17. Evaluation of the Effect of Uncorrected Misstatements. The auditor should evaluate whether
uncorrected misstatements are material, individually or in combination with other misstatements. In
making this evaluation, the auditor should evaluate the misstatements in relation to the specific
accounts and disclosures involved and to the financial statements as a whole, taking into account
relevant quantitative and qualitative factors.7/ (See Appendix B.)

Note: In interpreting the federal securities laws, the Supreme Court of the United States has held that a
fact is material if there is "a substantial likelihood that the …fact would have been viewed by the
reasonable investor as having significantly altered the 'total mix' of information made available."8/ As
the Supreme Court has noted, determinations of materiality require "delicate assessments of the
inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those
inferences to him …."9/

Note: As a result of the interaction of quantitative and qualitative considerations in materiality

judgments, uncorrected misstatements of relatively small amounts could have a material effect on the
financial statements. For example, an illegal payment of an otherwise immaterial amount could be
material if there is a reasonable possibility10/ that it could lead to a material contingent liability or a
material loss of revenue.11/ Also, a misstatement made intentionally could be material for qualitative
reasons, even if relatively small in amount.

Note: If the reevaluation of the established materiality level or levels, as set forth in Auditing Standard
No. 11,12/ results in a lower amount for the materiality level or levels, the auditor should take into
account that lower materiality level or levels in the evaluation of uncorrected misstatements.

18. The auditor's evaluation of uncorrected misstatements, as described in paragraph 17 of this

standard, should include evaluation of the effects of uncorrected misstatements detected in prior years
and misstatements detected in the current year that relate to prior years.

19. The auditor cannot assume that an instance of error or fraud is an isolated occurrence. Therefore,
the auditor should evaluate the nature and effects of the individual misstatements accumulated during
the audit on the assessed risks of material misstatement. This evaluation is important in determining
whether the risk assessments remain appropriate, as discussed in paragraph 36 of this standard.

20. Evaluating Whether Misstatements Might Be Indicative of Fraud. The auditor should evaluate
whether identified misstatements13/ might be indicative of fraud and, in turn, how they affect the
auditor's evaluation of materiality and the related audit responses. As indicated in AU sec. 316,
Consideration of Fraud in a Financial Statement Audit, fraud is an intentional act that results in material
misstatement of the financial statements.14/

21. If the auditor believes that a misstatement is or might be intentional, and if the effect on the
financial statements could be material or cannot be readily determined, the auditor should perform
procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to
have occurred and, if so, its effect on the financial statements and the auditor's report thereon.
22. For misstatements that the auditor believes are or might be intentional, the auditor should
evaluate the implications on the integrity of management or employees and the possible effect on other
aspects of the audit. If the misstatement involves higher-level management, it might be indicative of a
more pervasive problem, such as an issue with the integrity of management, even if the amount of the
misstatement is small. In such circumstances, the auditor should reevaluate the assessment of fraud risk
and the effect of that assessment on (a) the nature, timing, and extent of the necessary tests of accounts
or disclosures and (b) the assessment of the effectiveness of controls. The auditor also should evaluate
whether the circumstances or conditions indicate possible collusion involving employees, management,
or external parties and, if so, the effect of the collusion on the reliability of evidence obtained.

23. If the auditor becomes aware of information indicating that fraud or another illegal act has
occurred or might have occurred, he or she also must determine his or her responsibilities under AU
secs. 316.79-.82A, AU sec. 317, and Section 10A of the Securities Exchange Act of 1934, 15 U.S.C. § 78j-1.

Evaluating the Qualitative Aspects of the

Company's Accounting Practices

24. When evaluating whether the financial statements as a whole are free of material misstatement,
the auditor should evaluate the qualitative aspects of the company's accounting practices, including
potential bias in management's judgments about the amounts and disclosures in the financial
statements.

25. The following are examples of forms of management bias:

The selective correction of misstatements brought to management's attention during the audit (e.g.,
correcting misstatements that have the effect of increasing reported earnings but not correcting
misstatements that have the effect of decreasing reported earnings).

Note: To evaluate the potential effect of selective correction of misstatements, the auditor should
obtain an understanding of the reasons that management decided not to correct misstatements
communicated by the auditor in accordance with paragraph 15.
The identification by management of additional adjusting entries that offset misstatements accumulated
by the auditor. If such adjusting entries are identified, the auditor should perform procedures to
determine why the underlying misstatements were not identified previously and evaluate the
implications on the integrity of management and the auditor's risk assessments, including fraud risk
assessments. The auditor also should perform additional procedures as necessary to address the risk of
further undetected misstatement.

Bias in the selection and application of accounting principles.15/

Bias in accounting estimates.16/

26. If the auditor identifies bias in management's judgments about the amounts and disclosures in the
financial statements, the auditor should evaluate whether the effect of that bias, together with the
effect of uncorrected misstatements, results in material misstatement of the financial statements. Also,
the auditor should evaluate whether the auditor's risk assessments, including, in particular, the
assessment of fraud risks, and the related audit responses remain appropriate.

27. Evaluating Bias in Accounting Estimates. The auditor should evaluate whether the difference
between estimates best supported by the audit evidence and estimates included in the financial
statements, which are individually reasonable, indicate a possible bias on the part of the company's
management. If each accounting estimate included in the financial statements was individually
reasonable but the effect of the difference between each estimate and the estimate best supported by
the audit evidence was to increase earnings or loss, the auditor should evaluate whether these
circumstances indicate potential management bias in the estimates. Bias also can result from the
cumulative effect of changes in multiple accounting estimates. If the estimates in the financial
statements are grouped at one end of the range of reasonable estimates in the prior year and are
grouped at the other end of the range of reasonable estimates in the current year, the auditor should
evaluate whether management is using swings in estimates to achieve an expected or desired outcome,
e.g., to offset higher or lower than expected earnings.

Note: AU secs. 316.64-.65 establish requirements regarding performing a retrospective review of

accounting estimates and evaluating the potential for fraud risks.

Evaluating Conditions Relating to the

Assessment of Fraud Risks
28. When evaluating the results of the audit, the auditor should evaluate whether the accumulated
results of auditing procedures17/ and other observations affect the assessment of the fraud risks made
throughout the audit and whether the audit procedures need to be modified to respond to those risks.
(See Appendix C.)

29. As part of this evaluation, the engagement partner should determine whether there has been
appropriate communication with the other engagement team members throughout the audit regarding
information or conditions that are indicative of fraud risks.

Note: To accomplish this communication, the engagement partner might arrange another discussion
among the engagement team members about fraud risks. (See paragraphs 49-51 of Auditing Standard
No. 12.)

Evaluating the Presentation of the Financial

Statements, Including the Disclosures

30. The auditor must evaluate whether the financial statements are presented fairly, in all material
respects, in conformity with the applicable financial reporting framework.

Note: AU sec. 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles, establishes requirements for evaluating the presentation of the financial statements. Auditing
Standard No. 6, Evaluating Consistency of Financial Statements, establishes requirements regarding
evaluating the consistency of the accounting principles used in financial statements.

Note: The auditor should look to the requirements of the Securities and Exchange Commission for the
company under audit with respect to the accounting principles applicable to that company.

31. As part of the evaluation of the presentation of the financial statements, the auditor should
evaluate whether the financial statements contain the information essential for a fair presentation of
the financial statements in conformity with the applicable financial reporting framework. Evaluation of
the information disclosed in the financial statements includes consideration of the form, arrangement,
and content of the financial statements (including the accompanying notes), encompassing matters such
as the terminology used, the amount of detail given, the classification of items in the statements, and
the bases of amounts set forth.

Note: According to AU sec. 508, if the financial statements, including the accompanying notes, fail to
disclose information that is required by the applicable financial reporting framework, the auditor should
express a qualified or adverse opinion and should provide the information in the report, if practicable,
unless its omission from the report is recognized as appropriate by a specific auditing standard.18/

Evaluating the Sufficiency and Appropriateness

of Audit Evidence

32. Auditing Standard No. 8, Audit Risk, states:

To form an appropriate basis for expressing an opinion on the financial statements, the auditor must
plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement due to error or fraud. Reasonable assurance is obtained by reducing audit
risk to an appropriately low level through applying due professional care, including obtaining sufficient
appropriate audit evidence.19/

33. As part of evaluating audit results, the auditor must conclude on whether sufficient appropriate
audit evidence has been obtained to support his or her opinion on the financial statements.

34. Factors that are relevant to the conclusion on whether sufficient appropriate audit evidence has
been obtained include the following:

The significance of uncorrected misstatements and the likelihood of their having a material effect,
individually or in combination, on the financial statements, considering the possibility of further
undetected misstatement (paragraphs 14 and 17-19 of this standard).

The results of audit procedures performed in the audit of financial statements, including whether the
evidence obtained supports or contradicts management's assertions and whether such audit procedures
identified specific instances of fraud (paragraphs 20-23 and 28-29 of this standard).

The auditor's risk assessments (paragraph 36 of this standard).

The results of audit procedures performed in the audit of internal control over financial reporting, if the
audit is an integrated audit.

The appropriateness (i.e., the relevance and reliability) of the audit evidence obtained.20/

35. If the auditor has not obtained sufficient appropriate audit evidence about a relevant assertion or
has substantial doubt about a relevant assertion, the auditor should perform procedures to obtain
further audit evidence to address the matter. If the auditor is unable to obtain sufficient appropriate
audit evidence to have a reasonable basis to conclude about whether the financial statements as a
whole are free of material misstatement, AU sec. 508 indicates that the auditor should express a
qualified opinion or a disclaimer of opinion.21/

36. Evaluating the Appropriateness of Risk Assessments. As part of the evaluation of whether
sufficient appropriate audit evidence has been obtained, the auditor should evaluate whether the
assessments of the risks of material misstatement at the assertion level remain appropriate and
whether the audit procedures need to be modified or additional procedures need to be performed as a
result of any changes in the risk assessments. For example, the re-evaluation of the auditor's risk
assessments could result in the identification of relevant assertions or significant risks that were not
identified previously and for which the auditor should perform additional audit procedures.

Note: Auditing Standard No. 12 establishes requirements on revising the auditor's risk assessment.22/
Auditing Standard No. 13 discusses the auditor's responsibilities regarding the assessment of control risk
and evaluation of control deficiencies in an audit of financial statements.23/

Evaluating the Results of the Audit of Internal

Control Over Financial Reporting

37. Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated
with An Audit of Financial Statements, indicates that the auditor should form an opinion on the
effectiveness of internal control over financial reporting by evaluating evidence obtained from all
sources, including the auditor's testing of controls, misstatements detected during the financial
statement audit, and any identified control deficiencies. Auditing Standard No. 5 describes the auditor's
responsibilities regarding evaluating the results of the audit, including evaluating the identified control
deficiencies.24/
*************************************************************************************

1/ For purposes of this standard, the term "audit of financial statements" refers to the financial
statement portion of the integrated audit and to the audit of financial statements only.

2/ Terms defined in Appendix A, Definitions, are set in boldface type the first time they appear.

3/ Paragraphs 46-48 of Auditing Standard No. 12, Identifying and Assessing Risks of Material
Misstatement and paragraph .03 of AU sec. 329, Substantive Analytical Procedures.

4/ Paragraph 47 of Auditing Standard No. 12 contains a requirement to perform analytical procedures

relating to revenue as part of the risk assessment procedures.

5/ AU sec. 350.26.

6/ Auditing Standard No. 11.

7/ If the financial statements contain material misstatements, AU sec. 508, Reports on Audited Financial
Statements, indicates that the auditor should issue a qualified or an adverse opinion on the financial
statements. AU sec. 508.35 discusses situations in which the financial statements are materially affected
by a departure from the applicable financial reporting framework.

8/ TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976). See also Basic, Inc. v. Levinson, 485 U.S.
224 (1988).

9/ TSC Industries, 426 U.S. at 450.

10/ There is a reasonable possibility of an event, as used in this standard, when the likelihood of the
event is either "reasonably possible" or "probable," as those terms are used in the FASB Accounting
Standards Codification, Contingencies Topic, paragraph 450-20-25-1.

11/ AU sec. 317, Illegal Acts by Clients.

12/ Paragraphs 11-12 of Auditing Standard No. 11.

13/ Misstatements include omission and presentation of inaccurate or incomplete disclosures.

14/ AU sec. 316.05.

15/ Paragraph 5.d. of Auditing Standard No. 13, The Auditor's Responses to the Risks of Material
Misstatement.

16/ Paragraph 27 of this standard.

17/ Such auditing procedures include, but are not limited to, procedures in the overall review
(paragraph 9 of this standard), the evaluation of identified misstatements (paragraphs 20-23 of this
standard), and the evaluation of the qualitative aspects of the company's accounting practices
(paragraphs 24-27 of this standard).

18/ AU secs. 508.41-.44.

19/ Paragraph 3 of Auditing Standard No. 8.

20/ Paragraphs 7-9 of Auditing Standard No. 15, Audit Evidence, discuss the relevance and reliability of
audit evidence.
21/ AU sec. 508.22-.34 contains requirements regarding audit scope limitations.

22/ Paragraph 74 of Auditing Standard No. 12.

23/ Paragraphs 32-34 of Auditing Standard No. 13.

24/ Paragraphs 62-70 of Auditing Standard No. 5 discuss evaluating identified control deficiencies, and
paragraphs 71-73 of Auditing Standard No. 5 discuss forming an opinion on the effectiveness of internal
control over financial reporting.