ASB Update as of May 31, 2003

William F. Messier, Jr., Georgia State University
Academic Member of the Auditing Standards Board

Since my last report, a number of important events have affected the activities of the ASB. As most of you are aware, the Sarbanes-Oxley Act of 2002 gave the Public Company Accounting Oversight Board (PCAOB) the authority to establish auditing and related attestation, quality control, and ethics standards for registered public accounting firms. On April 18, 2003, the PCAOB announced that it would not recognize any professional group of accountants to propose standards. Instead, the PCAOB would develop “Professional Auditing Standards” that would be followed by registered public accounting firms for audits of public companies (see PCAOB Release No. 2003-005 at http://www.pcaobus.org/). In the meantime, the PCAOB has adopted the AICPA ASB’s auditing, attestation, and quality control standards, as well as the AICPA’s ethics and independence standards (as well as any relevant standards issued by the SEC), as they existed on April 16, 2003, as interim standards (see PCAOB Release No. 2003-006). Lastly, the PCAOB made three appointments: William J. McDonough was appointed as Chairman of the PCAOB, Douglas R. Carmichael as Chief Auditor and Director of Professional Standards, and Thomas Ray as Deputy Chief Auditor.

The ASB continues to work on three projects that are listed as Exposure Drafts. I will describe each of those efforts, and then describe how the ASB might proceed given the PCAOB’s decision to issue auditing standards.

Risk Assessments Project
In the last issue of The Auditor’s Report, I described the work that has been conducted by the Joint Risk Assessment Task Force. The International Auditing and Assurance Standards Board and the ASB issued their exposure drafts in October 2002. The requirements and guidance provided in the proposed exposure drafts would result in a substantial change in audit practice. The letters of comment to the ASB were due on April 30, 2003.

Internal Control Exposure Draft
The Internal Control Task Force was charged with developing standards to comply with Sarbanes-Oxley Section 404. Section 404 requires management to provide an assertion on the effectiveness of internal control, and the entity’s auditor to issue an “audit” report on management’s assertion. The ASB issued an Exposure Draft on March 18, 2003 that contained a new SAS entitled Auditing an Entity’s Internal Control over Financial Reporting in Conjunction with the Financial Statement Audit that provided guidance for a “public company audit,” defined as an integrated activity consisting of an audit of the financial statements and an audit of internal control. The Exposure Draft also contained an Amendment to Statement on Auditing Standards No. 100, Interim Financial Information, and a substantial revision of Reporting on an Entity’s Internal Control over Financial Reporting. The latter document would supersede Chapter 5 of SSAE No. 10, Attestation Standards: Revision and Recodification. Comment letters were due on May 15, 2003 for this exposure draft.

Omnibus SAS Exposure Draft
The ASB issued an Exposure Draft on April 1, 2003, entitled Sarbanes-Oxley Omnibus Statement on Auditing Standards, that contained a new SAS entitled Review of SEC Engagements by a Reviewing Partner. This proposed SAS established guidance for reviewing (concurring) partner qualifications; the nature, timing, and extent of the review; and documentation. The exposure draft also amended a number of existing SASs, including documentation and communications with audit committees. For example, the amendment to the documentation SAS requires accounting firms to retain certain records for seven years relevant to their audits and reviews of issuers’ financial statements. Comment letters on this exposure draft also were due on May 15, 2003.

What Will the ASB Do?
The agenda for the June ASB meeting includes each of these documents. The Board will review the comments letters on each document and most likely revise them based on the comments. This is a personal observation! After that process is finished, it seems likely that the ASB will forward the revised documents and comment letters to the PCAOB for their consideration.

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