PCAOB Standards Update1
Prepared for The Auditor's Report (Fall 2007)
By Gary Holstrum, Thomas Ray, and Gregory Scates**
This update addresses selected PCAOB standards-setting developments since the Summer 2007 Update that are likely to be of interest to accounting and auditing researchers, educators, and students. These developments include approval of Auditing Standard No. 5 (AS5) on audits of internal control over financial reporting, proposed guidance for integrated audits of small public companies, a proposed auditing standard for evaluating consistency of financial statements, a proposed ethics and independence rule on communication with audit committees, a proposed amendment of a rule on tax services, and auditing issues and projects being considered by the PCAOB staff and discussed by the Standing Advisory Group (SAG).
Approval of Auditing Standard No. 5 (AS5) on Audits of Internal Control over Financial Reporting (www.pcaobus.org/Standards/Standards_and_Related_Rules/Auditing_Standard_No.5.aspx)
In May, the Board adopted Auditing Standard No. 5: An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements, which will supersede Auditing Standard No. 2 when it becomes effective. AS5 was approved by the SEC on July 25, 2007 and is effective for audits of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002 for fiscal years ending on or after November 15, 2007.
The PCAOB staff, with assistance from representatives from several registered firms and smaller public companies as well as SEC staff, is developing guidance for integrated audits of smaller public companies. The Board also is focusing some additional attention on the delivery of education about the new internal control auditing standard to smaller registered auditing firms.
Proposed Auditing Standard on Evaluating Consistency of Financial Statements
(www.pcaobus.org/Standards/Proposed_Standards_and_Related_Rules.aspx)
In April, the Board proposed and sought comments regarding changes to its auditing standards in light of the Financial Accounting Standards Board's issuance of Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, and Proposed Statement of Financial Accounting Standards, The Hierarchy of Generally Accepted Accounting Principles. The PCAOB proposal would, if adopted by the Board and approved by the SEC, supersede AU sec. 420, Consistency of Application of Generally Accepted Accounting Principles, with a new auditing standard, Evaluating Consistency of Financial Statements; remove the hierarchy of generally accepted accounting principles ("GAAP hierarchy") from the interim auditing standards; and make conforming amendments to the interim auditing standards. The comment period for the proposed changes ended in May and the PCAOB staff is working to complete revisions to the proposals based on comments.
Proposed Ethics and Independence Rule on Communication with Audit Committees and a Proposed Amendment of a Rule on Tax Services
(www.pcaobus.org/Standards/Proposed_Standards_and_Related_Rules.aspx)
On July 24, the Board proposed for public comment a new ethics and independence Rule 3526, Communication with Audit Committees Concerning Independence, which would supersede the Board's interim independence requirement, Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, and two related interpretations. The proposed rule would require, among other things, a registered public accounting firm to communicate to an issuer's audit committee regarding any relationships between the firm and the issuer that may reasonably be thought to bear on the firm's independence. The communications would be required both before the firm accepts a new engagement pursuant to the standards of the PCAOB and annually for continuing engagements. In addition, the Board proposed an amendment to Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles, which would exclude from the scope of the rule the portion of the audit period that precedes the beginning of the professional engagement period. The comment period for these proposals ended September 7 and the PCAOB staff is working to complete revisions to the proposals based on comments.
Other Auditing Issues being Consider by PCAOB Staff and SAG
At its June 21, 2007, meeting, the Standing Advisory Group (SAG) discussed the following issues (www.pcaobus.org/News_and_Events/Events/2007/06-21.aspx), based on publicly available briefing papers prepared by PCAOB staff on each of the issues (hyperlinked below):
The briefing papers on fair value measurements and related parties referred to research synthesis reports prepared by teams of researchers formed as part of the Auditing Section's PCAOB Research Synthesis Program.
The PCAOB is about to announce the time and agenda for the October 2007 SAG meeting. Readers may access the agenda and PCAOB staff briefing papers for each of the issues discussed at the SAG meetings, as well as webcasts of each of the SAG meetings, through the SAG portion of the PCAOB Web site.
(www.pcaobus.org/Standards/Standing_Advisory_Group/index.aspx)
**Gary Holstrum is a consultant in the PCAOB Office of Chief Auditor (formerly PCAOB Associate Chief Auditor and Director of Research).Thomas Ray is PCAOB Chief Auditor and Director of Professional Standards.Gregory Scates is PCAOB Deputy Chief Auditor.
1 Note the hyperlinks to the PCAOB Web site (www.pcaobus.org) and to the Auditing Section Web site (aaahq.org/audit/index.htm). A convenient history of PCAOB standards-setting activity and related briefing papers are available through the hyperlinked previous PCAOB Standards-Setting Update articles in the Spring 2005, Summer 2005, Fall 2005, Spring 2006, Summer 2006, Fall 2006, Spring 2007, and Summer 2007 issues of The Auditor's Report. The views expressed in this article are those of the authors and not necessarily those of the Board, individual Board members, or other PCAOB staff. Responses to the article or related research may be emailed to holstrumg@pcaobus.org.
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