PCAOB Standards Update1
Prepared for The Auditor's Report (Spring 2008)
By Gary Holstrum, Thomas Ray, and Gregory Scates**
This update addresses selected PCAOB standards-setting developments since the Fall 2007 Update that are likely to be of interest to accounting and auditing researchers, educators, and students. These developments include a new auditing standard on evaluating consistency of financial statements and amendments related to the proposal by the FASB to incorporate the hierarchy of generally accepted accounting principles into the accounting standards, an audit practice alert on auditing fair value and the use of specialists, preliminary staff views of guidance for auditors of internal control for smaller public companies, and PCAOB standards-setting priorities for 2008, and a report on PCAOB inspections of firms that audit no more than 100 issuers.
Auditing Standard on Evaluating Consistency of Financial Statements and Amendments Related to the GAAP Hierarchy: On January 29, 2008, the Board adopted Auditing Standard No. 6, Evaluating Consistency of Financial Statements, and an accompanying set of amendments to the Board's interim auditing standards. The new standard and related amendments update the auditor's responsibilities to evaluate and report on the consistency of a company's financial statements and align the auditor's responsibilities with SFAS No. 154, Accounting Changes and Error Corrections. The new standard clarifies that the auditor's report should indicate whether an adjustment to previously issued financial statements results from a change in accounting principle or the correction of a misstatement. The Board also removed the hierarchy of generally accepted accounting principles (GAAP) from its interim auditing standards. The GAAP hierarchy identifies the sources of accounting principles and the framework for selecting principles to be used in preparing financial statements. The Board believes that the GAAP hierarchy is more appropriately located in the accounting standards. Because the FASB intends to incorporate the hierarchy in the accounting standards, it no longer will be needed in the auditing standards. The Board has coordinated with the FASB and understands that the FASB intends to coincide the effective date of its GAAP hierarchy standard with that of the PCAOB. Auditing Standard No. 6 and the amendments, if approved by the SEC, will become effective 60 days after SEC approval.
Audit Practice Alert on Auditing Fair Value and the Use of Specialists: On December 10, 2007, the PCAOB published Staff Audit Practice Alert No. 2, Matters Related to Auditing Fair Value Measurements in Financial Statements and the Use of Specialists. The Practice Alert highlights certain matters in four areas:
- Auditing fair value measurements;
- Classification of fair value measurements within the fair value hierarchy established by SFAS 157;
- The use of specialists in fair value measurements; and
- The use of pricing services in fair value measurements.
The Practice Alert does not create any new auditing requirement, but instead is designed to help auditors by reminding them of certain aspects of the auditing and accounting standards that are relevant to current conditions that pose significant auditing challenges.
Guidance for Auditors of Internal Control for Smaller Public Companies: On October 17, 2007, the staff of the PCAOB published for comment its preliminary views on how auditors can apply certain provisions of Auditing Standard No. 5 to audits of internal control of smaller, less complex public companies. The publication discusses the provisions in Auditing Standard No. 5 for scaling the audit for smaller companies and illustrates how auditors can address some of the particular challenges for performing audits of internal control in the smaller, less complex company environment. The comment period ended December 17, 2007.
PCAOB Standards-Setting Priorities for 2008: The October 18, 2007, meeting of the PCAOB Standing Advisory Group (SAG) featured a discussion of PCAOB standards-setting priorities for 2008, including the following projects:
- Auditor independence and principles of reporting
- Engagement quality review
- Auditor risk assessments
- Auditor’s use the work of specialists
- Auditor responsibilities concerning related party transactions
- Audit confirmations
- Audit implications of the use of International Financial Reporting Standards
- Audit implications of the use of XBRL
The PCAOB is about to announce the time and agenda for the February 2008 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.
Report on PCAOB Inspections of Firms that Audit No More than 100 Issuers: On October 22, 2007, the PCAOB issued a report on 2004, 2005, and 2006 PCAOB inspections of domestic triennially inspected firms, which includes firms that audit no more than 100 issuers. The report discusses areas of the audit where PCAOB inspectors have observed significant or frequent deficiencies in the first PCAOB inspections of triennial firms. The report is designed to alert triennial firms to areas where they could improve performance and to inform the public about certain inspections findings for triennial firms over the past three years. Although this report is not a standards-setting activity, it is included here because it should be a helpful reference for auditing researchers, educators, and students.
**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. 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, Summer 2007, and Fall 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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