Regulation

PCAOB to Scrap AS2, Start Over

In two weeks, the public accounting board will meet to discuss a new auditing standard to "supersede" the controversial Auditing Standard No. 2.
Sarah JohnsonDecember 5, 2006

In its clearest acknowledgement yet that the controversial Auditing Standard No. 2 is flawed, the Public Company Accounting Oversight Board said it will consider whether to propose a new auditing standard to “supersede” it. The matter will be discussed at an open meeting on Tuesday, December 19.

PCAOB chairman Mark Olson previously said a proposed revision, which could make it easier and cheaper for smaller companies to comply with Section 404 of the Sarbanes-Oxley Act, could be issued for public comment as early as the second week in December.

In fact, the board said on Tuesday that in two weeks it will consider proposing for public comment a new auditing standard to “supersede” AS2, its current guide for independent auditor assessments of corporate internal-controls reports. AS2 has been criticized because auditors appear to often use it too conservatively.

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“The PCAOB will consider changes to the auditing standard on internal control over financial reporting that provide for a much more efficient, risk-based, scalable implementation,” Olson said. “It is important that investors, companies, and auditors carefully consider and provide comments on the new proposal so that we reach the right result.”

The PCAOB also said this new standard will:

• More clearly focus auditors on identifying control weaknesses before they result in material misstatements in financial statements.

• Require auditors to use a top-down approach that begins with the financial statements and company-level controls, and identify for further testing only those controls that are important to the effective functioning of a company’s internal control over financial reporting.

• Stress the importance of a company’s control environment, and how it can affect the risk of financial reporting fraud or other material failure.

• Emphasize higher-risk stages of financial statement preparation, such as the period-end close process.

• Clarify that an internal control audit is limited to an evaluation of whether, in the auditor’s opinion, the company’s internal controls are effective, and say that the audit does not include an opinion on the adequacy of management’s process to reach its conclusion.

• Permit auditors to use experience gained in previous years’ audits, rather than start from scratch each year.

• Be shorter, easier to understand, and more clearly scalable.

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