Two auditing standards replace AS2 - proposal by PCAOB
Public Company Accounting Oversight Board (PCAOB) announced for public comment on two auditing standards to supersede existing Auditing Standard No. 2 (AS2) on Internal Control over Financial Reporting (ICoFR), and other related proposals.
Proposed Auditing Standard - An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements. Whose intent is:- Direct the auditor to the most important controls and emphasize the importance of risk assessment;
- Revise the definitions of significant deficiency and material weakness, as well as the "strong indicators" of a material weakness;
- Clarify the role of materiality, including interim materiality, in the audit;
- Remove the requirement to evaluate management's process;
- Permit consideration of knowledge obtained during previous audits;
- Direct the auditor to tailor the audit to reflect the attributes of smaller and less complex companies;
- Refocus the multi-location testing requirements on risk rather than coverage; and
- Recalibrate the walkthrough requirement.
Proposed Auditing Standard - Considering and Using the Work of Others. Whose intent is:
- Allow the auditor to use the work of others, and not just internal audit, for both the internal control audit and the financial statement audit, eliminating a barrier to integration of the two audits;
- Encourage greater use of the work of others by requiring auditors to evaluate whether and how to use the work of others to reduce their testing;
- Require the auditor to understand the relevant activities of others and determine how the results of that work may affect the audit;
- Provide a single framework for using the work of others based on the auditor's evaluation of the combined competence and objectivity of others and the subject matter being tested; and
- Eliminate the principal evidence provision previously included in AS No. 2.
The second standard is 20 pages long and will help guide the internal financial, quality, and environmental auditors to provide audit evidence useful to the external auditor who is using the first standard, and thus reduce the overall cost of the SOX 404 audit.
