Monday, June 4, 2007

New PCAOB standard aimed to increase efficiency in Internal Control audits.

The board adopted AS 5 to supersede AS 2. This will apply to all companies required to conduct internal control audits as required by the SEC.

Key reasons for the change:

1. The Board’s inspection of the internal control audits conducted as well as public roundtable discussions revealed that the audits took greater than necessary effort.
2. The Board also felt that adoption of AS 5 would make it easier for smaller companies to comply with the Act’s internal control requirements.

Key Features of the new Standard:

1. Emphasizes fraud-risk and fraud related controls in the process of risk assessment.
2. The effectiveness of the company’s entity level controls may reduce the amount of testing in the underlying process controls.
3. The new standard permits the auditors to restrict their own testing by letting them use the control testing of others.
4. The Audit committee should pre-approve any internal controls related non-audit services provided by the company’s auditor. In fact, Rule 3525 requires a registered public accounting firm that seeks to provide such service to provide details such as scope of the internal control related non-audit service, the potential effects of the proposed service on the firm’s independence and also document the discussions that are held with the audit committee.

This may reduce some of the economic and operational burden currently being experienced by many companies. This is true because increased auditor reliance on the work of others and stronger entity level controls may translate into a reduction in the auditor’s testing time and effort.

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