The Public Company Accounting Oversight Board voted to adopt Auditing Standard No. 5, which will replace its previous internal control auditing standard, the much-maligned Auditing Standard No. 2.
In announcing the new standard, “An Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial Statements,” the board said that the rule was designed to increase the likelihood that weaknesses in internal controls are found before they result in material misstatements of a company’s financial statements. But more importantly to the smaller public companies that have lobbied for changes to AS2, the board said that the standard is also meant to eliminate auditors performing unnecessary work.
AS5 was developed in coordination with the Securities and Exchange Commission, which approved its own guidance to public company management earlier this week. The new standard will go into effect after the SEC puts the changes to an official vote -- but it is expected that AS5 will go into effect for all audits of internal control for fiscal years ending after Nov. 15, 2007.
In a statement, PCAOB chairman Mark Olson described the standard as “more risk-based and scalable,” and said that the changes would allow auditors to focus on controls more specific to a company’s business.
The PCAOB plans to adjust its inspection program in the coming months to assure that it is consistent with the new standard, and will also continue to develop tailored guidance for auditors of smaller public companies detailing how best to apply the new standard.
A detailed discussion of the new standard, and the minor changes that the board made from its original December proposal, are available at www.pcaob.org/News_and_Events/News/2007/05-24.aspx.
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