A new report from the Public Company Accounting Oversight Board looks to draw some conclusions out of its inspections of approximately 275 audits of internal controls over financial reporting performed by registered public accounting firms.The report specifically looks at the second year implementation of the board’s Auditing Standard No. 2, “An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements.” Nearly a year ago, the PCAOB announced that during 2006 it would conduct inspections to determine whether auditors were achieving the objectives of the standard with the least expenditure of resources.

During the second year of review, PCAOB inspectors concentrated on four areas -- integrating the audits of financial statements and internal control, using a top-down approach, relying on the work of others and assessing risk.

In each of the four areas, the reviews identified ways in which auditors could have been more efficient. The most common observations were that some auditors:

  • Did not fully integrate their audits;
  • Failed to apply a top-down approach to testing controls;
  • Assessed the level of risk only at the account level and not at the assertion level, meaning those auditors likely expended more effort than necessary when testing controls for assertions that were lower risk; and,
  • Might have increased their use of the work of others.

In addition to the four areas of specific focus, the inspectors also identified other issues that could present additional opportunities for improvement. The full report is available at www.pcaob.org/Inspections/Other/2007/04-18_Release_2007-004.pdf.Separately, PCAOB Chairman Mark Olson testified before the Senate Committee on Small Business and Entrepreneurship yesterday, speaking about the impact of the Sarbanes-Oxley Act on small business, and the board’s oversight of small audit firms. His full testimony is available at www.pcaob.org.

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