The Public Company Accounting Oversight Board has proposed for public comment a new standard on auditing internal control over financial reporting and other related proposals. The proposed standard would supersede the Board’s existing internal control standard, Auditing Standard No. 2, and is designed to focus the auditor on the matters most important to internal control; eliminate unnecessary procedures; simplify and shorten the standard by reducing detail and specificity; and make the audit more scalable for smaller and less complex companies.
In addition to the proposed internal control standard, the Board also proposed for public comment a new auditing standard on considering and using the work performed by internal auditors, management and others in an integrated audit of financial statements and internal control, or in an audit of financial statements only. This proposed standard is intended to further clarify how and to what extent an independent auditor may use that work to reduce the work the auditor otherwise would have to perform. In addition, the Board proposed to revise the independence requirement that currently is embedded in the text of AS No. 2, which requires the auditor to seek specific pre-approval by the audit committee of any internal control related service. Finally, the Board also proposed certain changes to its other standards to conform to the changes being brought about by this rulemaking.
In addition, last week the Securities and Exchange Commission proposed an interpretive guidance for managements regarding their evaluations of internal control over financial reporting. The SEC says its proposed risk-based approach addresses many of the concerns that have been raised to the Commission including: excessive testing of controls generally; excessive documentation of processes, controls, and testing; and the ability to scale the evaluation to smaller companies. The SEC’s proposed guidance along with the PCAOB’s proposed changes are intended to make complying with Section 404 of the Sarbanes-Oxley Act of 2002 less burdensome and less expensive.
