The Public Company Accounting Oversight Board Thursday voted to adopt a standard that replaces its previous internal control auditing standard, Auditing Standard No. 2 (AS2).
The new standard, entitled "Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements" is principles-based. It is designed to increase the likelihood that material weaknesses in internal control will be found before they result in material misstatement of a company's financial statements, and, at the same time, eliminate procedures that are unnecessary. The final standard also focuses the auditor on the procedures necessary to perform a high quality audit that is tailored to the company's facts and circumstances.
Yesterday the Securities and Exchange Commission's five commissioners voted unanimously to approve "interpretive guidance" that gives management greater leeway in assessing the strength of a company's internal checks and balances to guard against fraud. PCAOB worked with the SEC to coordinate Auditing Standard No. 5 with the guidance to public company management.
"The internal control reporting requirements of the Sarbanes-Oxley Act are a key reason why the reliability and accuracy of financial reporting has improved over the past few years. The renewed confidence in financial reporting is critical for the health of our markets," said PCAOB Chairman Mark Olson. "The new standard is more risk-based and scalable, which will better meet the needs of investors, public companies and auditors alike."
PCAOB also adopted the related Rule 3525, "Audit Committee Pre-Approval of Non-Audit Services Related to Internal Control Over Financial Reporting," and conforming amendments to certain of the board's other auditing standards.
The final standard may be used by auditors immediately following SEC approval, and it, along with Rule 3525, and the conforming amendments, would be required for all audits of internal control for fiscal years ending on or after Nov. 15, 2007.
PCAOB said it intends in the coming months to adjust its inspection program to assure that it is consistent with the new standard and its principles-based approach. The board is also continuing to develop for auditors of smaller public companies tailored guidance for applying the new standard as outlined in its four-point plan of May 2006.