The Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) have released two sets of frequently asked questions to help practitioners implement the new auditing standard approved by the SEC this week.
Auditing Standard No. 2 is titled, "An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements." The standard is needed to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
Some of the issues covered by the SEC include questions on qualification of the report on internal controls, transition periods, and disagreements between the auditor and registrant. It also covers disclosure requirements relating to significant deficiencies and material changes made in internal controls, among other issues.
The PCAOB document covers auditor independence (pre-approval of internal-control related services), scope and extent of testing, evaluating deficiencies, and more.
Find copies of the FAQs at:
Beginning Nov. 15, companies will have to include attestations to the effectiveness of internal control over financial reporting with their 2004 annual reports. Companies with market capitalization of less than $75 million and foreign companies listed on U.S. stock exchanges have until July 15, 2005, to comply.
PCAOB Chairman William J. McDonough has termed Auditing Standard No. 2 "the most important and far-reaching" standard the PCAOB would ever adopt. It requires auditors to test and examine internal controls in detail, and should further protect investors, he said, because solid internal controls are the "first line of defense" against misconduct and an important deterrent to fraud.