PCAOB issues AS6 on consistency

Internal Auditor, April, 2008 by J. Whitley

THE U.S. PUBLIC COMpany Accounting Oversight Board (PCAOB) has adopted Auditing Standard No. 6 (AS6), Evaluating Consistency of Financial Statements, to clarify how external auditors evaluate and report adjustments to previously issued financial statements. AS6 also aligns the external auditor's responsibilities with the Financial Accounting Standards Board's Statement of Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error Corrections. The U.S. Securities and Exchange Commission (SEC) must approve the standard and related amendments to the interim audit standards, which would take effect 60 days after approval.

The PCAOB developed the new standard to improve the quality of the external auditor's reporting on items that affect the consistency of financial statements, including whether an adjustment to previously issued financial statements results from a change in accounting principle or the correction of a misstatement. Under AS6, auditors must evaluate a change in accounting principle that has a material effect on the financial statements to determine whether the company's method of accounting for the effect of the change conforms with U.S. Generally Accepted Accounting Principles.

Auditors must also review whether the disclosures related to the accounting change are adequate and whether the company can justify that the alternative principle is preferable as required by SFAS No. 154. Under the amendments to the PCAOB's interim audit standards--AU Section 508: Reports on Audited Financial Statements--the auditor would call attention to the change in accounting principle in the auditor's report by providing an explanatory paragraph identifying the nature of the change and a reference to the issuer's note describing the change.

Information about AS6 and the amendments to the interim audit standards can be obtained from the PCAOB's Web site, www.pcaob.org.