The PCAOB 101

Internal Auditor, June, 2008 by Tom Olach

STANDARD-SETTING Section I03 of the Sarbanes-Oxley Act places responsibility for writing and modifying audit standards with the PCAOB, subject to SEC approval. To date, the PCAOB has established five SEC-approved audit standards (ASs):

* AS1: References in Auditors' Reports to the Standards of the Public Company Accounting Oversight Board. The most significant provision of ASI is its authorization for the board to establish audit standards for use by registered accounting firms. In addition, it requires registered firms to acknowledge their adherence to the PCAOB's standards.

* AS2: An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements. AS2 was created to require registered accounting firms to evaluate and give an opinion about management's assessment of internal controls related to financial reporting, pursuant to Sarbanes-Oxley Section 404. Because of the excessive resources required of both registered accounting firms and public companies to comply with this standard, AS2 was superseded by AS5.

* AS3: Audit Documentation. AS3 requires registered accounting firms to prepare and retain documentation under the PCAOB rules. Workpapers and other audit-related documents must be maintained for seven years--anyone who destroys workpapers or audit-related documentation faces a maximum of 10 years in prison. If the destroyed documentation is related to a federal investigation or bankruptcy proceedings, perpetrators face a maximum prison sentence of 20 years.

* AS4: Reporting on Whether a Previously Reported Material Weakness Continues to Exist. AS4 provides requirements and guidance for registered accounting firms that are engaged to report on material weaknesses previously identified during a Section 404 evaluation. Because the AS4 engagement is entirely optional, it can be performed by either an organization's registered accounting firm or its internal auditors. The objective of AS4 engagements is to provide reasonable assurance that the material weakness no longer exists.

* AS5: An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements. AS5 supersedes AS2 and takes a more conservative approach to ensuring the effectiveness of public companies' internal controls over financial reporting. It states that registered accounting firms should evaluate management's assessment of internal controls while simultaneously performing the financial statement audit. AS5 helps increase both external and internal audit efficiency by clarifying the use of relevant work by others, emphasizing the importance of having both internal auditors and their organization's registered accounting firm create clear, comprehensible workpapers and audit related documentation.

Recently the board submitted another audit standard to the SEC for approval, AS6: Evaluating Consistency of Financial Statements. AS6 would update registered public company accounting firms' responsibility for evaluating and reporting on the consistency of public companies' financial statements. The standard aims to clarify the steps registered public accounting firms should take to enhance the quality of disclosures pertaining to clients' accounting changes, such as changes in an accounting principle.