The Public Company Accounting Oversight Board announced that its Auditing Standard No. 2, “ An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements,” has been approved by the Securities and Exchange Commission. The PCAOB expects to publish staff guidance regarding implementation of the standard.
“This standard is one of the most important and far-reaching auditing standards the Board will ever adopt,” said PCAOB Chairman William J. McDonough. “In the past, internal controls were merely considered by auditors; now they will have to be tested and examined in detail. That process will add an important protection for investors because solid internal controls are the first line of defense against misconduct and one of the most effective deterrents to fraud.”
Auditing Standard No. 2 addresses both the work that is required to audit internal control over financial reporting and the relationship of that audit to the audit of the financial statements. An audit of internal control includes, among other things, evaluating the process management used to perform its assessment of internal control effectiveness, evaluating the effectiveness of both the design and operation of the internal control, and forming an opinion about whether internal control over financial reporting is effective.
Companies considered accelerated filers (seasoned U.S. companies with public float exceeding $75 million) are required to comply with the internal control reporting and disclosure requirements of Section 404 of the Act for fiscal years ending on or after November 15, 2004. Accordingly, auditors engaged to audit the financial statements of such companies for fiscal years ending on or after November 15, 2004, also are required to audit and report on the company's internal control over financial reporting as of the end of such fiscal year. Other companies (including smaller companies, foreign private issuers and companies with only registered debt securities) have until fiscal years ending on or after July 15, 2005, to comply with these internal control reporting and disclosure requirements, and the requirement for audit reporting on internal control is similarly delayed.
The SEC’s order approving the auditing standard is available on the SEC's Web site. The text of Auditing Standard No. 2 can be found under Rulemaking on the PCAOB's Web site.