Washington, D.C., Oct. 21, 2008
The Public Company Accounting Oversight Board voted today to propose for public comment a suite of seven new auditing standards related to the auditor's assessment of and responses to risk and related conforming amendments. The proposed standards would supersede the Board's interim auditing standards related to audit risk and materiality, audit planning and supervision, consideration of internal control in an audit of financial statements, audit evidence, and performing tests of accounts and disclosures before year end.
The proposed standards would establish requirements and provide direction on audit procedures performed throughout the audit, from the initial planning stages through the evaluation of the audit results in forming the opinions in the auditor's report. The proposals build upon and attempt to improve the existing framework for risk assessment by, among other things, taking account of improvements in risk assessment methodologies, enhancing the integration of the risk assessment standards with the Board's standard for the audit of internal control over financial reporting, emphasizing the auditor’s responsibilities for considering the risk of fraud as being a central part of the audit process, and reducing unnecessary differences with the risk assessment standards of other auditing standard setters.
Chairman Mark Olson said, “An appropriate assessment of risk is the foundation of a high quality audit. Today’s proposals are intended to strengthen that foundation, which should result in improvements throughout the audit.”
The Board is proposing these standards for a 120-day comment period, ending February 18, 2009. Interested persons are encouraged to submit their comments to the Board. The Board will carefully consider all comments received before taking final action on the proposal. Comments will be posted on the Board’s Web site, www.pcaobus.org, on the Rulemaking Rocket under Rules (Rulemaking Docket No. 026). Any new auditing standard or amendment to a PCAOB standard that is adopted will be submitted to the Securities and Exchange Commission for approval.
The proposing release, text of the proposed auditing standard, and related amendments to PCAOB standards are available on the Board’s Web site under Rulemaking Docket No. 026. An archive of the Webcast and a podcast of the Board’s public meeting will also be available on the Board's Web site at www.pcaobus.org.
A more detailed discussion of the matters proposed for public comment follows:
The seven standards the Board proposed are, like the existing interim PCAOB standards, rooted in the concept of audit risk. Audit risk can be described as the risk that the auditor will express an inappropriate opinion when the financial statements are materially misstated. The objective of an audit of financial statements is to limit audit risk to a low level, so that the auditor can opine with reasonable assurance that the financial statements present fairly, in all material respects, a company’s financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.
A number of factors and developments influenced the development of the proposed standards, including improvements in audit methodologies; recommendations to the profession on ways in which auditors could improve risk assessment; advice from the Board's Standing Advisory Group ("SAG"); the adoption of Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements; and observations from the Board's oversight activities.
The proposed risk assessment standards are as follows:
The Board believes that the proposed standards, if adopted, would result in improvements to audits of issuers, such as the following: