PCAOB Issues Report on First Year of Implementation of Auditing Standard No. 5

The Public Company Accounting Oversight Board today issued a report on the first year of implementation of Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements (AS No. 5).

The report is based on PCAOB inspections that examined portions of approximately 250 audits of internal control over financial reporting (ICFR) by the eight largest domestic registered firms in 2007 and 2008. AS No. 5 became effective for audits for fiscal years ending on or after Nov. 15, 2007, and replaced the PCAOB’s previous ICFR standard, Auditing Standard No. 2.

The period covered by the report was, for auditors and preparers of financial statements, a period of transition to new internal control requirements. Auditors responded to the issuance of AS No. 5 and preparers of financial statements received guidance from the U.S. Securities and Exchange Commission (SEC) on management’s assessment of ICFR.

The PCAOB’s 2008 inspections of ICFR audits were focused on whether auditors were effectively transitioning to AS No. 5, and were designed to assess the quality of the firms’ AS No. 5 implementation in the following areas: risk assessment; fraud risk; using the work of others; entity-level controls; the nature, timing, and extent of controls testing; and evaluating and communicating deficiencies.

"This report finds that, in the engagements our inspection teams looked at, auditors generally focused on the areas that presented more significant audit risk,” said Daniel L. Goelzer, Acting PCAOB Chairman. “While we are encouraged by the first-year implementation of AS No. 5, there is still room for improvement, and we will continue to review and assess the effectiveness of firms’ integrated audit procedures in 2009."

George Diacont, Director of the PCAOB Division of Registration and Inspections, added, "This report discusses six areas in which auditors may be able to make further improvements in their integrated audits, and I encourage auditors to use this report to do so."

The report focuses on audits performed by the eight domestic firms that the Board has inspected annually in each year since 2004. Four of these firms audit public companies that represent approximately 98 percent of total U.S. market capitalization.

In this report, the Board is not changing or proposing to change any existing standard, nor is the Board providing any new interpretation of any existing standards.