Current Developments at the PCAOB Ensuring Integrity: 3 rd Annual Auditing Conference at Baruch College December 4, 2008.
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Current Developments at the PCAOB Ensuring Integrity: 3 rd Annual Auditing Conference at Baruch College December 4, 2008
Thomas Ray, CPA Chief Auditor and Director of Professional Standards Public Company Accounting Oversight Board The views Mr. Ray expresses are his and do not necessarily reflect the views of the Board, individual Board members, or other members of the Board’s staff.
Overview Key features: new and proposed standards Evaluating consistency GAAP hierarchy Communications about independence Amendment to Rule 3523 Engagement quality review Risk assessment Other standards setting priorities Risks arising in current environment
Evaluating Consistency Auditing Standard No. 6 will supersede AU sec. 420 and its interpretations Aligns with FASB Statement 154 AS 6 – Requires the auditor to evaluate consistency and report on inconsistencies Describes the periods subject to evaluation Clarified that the evaluation should include evaluation of previously issued financials
Evaluating Changes in Accounting AS 6 also requires the auditor to evaluate a change in accounting principle that has a material effect on the financial statements to determine whether – The newly adopted accounting principle is a generally accepted accounting principle, The method of accounting for the effect of the change is in conformity with generally accepted accounting principles, The disclosures related to the accounting change are adequate, and The company has justified that the alternative accounting principle is preferable.
Reporting on Inconsistencies When previously issued financial statements have been adjusted, the auditor should identify the nature of the change in his or her report “… the company has changed its method of accounting …” “… the 200X financial statements have been restated to correct a misstatement …” Applies to all material error corrections
Changes in Classification Changes in classification need not be recognized in the auditor’s report, unless the change represents either – A change in accounting principle The correction of a material misstatement
GAAP Hierarchy Amendments to AU sec. 411 remove the GAAP hierarchy from the auditing standards The FASB Statement 162 incorporates the hierarchy into the accounting standards Effective dates are coordinated AU 411 now refers the auditor to the SEC requirements for the company under audit
Evaluation of Fair Presentation The auditor's opinion that financial statements are fairly presented in conformity with GAAP should be based on his or her judgment as to whether – the accounting principles selected have general acceptance; the accounting principles are appropriate in the circumstances; the financial statements, including the related notes, are informative of matters that may affect their use, understanding, and interpretation; the information presented in the financial statements is classified and summarized in a reasonable manner, that is, neither too detailed nor too condensed; and the financial statements reflect the underlying transactions and events within a range of acceptable limits, that is, limits that are reasonable and practicable to attain in financial statements. Source: Summarized from AU sec. 411.04.
Independence Communications Rule 3526, Communication With Audit Committees Concerning Independence, will supersede ISB No. 1 and its interpretations Requires auditor to communicate to the audit committee relationships that may reasonably be thought to bear on the auditor's independence Prior to accepting an initial engagement Annually thereafter
Communication Requirements In writing Discuss with the audit committee the potential effects of the relationships Document the substance of the discussion Annually must affirm to the audit committee in writing that the audit firm is independent in compliance with Rule 3520
Tax Services to Executives Amended Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles Prohibition was amended to apply only to the professional engagement period Objective of change was to avoid unnecessary restriction on choice of auditor
Engagement Quality Review Proposed auditing standard would replace interim SECPS concurring partner review Would apply to all registered firms and all engagements conducted pursuant to the standards of the PCAOB Comment period ended on May 12, 2008
Engagement Quality Review Some features similar to interim standard and standards of IAASB Competence Independence, integrity and objectivity Standard procedures Some features are different Explicit risk focus Concurring approval of issuance
Concurring Approval of Issuance Reviewer must not provide concurring approval of issuance if he or she knows, or should know based on the requirements of the standard, that – Team failed to obtain sufficient competent evidence Team reached an inappropriate conclusion The report is not appropriate, or The firm is not independent
Proposed Auditing Standards Related to Risk Assessment PCAOB Release No. 2008-006 – “Proposed Auditing Standards Related to the Auditor's Assessment of and Response to Risk and Conforming Amendments to PCAOB Standards” Released October 21, 2008
Proposed Auditing Standards Related to Risk Assessment Audit Risk in an Audit of Financial Statements Audit Planning and Supervision Identifying and Assessing Risks of Material Misstatement The Auditor's Responses to the Risks of Material Misstatement Evaluating Audit Results Consideration of Materiality in Planning and Performing an Audit Audit Evidence Conforming Amendments
Significant Features of Risk Standards Reflect more risk-based audit approaches Enhance the integration of the audit of financial statements with audit of internal control over financial reporting Integrate the auditor’s current responsibilities for considering fraud Reduce unnecessary differences with risk assessment standards of other standard- setters
Comment Period Available through PCAOB website at http://www.pcaobus.org/Rules/Docket_0 26/index.aspx http://www.pcaobus.org/Rules/Docket_0 26/index.aspx 120-day comment period ends on February 18, 2009
Other standards setting priorities Fair Value Specialists Related Parties Confirmations Recommendations from Federal advisory committees
Risks Arising in Current Environment Staff Audit Practice Alert No. 2 still relevant Fair value measurements and disclosures Other than temporary impairment Accounting estimates, risk of fraud Disclosure about risks and uncertainties Valuation of loans Valuation of goodwill, other intangibles and long-lived assets Postretirement benefits Going concern