16 May 2005

PCAOB issues guidance on audits of internal control

The Public Company Accounting Oversight Board (PCAOB) published additional guidance to auditors on implementation of Section 404 of Sarbanes-Oxley. The guidance represents the PCAOB’s response to questions and concerns raised at the April 13, SEC roundtable on internal audit controls reporting. The new guidelines will allow external auditors to directly communicate with management and tailor audits to individual clients. External auditors will also be able to use the work of internal audit staff. Further, the new guidelines will allow for an integrated audit of internal controls and financial statements.

The guidance consists of a Board Policy Statement Regarding Implementation of Auditing Standard No. 2 and a series of staff questions and answers. The questions and answers provide technical guidance to auditors on how to use the provisions and underlying principles of Auditing Standard No. 2 to conduct effective and cost-efficient audits of public companies’ internal control over financial reporting. The Board’s Policy Statement amplifies some of the themes in the questions and answers and articulates the Board’s policy on how it intends to administer Auditing Standard No. 2 in its oversight of the registered public accounting firms that audit public companies.

While roundtable participants generally supported the objectives of Section 404, many expressed concerns about compliance costs and offered constructive comments about how the implementation process can be improved. At the close of the roundtable, PCAOB Chairman William J. McDonough pledged that the Board would respond to some of the concerns about auditors’ implementation of Auditing Standard No. 2 by issuing additional guidance on the standard on May 16.

Press release

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