Wednesday, November 30, 2005

PCAOB looks at Initial Implementation of Auditing Standard #2

Christine DiFabio of the Financial Executives Institute provides a nice summary of the PCAOB (Public Companies Accounting Oversight Board) report (also linked in the FEI link above) and its findings that compliance with Statement 2 on Internal Control has not gone as well as the PCAOB hoped. PCAOB did acknowledge that a tight time frame and shortages of trained personnel contributed to the shortfall. Specific efficiency issues mentioned in the report included a lack of integration between the internal control audit and financial audit; lack of efficient use of work done by other parties (such as internal auditors?), lack of a "top-down" approach, lack of adjusting tests of transactions based on riskiness of asset or transaction, trying to test transactions at different stages rather than "walking it through" from beginning to end. Among effectiveness concerns were insufficient testing of compensating internal controls if primary controls were insufficient and lack of sufficient training of internal controls related to note disclosure.

PCAOB is under some pressure for cost and aggravation; a Business Week article (see link at right) today indicated that some smaller companies were eschewing going public to avoid Sarbanes-Oxley compliance. At the same time; many of the observations made here by PCAOB (such as better use of other party work and integration of internal control and financial audits are good ideas on their face; whether or not an audited company is subject to Sarbanes-Oxley.


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