PCAOB Will Amend Internal Control Standard, but No Timetable Given

The PCAOB is committed to amending its auditing standard on internal controls pursuant to a framework of recognized objectives, according to Chief Auditor Thomas Ray. Indeed, he said that amending Auditing Standard No. 2 is the Board’s top priority, but, when specifically questioned, the chief auditor declined to give a time frame for when the amendments will be effected. In remarks at a just concluded AICPA conference in Chicago, he outlined elements of the Board’s amendments. For example, he said that the amendments will focus on improving high risk areas. The amendments will also retain core principles, such as reasonable assurance. Definitions will be clarified, such as material weakness and significant deficiency. The SEC has deferred to the Board to define these important terms.

Similarly, the concept of materiality will be clarified. It is not within the Board’s purview to change the definition of materiality, he noted, but the Board can provide guidance. The Board also intends to reconsider the list of strong indicators of a material weakness, such as ineffective audit committee oversight. The changes will also incorporate key concepts from the Board’s May 2005 guidance. For example, the top-down approach mentioned in the guidance will be codified in the standard. Also, the importance of integrating the financial statement audit and the internal controls audit will be strongly amplified in the amendments. In addition, the Board will provide guidance encouraging auditors to more frequently use the work of other. The amendments will also allow for the use of experience gained in prior years.