PCAOB to Consider "New" Internal Control Audit Standard on Dec. 19

December 5, 2006

FEI Summary

The Public Company Accounting Oversight Board (PCAOB) announced it will hold an open meeting on December 19 to consider proposing a "new" internal control audit standard which would "supersede" the current PCAOB standard for Section 404 audits, Auditing Standard No. 2 (AS2).

The five goals PCAOB is trying to accomplish through the proposed revisions (in essence, new standard), according to the December 5 announcement, are:

1. Focus the Internal Control Audit on Most Important Matters (including, a top-down approach focusing on identifying control weaknesses before they become material misstatements). [NOTE: the press release used the term "important" in number 1, to further test controls that are “important” to the effective functioning of a company’s internal control, not "material,” although "material is used elsewhere.]

2. Eliminate Procedures that are Unnecessary to Achieve the Intended Benefits (including: permit [i.e., eliminate prohibition on] use of prior years work by auditors and "require auditors to consider whether and how to use the work of others, instead of doing certain procedures themselves).

3. Incorporate Guidance on Efficiency – e.g. PCAOB's May 2005 "guidance," other guidance issued by PCAOB to make implementation of the internal control audit standard (originally issued as AS2) more efficient and effective – directly into the new audit standard itself.

4. Provide Explicit and Practical Guidance on Scaling the Audit to Fit the Size and Complexity of the Company .

5. A Simplified Standard – Propose a "simplified" standard (vs. AS2) that is shorter, easier to understand, and more clearly scalable to audits of companies of all sizes and complexity, by:

·         Reducing granularity;

·         Redefining key terms;

·         Clarifying that the auditor’s evaluation of materiality for purposes of an internal control audit is based on the same long-standing principles applicable to financial statement audits; and

·         Consolidating the board’s standards on using the work of others in internal control audits and in financial statement audits into one new standard, so as to better facilitate integration of the two audits.

The PCAOB's action will follow the U.S. Securities and Exchange Commission’s (SEC) open commission meeting on Dec.13 , at which time the SEC will consider proposed rulemaking to make management's assessment of internal control under Sarbanes-Oxley Section 404 more efficient and effective.

Prepared Dec. 5, 2006 by Edith Orenstein, eorenstein@FinancialExecutives.org, Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.