Summary of PCAOB Proposed Standard Setting Activities for 2007

October 5, 2006

FEI Summary

The Public Company Accounting Oversight Board (PCAOB) presented its prioritized list of standard setting activities for 2007 to its Standing Advisory Group (SAG) on Oct. 5, 2006. The revision of Auditing Standard No. 2, “An Audit of Internal Control over Financial Reporting Conducted in Conjunction with an Audit of the Financial Statements” (AS2), tops the list of highest priority projects. The list appears below and is further detailed in Chief Auditor Tom Ray’s remarks to SAG which have been posted here.

2007 Standard-Setting Priority List – seven priority projects for this year

Current standard setting projects (4 projects)

1.       Revision of AS2

2.       Principles of reporting - conform auditing standards to new Financial Accounting Standards Board (FASB) standards on:  

o        Accounting Changes and Error Corrections (FAS 154)

o        GAAP Hierarchy (soon-to-be issued final FASB standard on GAAP Hierarchy would, among other things, move hierarchy from auditing standards to accounting standards)

3.       Engagement quality review (including concurring partner review)

4.       Risk assessment, including fraud risk assessment

Projects expected to begin this year (3 projects):

1.       Related parties

2.       Confirmations (used to corroborate information with third parties)

3.       Use of Specialists

o        How specialists are used by client companies and by auditors in Fair Value and other measurements,

o        Use of specialist’s work as evidential matter

Projects dropped from priority list (3 projects)

The following projects were on the 2006 priority list but are no longer considered “priorities”

1.       Communications with audit committees

o        PCAOB believes auditors are not having trouble identifying matters to communicate to audit committees, and PCAOB has not identified issues about auditors’ legal relationship to company

2.       Quality control standards of audit firms

o        No longer considered a “priority” standard-setting project, inspections will continue to address this

3.       Codification of PCAOB standards and authority of PCAOB interim standards

o        Codification still considered a good idea, but not priority

o        Authority of interim standards (AICPA standards adopted by PCAOB) is not causing an issue in practice.

Other standard setting projects conducted in 2006

Work may continue on the first two items below - no “priority” attached; work completed on last two:

1.       Fraud

o        Analyzing inspection results of implementation of SAS 99, auditors responsibility to evaluate and respond to risk of fraud, SAS 99 became effective 2003,

o        Considering whether to issue a “Rule 4010” summary report on inspection findings re: SAS 99

2.       Fair Value

o        Monitoring FASB developments

o        FAS 157 issued Sept. 15, earlier this year FASB also exposed proposed std on FV Option

o        We are evaluating existing auditing standards on auditing estimates, auditing FV, and use of work of others, all of which are pertinent, to determine if changes to standards or staff guidance useful

3.       Predecessor Auditors

o        FAS 154, Accounting Changes and Error Corrections, requires all voluntary changes in accounting be applied retrospectively to all prior periods presented, unless it is impracticable to do so; prior FASB standard required correction in period of the change.

o        PCAOB staff issued Questions & Answers (Q&A’s) on June 9 to guide current and predecessor auditors on adjustments to prior-period financial statements previously audited by another auditor

4.       Stock Options

o        PCAOB issued Practice Alert No. 1 on July 28 on “Matters Relating to Timing and Accounting of Option Grants.”  PCAOB does not plan further standard-setting in this area at this time. SEC has issued guidance.