PCAOB Issues Summary Report on Internal Control Related Inspections

April 17, 2007

FEI Summary

The Public Company Accounting Oversight Board (PCAOB) issued a report on the second year implementation of its Auditing Standard No. 2, An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements (AS2). The report is based on PCAOB inspections that looked at portions of approximately 275 audits of internal control over financial reporting (ICFR) by registered public accounting firms.

The report is a follow-up to the PCAOB announcement in May 2006 that outlined the 2006 inspection process. The PCAOB indicated that it would conduct inspections to determine whether auditors were achieving the objectives of AS2 with the least expenditure of resources. Inspectors concentrated on four areas: integrating the audits of financial statements and internal control, using a top-down approach, using the work of others and assessing risk. The report issued April 17 focuses on findings in these areas, as well as noting that progress was made in improving the efficiency of internal control audits. The PCAOB believed that many of these improvements resulted from the easing of time constraints that auditors and issuers faced in the first year, issuers' and auditors' additional experience and changes that auditors made in their methodologies and staff training.

According to the report, the inspectors found evidence that most firms had made progress in integrating their audits (for example, by using the same engagement team to perform both the financial statement audit and the audit of internal control over financial reporting). The inspectors also observed more instances in which auditors approached the audit of internal control from the top down and thus did a better job of focusing their testing and evaluation on the relevant company-level controls. Several of the firms achieved greater efficiencies by varying the extent of their testing commensurate with the level of risk and, generally, auditors used the work of others more in the second year of implementing AS2 than in the first year.

However, the board also identified ways in which auditors can further improve their implementation of AS2. The board considered these results when it proposed a revised standard of Internal Control currently being deliberated.

This report is a general report under the board’s Rule 4010 and does not identity any firm or firms to which the inspection observations in the report apply.

Access the press release here and full report here.

Prepared April 18, 2007 by Christine DiFabio (cdifabio@FinancialExecutives.org), Director, Technical Activities, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.