PCAOB Revisits Amending Seven Auditing Standards Governing Auditor Risk Assessment
The Public Company Accounting Oversight Board (PCAOB) has re-issued for public comment revised versions of seven proposed auditing standards and related amendments designed to enhance the effectiveness of an auditor’s assessment of and response to risk.
“A sound and sophisticated understanding of the risks of material misstatement, and planning and executing the audit to respond to those risks, are essential to affording investors reasonable assurance that financial statements are free of material error. For that reason, these seven standards – once finalized – will serve as the bedrock for much of the Board’s future standards-setting,” said Acting PCAOB Chairman Daniel L. Goelzer. “These standards will provide a base that focuses on appropriate risk identification and on audit planning tailored to those risks. Future standards will build on that foundation.”
Originally proposed in October 2008, PCAOB voted in December to re-propose standards and amendments that would establish requirements for audit procedures performed throughout the audit, from the initial planning stages through the evaluation of the audit results in forming the opinion in the auditor's report.
Though not fundamentally different from the first version, the revised standards do reflect numerous enhancements and clarifications based on earlier comments. The most significant changes better-align risk assessment procedures with those specified in Auditing Standard No. 5, which governs audits of internal control over financial reporting. The need to evaluate financial statement disclosures as part of assessing the risk of material misstatement is also more explicitly emphasized.
The revised standards also expand requirements relating to the auditor’s responsibility to consider the possibility of fraud, including an increased emphasis on consideration of potential management bias and of risks related to missing or incomplete disclosures. In addition, the standards emphasize the auditor's responsibility to consider the risk of fraud throughout the audit and contain new requirements intended to improve an auditor’s evaluation of disclosures in financial statements.
“Since these standards were first proposed last year, the world has witnessed firsthand the consequences of ineffective risk management. It is clear that the loss of trillions of investors’ dollars was, at least in part, the result of weak or non-existent risk management oversight on the part of management teams and directors in the financial industry,” said PCAOB Board Member Steven B. Harris, who specifically encouraged investors to submit comments on the proposed revisions.
Harris notes that every audit carries the risk that the auditor will express an inappropriate opinion when the financial statements are materially misstated, which is why the revised standards more clearly articulate the auditor’s responsibility to consider business risks as a very important element of audit risk. He also points to the integration of, and emphasis on, the auditor’s responsibility to consider the risk of fraud throughout the entire audit process as another significant improvement in the revised standards.
“This emphasis on the auditor's consideration of fraud is to prompt auditors to make a more thoughtful and thorough assessment of the risk of fraud and to develop appropriate responses, rather than approaching the assessment of fraud risk as an isolated exercise,” said Harris. “The need for this type of integration has been clear based on observations made during our inspections process.”
PCAOB is seeking comment on the re-proposed standards for a 75-day period ending March 2, 2010. Comments will be posted on the organization’s website, www.pcaobus.org, on the Rulemaking Docket under Rules (Rulemaking Docket 026). Any new auditing standard or amendment to a PCAOB standard that is adopted will be submitted to the Securities and Exchange Commission for approval.
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