The PCAOB proposed a
standard,
An Audit of Internal Control Over
Financial Reporting That Is Integrated With an
Audit of Financial Statements,
to replace PCAOB Audit Standard no. 2
(AS2). The proposal is designed to
focus audits on the matters most significant to
internal control, eliminate unnecessary
procedures, simplify the standard itself by
reducing detail (the text is roughly one-third the
length of AS2) and make audits more scalable for
smaller companies. The proposed standard would
Direct the auditor to the most
important controls and emphasize the importance of
risk assessment.
Revise the definitions of
significant deficiency and material
weakness, as well as the “strong
indicators” of a material weakness.
Clarify the role of materiality,
including interim materiality, in the audit.
Remove the requirement to evaluate
management’s process.
Permit consideration of knowledge
obtained during previous audits.
Direct the auditor to tailor the
audit to reflect the attributes of smaller and
less-complex companies.
Refocus the multilocation testing
requirements on risk rather than coverage.
Although the effective date is not yet
determined, PCAOB Chair Mark Olson said, “We’re
trying to have the whole thing done so that it can
be fully absorbed for the 2007 audit.” The
PCAOB also proposed to revise and redistribute
certain topics covered in AS2 to other existing
standards; these include easing restrictions on
using the work of others and new guidance on audit
committee preapproval of services related to
internal control. Comments are due by
February 26. To view the EDs, visit www.pcaobus.org/Rules/Docket_021/index.aspx
.
The SEC proposed interpretive
guidance for management on its obligations under
section 404 of the Sarbanes-Oxley Act of 2002.
The guidance is organized around two
principles:
Management should evaluate the design
of the controls it has implemented to determine
whether there is a reasonable possibility that a
material misstatement in the financial statements
would not be prevented or detected in a timely
manner.
Management should gather and analyze
evidence about the operation of the controls being
evaluated based on its assessment of the risk
associated with those controls. The SEC
also proposed changes to SEC rules 13a-15 and
15d-15 to clarify that a company choosing to
evaluate internal control in accordance with the
new guidance would satisfy the annual evaluation
requirement. However, the commission says it would
allow management to use methods other than those
in the proposed guidance to achieve the same
objectives. This would give larger companies that
have already complied with section 404 the option
to continue to use their current processes rather
than starting over under the new guidance.
The SEC also plans to amend Regulation S-X to
clarify the auditor’s reporting requirement under
section 404. To view the new guidance, visit www.sec.gov/rules/proposed.shtml
. The effective date has not been
determined. In an interview with the JofA, SEC
Chairman Christopher Cox said, “I expect that 404
relief will be in effect for U.S. companies—or for
companies both in the United States and abroad—no
later than the second quarter of 2007.” Comments
are due by February 26. The commission
also adopted revised compliance deadlines for
smaller companies. Previously, nonaccelerated
filers were to begin including both management’s
assessment of internal control and an auditor’s
attestation to management’s assessment for fiscal
years ending on or after July 15, 2007. The new
deadline gives nonaccelerated filers until fiscal
years ending on or after December 15, 2007, to
provide management’s assessment of internal
control over financial reporting. But
nonaccelerated filers now will have
another year to meet the auditor’s attestation
requirement.
FASB issued an exposure draft
to address concerns that existing disclosure
requirements do not provide adequate
information to investors and others about the
effects of derivative and hedging activities on a
company’s financial statements. The ED,
Disclosures About Derivative Instruments and
Hedging Activities, would, among other
things, require entities to discuss their
objectives and strategies for using derivative
instruments in terms of the underlying risk and
accounting designation. The ED would amend
and expand the disclosure requirements of the
similarly titled FASB Statement no. 133.
“The proposed disclosure requirements are
intended to enhance understanding of how and why
entities use derivatives, how they are accounted
for in an entity’s financial statements, and how
they affect an entity’s financial position,
results of operations and cash flows,” FASB
Project Manager Kevin Stoklosa said in a news
release. The requirements would take
effect for periods ending after December 15, 2007.
Comments are due by March 2. The draft is
available at www.fasb.org/draft/ed_derivatives_disclosure.pdf.
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