PCAOB releases first-year AS2 report
Focuses on issues that hinder
SOX Update: Sarbanes-Oxley Issues
"An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements (AS2)," the PCAOB has issued a report discussing several implementation problems that were identified. The report primarily focuses on those issues that kept many audits from being as effective and/or efficient as the PCAOB intended. In light of the challenges that auditors faced during the first year of implementation, such as shortages of sufficiently experienced staff members and a compressed timeframe, the PCAOB acknowledged that some audit firms have reported plans to make, or are already in the process of making, improvements in subsequent AS2 engagements.
The PCAOB identified the following as the principal hindrances faced by many firms in conducting effective and efficient engagements under AS2:
- Failure to integrate the audits of internal controls under AS2 with audits of the financial statements leading to duplication of efforts and limited reliance on controls during the financial statement audit.
- Applying a bottom-up rather than a top-down approach. Several auditors focused initially on detailed tests of individual controls at the transaction, process, or application levels instead of first evaluating the company-wide controls and significant accounts at a high level and working down to the relevant specific controls.
- Inadequate consideration of the unique risk factors of each company. The PCAOB found that some auditors, still plagued by the checklist mentality, applied a uniform approach to testing the internal controls of all clients rather than altering the nature, extent, and timing of their audit procedures to account for the distinct risks faced by each individual company. As a result, auditors spent too much in many low-risk areas and didn't give enough attention to high-risk areas.
- Inefficient walkthroughs of transaction controls because of the use of different transactions to test separate parts of the control instead of walking a single transaction through the entire control process to gain a more comprehensive view.
- Less reliance on the work of others than permitted under AS2, which resulted in inefficient use of time and resources during the engagement.
- Insufficient evaluation of compensating controls upon the discovery of control deficiencies. Some auditors relied solely on management's assertions regarding the existence and adequacy of compensating internal controls without properly testing the operations of those controls when deficiencies were revealed late in the audit process.
- Inadequate testing of controls over financial statement presentation and disclosures. These controls are of vital importance in the financial reporting process; however, several auditors failed to sufficiently test them, which resulted in ineffective audits of internal controls as well as unnecessary substantive testing during the financial statement audit.
The full text of the report is available at the PCAOB Web site: www.pcaobus.org.
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