SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-50688; File No. PCAOB-2004-08)
November 17, 2004
Public Company Accounting Oversight Board; Order Approving Proposed Conforming Amendments to PCAOB Interim Standards Resulting from the Adoption of PCAOB Auditing Standard No. 2, "An Audit Of Internal Control Over Financial Reporting Performed In Conjunction With An Audit of Financial Statements"
On September 16, 2004, the Public Company Accounting Oversight Board (the "Board" or the "PCAOB") filed with the Commission proposed Conforming Amendments to PCAOB Interim Standards Resulting from the Adoption of PCAOB Standard No. 2, "An Audit Of Internal Control Over Financial Reporting Performed In Conjunction With An Audit of Financial Statements" ("Conforming Amendments"), pursuant to the Sarbanes-Oxley Act of 2002 (the "Act")1 and Section 19(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). The Conforming Amendments would change and add to the interim standards certain text, including references, to assist auditors in performing integrated audits of financial statements and internal control and would apply certain concepts developed in Auditing Standard No. 2 to assist an auditor engaged solely to audit the financial statements. Notice of the proposed Conforming Amendments was published in the Federal Register on October 13, 2004,2 and the Commission received two comment letters. For the reasons discussed below, the Commission is granting approval of the proposed Conforming Amendments.
The Act establishes the PCAOB to oversee the audits of public companies and related matters, to protect investors, and to further the public interest in the preparation of informative, accurate and independent audit reports.3 Section 103(a) of the Act directs the PCAOB to establish auditing and related attestation standards, quality control standards, and ethics standards to be used by registered public accounting firms in the preparation and issuance of audit reports as required by the Act or the rules of the Commission. Section 103(a)(3) of the Act also states that the Board may adopt any statement of auditing or related professional practice standards developed by a professional group of accountants as interim or transitional standards, with the Board retaining full authority to modify, supplement, revise or subsequently amend, modify or repeal, in whole or in part, any such statements. Pursuant to this authority, the PCAOB adopted the auditing and related professional practice standards of the American Institute of Certified Public Accountants, as they existed on April 16, 2003, as interim or transitional standards (the "interim standards").4
The proposed Conforming Amendments specifically identify changes to the interim standards as a result of adopting PCAOB Auditing Standard No. 2. The identification of such changes is intended to help auditors comply with the Board's standards, as well as to eliminate potential confusion and inconsistencies in interpretation with respect to the affected portions of the Board's interim standards.
The Conforming Amendments also supersede AT Section 501, Reporting on an Entity's Internal Control Over Financial Reporting ("AT 501")5 and SAS No. 60, Communication of Internal Control Related Matters Noted in an Audit ("SAS No. 60").6 AT 501 provides guidance for performing an attestation engagement to issue an examination report on the effectiveness of an entity's internal control over financial reporting as of a point in time. The Board believes that Auditing Standard No. 2 is a superior standard to its predecessor attestation standard, AT 501, and the proposal would supersedes AT 501, effective immediately upon approval of the Conforming Amendments by the Commission. SAS No. 60 provides guidance in identifying and communicating conditions that relate to a company's internal control observed during an audit of the financial statements. SAS No. 60 for integrated audits (i.e., audits of both financial statements and internal control over financial reporting) would be replaced by portions of Auditing Standard No. 2, and the proposal also would amend SAS 60 as it applies to financial statement only audits.
The proposed Conforming Amendments have multiple effective dates. The amendments that affect integrated audits for accelerated filers would be effective for fiscal years ending on or after November 15, 2004 (i.e., at the same time as Auditing Standard No. 2 for integrated audits of accelerated filers that are subject to the Commission's rules implementing Section 4047 of the Act). Those amendments that affect audits of financial statements only and those that affect integrated audits of non-accelerated filers subject to the Commission's rules implementing Section 404 of the Act would be effective for fiscal years ending on or after July 15, 2005. Finally, the superseding of AT 501 would be effective immediately upon approval by the Commission.
The Commission's comment period on the Proposed Standard ended on November 3, 2004, with the Commission receiving two comment letters. The comment letters came from two registered public accounting firms.
Both commenters expressed support for Commission approval of the Conforming Amendments.
On the basis of the foregoing, the Commission finds that proposed Conforming Amendments are consistent with the requirements of the Act and the securities laws and are necessary and appropriate in the public interest and for the protection of investors.
IT IS THEREFORE ORDERED, pursuant to Section 107 of the Act and Section 19(b)(2) of the Exchange Act, that the proposed Conforming Amendments to PCAOB Interim Standards Resulting from the Adoption of PCAOB Standard No. 2, "An Audit Of Internal Control Over Financial Reporting Performed In Conjunction With An Audit of Financial Statements", (File No. PCAOB-2004-08) be and hereby are approved.
By the Commission.
J. Lynn Taylor
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