Standard 5 of the PCAOB
On May 24, 2007, the Public Company Accounting Oversight Board voted to approve Auditing Standard No. 5 (AS5), titled “An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements.” The newly approved AS5, drafted in organization with the Securities and Exchange Commission, replaces the PCAOB’s previous internal control standard, Auditing Standard No. 2. The PCAOB has stated that AS5 has four main goals: (1) to focus the internal control audit on the most important matters; (2) to eliminate procedures that are unnecessary to achieve the intended benefits; (3) to make the audit scalable to fit the size and the complexity of any company, (4) and to simplify the text of the standard. PCAOB Stated that AS5 is principles-based. It is intended to increase the possibility that material flaws in internal control will be found before they result in material misstatement of a company’s financial statements, while eliminating actions that are unnecessary. According to Mark Olson, PCAOB Chairman, the standard 5 was made to better meet the needs of investors, public companies and auditors. AS5 was also designed to simplify compliance requirements. As a result, many finance experts expect AS5 to lessen the costs for Sarbanes-Oxley (SOX) 404 compliance. AS5 encourages a top-down, risk-based method while evaluating internal controls of an enterprise - excluding several strict requirements in AS2 that drove obsessive auditing. Most financial executives see the new standard leading to fewer specifications and more work in recognizing areas where a company’s risks of financial misstatement are greater. For example, for auditors and management, it means getting away from recording and testing most of the controls and concentrating instead on the risk -prone areas. The PCAOB and the SEC had good purposes in developing AS5: more flexibility, more discretion, less cost and the ability for smaller public...
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