Current Developments at the PCAOB

Ensuring Integrity: 3rd Annual Auditing Conference at Baruch CollegeDecember 4, 2008

Thomas Ray, CPAChief Auditor and Director of Professional Standards

Public Company Accounting Oversight Board

The views Mr. Ray expresses are his and do not necessarily reflect the views of the Board, individual Board members, or other members of the Board’s staff.

Overview

Key features: new and proposed standards Evaluating consistency GAAP hierarchy Communications about independence Amendment to Rule 3523 Engagement quality review Risk assessment

Other standards setting priorities Risks arising in current environment

Evaluating Consistency

Auditing Standard No. 6 will supersede AU sec. 420 and its interpretations

Aligns with FASB Statement 154 AS 6 –

Requires the auditor to evaluate consistency and report on inconsistencies

Describes the periods subject to evaluation Clarified that the evaluation should include

evaluation of previously issued financials

Evaluating Changes in Accounting

AS 6 also requires the auditor to evaluate a change in accounting principle that has a material effect on the financial statements to determine whether – The newly adopted accounting principle is a

generally accepted accounting principle, The method of accounting for the effect of the

change is in conformity with generally accepted accounting principles,

The disclosures related to the accounting change are adequate, and

The company has justified that the alternative accounting principle is preferable.

Reporting on Inconsistencies

When previously issued financial statements have been adjusted, the auditor should identify the nature of the change in his or her report “… the company has changed its method of

accounting …” “… the 200X financial statements have been

restated to correct a misstatement …”

Applies to all material error corrections

Changes in Classification

Changes in classification need not be recognized in the auditor’s report, unless the change represents either – A change in accounting principle The correction of a material misstatement

GAAP Hierarchy

Amendments to AU sec. 411 remove the GAAP hierarchy from the auditing standards

The FASB Statement 162 incorporates the hierarchy into the accounting standards

Effective dates are coordinated AU 411 now refers the auditor to the SEC

requirements for the company under audit

Evaluation of Fair Presentation

The auditor's opinion that financial statements are fairly presented in conformity with GAAP should be based on his or her judgment as to whether – the accounting principles selected have general acceptance; the accounting principles are appropriate in the circumstances; the financial statements, including the related notes, are

informative of matters that may affect their use, understanding, and interpretation;

the information presented in the financial statements is classified and summarized in a reasonable manner, that is, neither too detailed nor too condensed; and

the financial statements reflect the underlying transactions and events within a range of acceptable limits, that is, limits that are reasonable and practicable to attain in financial statements.

Source: Summarized from AU sec. 411.04.

Independence Communications

Rule 3526, Communication With Audit Committees Concerning Independence, will supersede ISB No. 1 and its interpretations

Requires auditor to communicate to the audit committee relationships that may reasonably be thought to bear on the auditor's independence Prior to accepting an initial engagement Annually thereafter

Communication Requirements

In writing Discuss with the audit committee the

potential effects of the relationships Document the substance of the

discussion Annually must affirm to the audit

committee in writing that the audit firm is independent in compliance with Rule 3520

Tax Services to Executives

Amended Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles

Prohibition was amended to apply only to the professional engagement period

Objective of change was to avoid unnecessary restriction on choice of auditor

Engagement Quality Review

Proposed auditing standard would replace interim SECPS concurring partner review

Would apply to all registered firms and all engagements conducted pursuant to the standards of the PCAOB

Comment period ended on May 12, 2008

Engagement Quality Review

Some features similar to interim standard and standards of IAASB Competence Independence, integrity and objectivity Standard procedures

Some features are different Explicit risk focus Concurring approval of issuance

Concurring Approval of Issuance

Reviewer must not provide concurring approval of issuance if he or she knows, or should know based on the requirements of the standard, that – Team failed to obtain sufficient competent

evidence Team reached an inappropriate conclusion The report is not appropriate, or The firm is not independent

Proposed Auditing Standards Related to Risk Assessment

PCAOB Release No. 2008-006 – “Proposed Auditing Standards Related to the Auditor's Assessment of and Response to Risk and Conforming Amendments to PCAOB Standards”

Released October 21, 2008

Proposed Auditing Standards Related to Risk Assessment Audit Risk in an Audit of Financial

Statements Audit Planning and Supervision Identifying and Assessing Risks of Material

Misstatement The Auditor's Responses to the Risks of

Material Misstatement Evaluating Audit Results Consideration of Materiality in Planning and

Performing an Audit Audit Evidence Conforming Amendments

Significant Features of Risk Standards

Reflect more risk-based audit approaches

Enhance the integration of the audit of financial statements with audit of internal control over financial reporting

Integrate the auditor’s current responsibilities for considering fraud

Reduce unnecessary differences with risk assessment standards of other standard-setters

Comment Period

Available through PCAOB website at http://www.pcaobus.org/Rules/Docket_026/index.aspx

120-day comment period ends on February 18, 2009

Other standards setting priorities

Fair Value Specialists Related Parties Confirmations Recommendations from Federal

advisory committees

Risks Arising in Current Environment

Staff Audit Practice Alert No. 2 still relevant Fair value measurements and disclosures Other than temporary impairment Accounting estimates, risk of fraud Disclosure about risks and uncertainties Valuation of loans Valuation of goodwill, other intangibles and

long-lived assets Postretirement benefits Going concern