SEC Trends & Developments - Summer 2011 - New Auditing Standards and How They May Affect Issuers

New audit standards covering the audits of public companies are effective for periods beginning on or after December 15, 2010, so 2011 calendar year companies will be subject to these new requirements. These standards, known as the Public Company Accounting Oversight Board (PCAOB) risk assessment standards, or Auditing Standards No. 8 through No. 15, explicitly require auditors to plan their audits by the assessed risk of the audit area being addressed. How will the changes affect auditors and the issuers they audit?

The expectations are the effects should be minor. All auditors, from the Big 4 down to the smallest firms, should have been using risk assessment procedures in the audits of non-issuers since the adoption by the Auditing Standards Board (ASB) of their risk assessment standards for calendar year 2007 audits. Since most auditors of public companies also do non-issuers, many have been performing the audits using risk assessment procedures in addition to what was required under the PCAOB standards. Under the new standards, these procedures are required.

In setting their standards, the PCAOB took a similar approach to the ASB, but enhanced the standards with requirements that they felt were important to protect the public interest (and their ability to inspect auditors). Many of the enhancements result in increased documentation requirements. Materiality was defined in relation to federal securities laws and related Supreme Court interpretations. Also, while seven standards were proposed, eight were adopted. Supervision was considered to be of such importance that it was given its own Auditing Standard.

One area where the PCAOB standards are more detailed than those of the ASB is in multi-location engagements, including indicating that materiality at individual locations should be lower than the entity as a whole. As a result, issuers may notice more procedures being done, or more locations being covered, than they have in prior audits.

Under the ASB standards, requirements were fairly general, while under the PCAOB standards, specific "suggestions" of procedures to be followed, for instance in which public information to review or which performance measures to consider, is very specific. One welcome change for auditors is more specific guidance on the "final" or overall analytical review, which guidance under ASB standards essentially consisted of 'read the financial statements and related notes, and consider whether you audited enough.'

While the standards and the changes they effect are applicable to the auditor, there will likely be increased inquiries, procedures and documentation in the performance of the audit which will affect the issuers indirectly.

The full text of the new standards is available on the PCAOB website at under Standards/Auditing. 

SEC Trends & Developments - Summer 2011 Issue 

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