One day after the SEC approved interpretive guidance to assist management in creating a process for evaluating internal controls over financial reporting, the PCAOB adopted Auditing Standard No. 5, An Audit of Internal Control over Financial Reporting that Is Integrated with an Audit of Financial Statements. This new standard replaces Auditing Standard No. 2. 

The PCAOB collaborated with the SEC to ensure Auditing Standard No. 5 is consistent with the SEC’s interpretive guidance. Mark Olson, PCAOB Chairman, indicated that, similar to the SEC’s interpretive guidance, the “new standard is more risk-based and scalable.” The new standard requires that auditors report to the audit committee any control deficiencies that are important, even though they may not constitute a “material weakness.” Thus, while eliminating unnecessary procedures and costs, the new standard is designed to increase the chances of finding material weaknesses in internal controls before such material weaknesses have a material effect on a company’s financial statements. 

The standard is effective for audits performed during fiscal years ending on or after November 15, 2007, but the PCAOB encourages auditors to comply with the new standard once it is approved by the SEC.

The PCAOB is developing guidance for auditors of smaller companies to apply the new standard.