Yesterday, the Securities and Exchange Commission approved PCAOB Auditing Standard No. 5, which, together with the SEC’s new guidance on internal control over financial reporting, will allow Section 404 audits to be scaled appropriately in light of a particular company’s size and complexity.

Auditing Standard No. 5 replaces Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. 

In addition to its scalability, Auditing Standard No. 5 includes various improvements, including the following:

  • There exists fewer mandatory requirements, which will allow auditors to use their best judgment to determine when certain tests should be performed;
  • It narrows auditors’ focus on high-risk areas, and thus, allows auditors to closely examine deficiencies that my constitute a “material weakness”; and
  • It emphasizes a principles-based approach, which will allow auditors to use their best judgment in determining the extent to which they can rely on another person’s work.

Audits conducted for fiscal year ending on or after November 15, 2007 will be required to utilize Auditing Standard No. 5.