Following approval last week by the Securities and Exchange Commission of a new auditing standard aimed at increasing the accuracy of financial reports while reducing unnecessary audit costs, public companies should start planning their 2007 audits with provisions of the new standard in mind, according to Accounting Management Solutions, Inc.
The new auditing standard — known as Auditing Standard No. 5, or AS 5 — in combination with the commission’s new management guidance, will make Section 404 audits and management evaluations more risk-based and scalable to company size and complexity.
AS 5 is effective for integrated audits for fiscal years ending on or after Nov. 15, 2007. However, the SEC notes, earlier adoption is permitted and encouraged.
AS 5 replaces Auditing Standard No. 2 (An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements) and is intended to increase the likelihood that material weaknesses in internal controls will be discovered before they result in a material misstatement of a company’s financial statements, according to Greg Starr, AMS Middle Market Practice director.
He added that AS 5 aims to reduce unnecessary procedures and related costs, particularly for public companies with a market capitalization of $75 million or less.
DIFFERENCES BETWEEN AS 2 AND AS 5
According to Starr, the differences between AS 2 and AS 5 are significant and have a direct bearing on the content and execution of the entire audit, starting with the risk assessment. For example, he notes, under AS 5:
1) Management's risk assessment and principles-based judgment are emphasized over the prescriptive auditor-focused approach under AS 2. 2) The risk analysis starts at the financial statement level and entity level controls. 3) There is an increased emphasis on entity-level controls. 4) The objective is to opine on the effectiveness of internal control over financial reporting vs. opining on management's assessment of internal control (AS 2). 5) AS 5 permits the auditor to place greater reliance on the work of others. 6) There is an increased emphasis on fraud.
START WITH AN AS 5 RISK ASSESSMENT
When complying with Sarbanes-Oxley Act of 2002 (SOX) for the current year, whether you are a first time non-accelerated filer or an accelerated filer, Starr advises companies to start with a risk assessment based on AS 5.
While SOX compliance is rarely viewed positively, it provides a great opportunity for companies to take advantage of AS 5 to enhance and fine tune their control environment, says Starr.
"Putting the appropriate time and effort upfront, and applying the right resources to develop a superior risk assessment will likely reap rewards now and well into the future by reducing SOX compliance costs and audit fees," he says.