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October 14, 2007

US watchdog focuses on smaller firms and companies

US watchdog focuses on smaller firms and companies

The US Public Company Accounting Oversight Board (PCAOB) has reported on the issues it has identified in the inspection of US firms that audit 100 or fewer public companies. The watchdog has also approved amendments in relation to the frequency of inspections for firms that do not regularly issue audit reports and published staff guidance on auditing internal control over financial reporting in smaller public companies.

The inspection report is based on the PCAOB’s inspections of almost 500 US firms between 2004 and 2006. It includes observations of 11 areas where auditing or quality-control deficiencies were observed. They are revenue, related-party transactions, equity transactions, business combinations and impairment of assets, going-concern considerations, loans and accounts receivable (including allowance accounts), service organisations, use of other auditors, use of the work of specialists, independence and concurring partner review.

PCAOB chair Mark Olson said the report provides an “instructive set of observations” of the common issues identified during inspections of these audit firms.

The PCAOB’s director of the division of registration and inspections, George Diacont, said the board expects it to “help firms as they evaluate their own work by identifying significant areas where they should strive to ensure compliance with applicable standards and continuously improve their quality control”.

The US watchdog has also adopted two amendments to PCAOB Rule 4003, which addresses the minimum frequency with which the board will conduct inspections of different categories of registered public accounting firms.

The amendments eliminate Rule 4003’s requirement that the board regularly inspect each registered public accounting firm that plays a “substantial role” in audits but does not issue audit reports. The amendments would also eliminate the rule’s requirement that the board inspect each registered public accounting firm that issues an audit report, even if the firm does not regularly issue audit reports.

At present, more than 800 registered firms fall into that category under the terms of the amended rule. The PCAOB said the amendments and the discretionary approach to inspections of firms that play a substantial role reflect the risk-based focus when considering the most prudent allocation of its inspection resources.

Staff guidance on auditing internal control in smaller public companies explains how auditors can apply the PCAOB’s Auditing Standard No 5 (AS5) to audits of smaller, less complex public companies.

The watchdog said the guidance demonstrates how auditors can apply the principles described in the standard and provides examples of approaches to particular auditing issues that might arise in audits of smaller, less complex companies.

Olson said it is a key component of the PCAOB’s effort to support the successful implementation of the new standard. “The guidance will assist auditors of smaller, less complex public companies in implementing AS5. Importantly, it works in tandem with other efforts under way at the PCAOB to engage auditors as they move to implement the new standard,” he said.

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