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.

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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

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

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.