Auditing Standard No. 5
The purpose of this paper is to discuss the emerging issues that Auditing Standard No. 2 had that were later fixed by Auditing Standard No. 5. The paper describes the events leading up to the issue and background information of the issue. It also outlines the general arguments regarding the subject and the solution to the issue which was Auditing Standard No.5. AS5 officially replaced Public Company Accounting Oversight Board’s As2 On May 24, 2007. AS5 made many important changes that improved the auditing standards and made the auditor’s workload be done in a more efficient and timely matter and get them to focus on the most important matters.
Public Company Accounting Oversight Board
Auditing Standard No. 5
Auditing Standard No. 5 (AS5) will replace Public Company Accounting Oversight Board Auditing Standard No. 2, An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements (Auditing Standard No. 2). It provides the new professional standards and related performance guidance for independent auditors to show and report on. It explains management's assessment of the effectiveness of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002. In approving Auditing Standard No. 5, the Commission has strengthened investor protection by refocusing resources on what truly matters to the integrity of financial statements. Some of the improvements that have been made by the PCAOB's new auditing standard that will replace Auditing Standard No. 2 are that Auditing Standard No. 5 is less prescriptive. Auditing Standard No. 5 is less than half the length of Auditing Standard No. 2 and is easier to read. AS5 makes the audit scalable so it can change to fit the size and complexity of any company, it directs auditors to focus on what matters most and eliminates unnecessary procedures from the audit process. Finally, Auditing Standard No. 5 includes a principles-based approach to determining when and to what extent the auditor can use the work of others.
In 2002, Congress passed the Sarbanes-Oxley Act which established new provisions related to internal control over financial reporting. Section 404 of the Act requires company management to assess and report on the effectiveness of the company's internal control. It also requires a company's independent auditor that is registered with the Public Company Accounting Oversight Board (PCAOB), to confirm to management's disclosures regarding the effectiveness of its internal control. As directed by Sections 103 and 404 of the Act, the Board established a standard to govern the newly required audit by adopting Auditing Standard No. 2, An Audit of Internal Control
Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. The Securities and Exchange Commission (SEC) approved Auditing Standard No. 2 on June 17, 2004 (Public, 2014).
Since Auditing Standard No. 2 became effective, PCAOB and SEC has closely monitored the progress that registered firms have made in implementing its requirements. As a result of this monitoring, two basic propositions emerged. Many believe the audits of internal control have produced significant benefits. The costs of compliance with Section 404 and implementation of Auditing Standard No.2 have been significant. Unfortunately, these benefits have come at a significant cost. The costs have been greater than expected and the related effort has appeared greater than necessary to conduct an effective audit of internal control over financial reporting. As part of a four-point plan to improve implementation of the internal control requirements, the Board determined to amend Auditing Standard No. 2. On December 19, 2006, the Board proposed for comment a new standard on auditing internal control. The Board received 175 comment letters on its proposals.