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SEC Requests Additional Comment on Audit Standard

The SEC has requested comments on specific issues involving Auditing Standard No. 5, which the Public Company Accounting Oversight Board recently adopted. For example, the SEC asks for comments on whether the standard is sufficiently clear about the extent to which auditors can use the work of others. The comment period ends on July 12, 2007.

Auditing Standard No. 5 was adopted as part of a coordinated effort between the SEC and the PCAOB to reform the internal control reporting mandates of Section 404 of the Sarbanes-Oxley Act. For its part, the SEC adopted guidance for management in evaluating and assessing internal controls.

As part of the approval process, the Commission also asked if Auditing Standard No. 5's definition of material weakness, which is consistent with the definition the SEC adopted, appropriately described the deficiencies that should prevent the auditor from finding that the internal controls are effective. Similarly, the SEC asked if the requirement that the auditor communicate any significant deficiencies to the audit committee would divert auditors' attention away from material weaknesses.

More broadly, the SEC is seeking comment on whether Auditing Standard No. 5 will reduce expected audit costs under Section 404, particularly for smaller public companies. It is similarly asked if the standard would inappropriately discourage or restrict auditors from scaling audits, particularly for smaller public companies.

The SEC also wants to know if materiality is appropriately defined throughout the standard in a way that provides sufficient guidance to the auditors. For example, the SEC questioned if materiality is appropriately incorporated into the guidance regarding the matters to be considered in planning an audit and the identification of significant accounts.

Release No. 34-55912 is reported at ¶87,914 .