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PCAOB's Chief Auditor Outlines 2007 Priorities

Thomas Ray, the PCAOB's chief auditor, outlined the Board's priorities for 2007 and the status of a number of 2006 projects in opening remarks at the annual meeting of the Standing Advisory Group. The staff is preparing a draft of a revised Auditing Standard No. 2 on internal controls and is working on implementation guidance for auditors of smaller public companies, he said. These projects will require a significant amount of the staff's resources over the next 12 months, according to Ray. He also reported that the staff has made progress on its engagement quality review and risk assessment projects. His prepared remarks were released by the PCAOB.

Ray said the staff is evaluating the results of its inspection process in connection with its engagement quality review project. The Board is required under the Sarbanes-Oxley Act to adopt a requirement for a concurrent or second partner review of audit reports, and for the concurring approval of their issuance. The PCAOB refers to the concurring or second partner review as the engagement quality review. This issue has been considered by the SAG on two previous occasions, Ray noted. Those discussions and the staff inspections have contributed to the progress the staff has made on the project.

Ray said the staff is evaluating the work of the International Auditing and Assurance Standards Board and the U.S. Auditing Standards Board on the auditor's risk assessment process. This is a large project that also affects other interim auditing standards, according to Ray. The staff is in the early stages of the project which likely will continue over the next 12 months.

Ray advised that the staff has identified three projects that it will begin next year, including related parties, confirmations and the use of specialists. The related parties project will review fraud risk factors and the auditor's obligation for the identification and evaluation of related parties and related party transactions. Ray said that related parties have proven difficult for auditors because they are sometimes difficult to identify. Auditors sometimes rely on management and a company's principal owners to identify these parties and transactions, he said.

The PCAOB's related parties project will seek to help auditors understand the procedures that are necessary to obtain reasonable assurance that related parties and related transactions are identified, appropriately disclosed and do not contain material financial misstatements. This project originated under the broader fraud project, according to Ray. The staff has decided to address this issue as a separate standard setting project that will also include fraud risks, he advised.

The confirmation project was also separated from the broader fraud project, but will include the consideration of fraud risk factors. The staff will consider the auditor's use of confirmations to corroborate account balances and transactions with third parties. The existing standards do not address certain practice issues, Ray explained, such as management requests not to confirm.

The staff is undertaking a project on the use of specialists, as discussed at past SAG meetings, given the increased reliance on specialists in areas such as fair value measurements in financial reporting. Ray said the IAASB is in the process of reviewing related parties, confirmations and specialists. The ASB is reviewing related parties and the use of specialists. Ray said the PCAOB is monitoring these projects and will consider their results.

The Board has removed a number of projects from its list of priorities, including communications with audit committees, quality control standards and the codification of PCAOB standards. The Board has found that auditors are not having difficulty identifying the issues that must be communicated to audit committees. The staff is taking more time to learn about quality control standards through its inspection process, he added. While the Board believes that the codification of its permanent standards is a good idea, it does not believe the project is a priority.

The October 5 meeting of the SAG was its last meeting of the year. Ray said that new members of SAG should be announced within a few weeks. The SAG is a very valuable resource to the PCAOB, he said.