(The article featured below is a selection from PCAOB Reporter, which is available to subscribers of that publication.)

PCAOB Proposes Seven New Auditing Standards on Risk Assessment

The PCAOB on October 21 proposed seven new auditing standards to update and supersede the current standards on risk assessment. PCAOB Chairman Mark Olson said the proposed risk assessment standards have been a high priority for the Board. In drafting the proposed standards, the staff considered the risk assessment standards of the International Audit and Assurance Standards Board to reduce any unnecessary differences. Olson said the proposals send a strong message about the Board's view that assessing the risk of fraud is a central part of the audit process and not a separate consideration. The comment period will remain open until February 18, 2009.

The proposed standards outline the procedures that should be performed during an audit, beginning with the initial planning stages and concluding with the formation of the opinions in the auditor's report. The standards reflect improvements in risk assessment methodologies and improve the integration of the risk assessment standards with the standard for the audit of internal control over financial reporting. The standards emphasize the auditor's responsibility for considering the risk of fraud and reducing audit risk to a level that will provide reasonable assurance in an audit of the financial statements.

The proposed standards describe the auditor's responsibility for planning the audit, assessing the matters that are important to the audit and developing an appropriate strategy. The standards also describe the responsibilities of the engagement partner and other engagement team members for reviewing the work of the engagement team.

The standards outline the auditor's responsibilities for responding to the risks of material misstatement in the conduct of the audit and during specific audit procedures. The auditor's responsibilities for applying the concept of materiality, as defined in the federal securities laws, is described. Auditors must understand and consider materiality in planning the scope of the audit procedures.

The staff reviewed the provisions of the IAASB's recently adopted risk assessment standards to determine whether they were appropriate for the audits of issuers and whether they were consistent with the PCAOB's mandate. The staff concluded that many of the standards were generally suitable for the audits of issuers, but that certain changes were necessary before adopting them as PCAOB standards. Board member Bill Gradison approved of the comparison in the proposal between the PCAOB's proposed standards and the IAASB's. He urged the staff to continue to include comparative information in future standards proposals since multiple standards are currently in use.

Board member Charles Niemeier noted that by starting with a comparison of the international standards of auditing , the staff's drafting process was more complicated. It would have been easier to start with a clean slate, in his view. He questioned whether the benefits outweighed the costs of taking that approach and whether it should be followed in future standard setting projects. Niemeier also commented on the statement of objectives that accompanies each of the proposed standards. The objectives were generally adapted from the international auditing standards. While objectives may be a good way to describe a required outcome, he noted that the objectives do not state required outcomes. Without required objectives, the standards have to require specific procedures, he said.

Niemeier also raised concerns that the time spent adapting the proposed standards to the international auditing standards may have distracted the project from more deserving areas such as evaluating the risk in large or multi-location audits. He urged commenters to consider these issues.

Board member Daniel Goelzer characterized the proposed standards as a new direction in PCAOB standard setting. Earlier initiatives responded to specific mandates from the Sarbanes-Oxley Act, he explained, but the risk assessment project reflects Congressional intent that the Board set public company auditing standards and strengthen existing standards. As for the comparison with international auditing standards, Goelzer said the Board is still feeling its way in determining what the relationship should be. It makes sense to avoid inconsistency, while not adhering strictly to conformity, in his view.

Given the magnitude of the project, Goelzer suggested that it may be necessary to publish a revised proposal and undergo a new comment period after the initial comment period closes. Another option is to hold public forums for discussion to consider industry views.