Wednesday, November 10, 2010

Big Four Audit Firms Believe that PCAOB’s Proposed Confirmation Standard is Overly Prescriptive and Downplays Professional Judgment

Definitely take a look at this post. One of the main principles in setting auditing standards is determining the cost/benefit of implementing it. Though the proposition enhances the audit process, it seems very difficult to implement. The PCAOB must determine whether these standards are necessary...

Excerpts via Jim Hamilton.
The proposed standard is intended to reforms the auditor’s use of confirmation, which involves direct auditor communication with a third party about a particular item affecting the company's financial statements. Because confirmation involves third parties it provides a high level of audit evidence and, according to PCAOB Acting Chair Dan Goelzer, is one of the building blocks of auditing. Asking customers who owe the company money to confirm the accuracy of their balances is a familiar example of an audit confirmation, but there are many other aspects of financial reporting that can be the subject of confirmation procedures. Confirmation of receivables has been required in the United States since the SEC's 1940 McKesson Robbins case, described by the PCAOB Chair as involving a ``stunning’’ fraud in which the perils of auditing that takes the company's word for its receivables were dramatically demonstrated.
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In the view of Ernst&Young, the proposed standard significantly departs from previous PCAOB standards in terms of its level of prescriptiveness, extends beyond the areas of technology and restrictive language and will result in substantial changes in the manner in which auditors utilize confirmations. E&Y believes that the proposed standard is overly prescriptive and does not adequately allow for auditors to use professional judgment and tailor their audit procedures to respond to assessed risks. Specifically, the firm is concerned with the expansion of the requirement to use confirmations in the areas of receivables, cash and significant risks, without also including a provision whereby auditors may exercise professional judgment in determining not to perform confirmation procedures when the use of confirmations in such areas would be ineffective or the associated risk of material misstatement is sufficiently low.
Click Here to Read: Big Four Audit Firms Believe that PCAOB’s Proposed Confirmation Standard is Overly Prescriptive and Downplays Professional Judgment

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