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PCAOB Offers Guidance on AS7 Documentation

Tammy Whitehouse | February 23, 2010

Audit regulators are putting down early notions that a new rule on internal reviews requires copious documentation.

The Public Company Accounting Oversight published a single question and answer addressing implementation of Auditing Standard No. 7: Engagement Quality Review addressing the new standard’s documentation requirements. The Securities and Exchange Commission called for the guidance when it approved the new standard in early January.

AS7 replaces earlier professional standards established by the American Institute of Certified Public Accountants for how audit firms should review their audit work internally before publishing their audit reports. The standard provides more rigorous requirements for all accounting firms auditing public company financial statements to review engagements internally in the hope that it will reduce audit deficiencies before reports are issued.

The PCAOB developed the standard in response to observations by inspectors that audit firms weren’t putting enough elbow grease into the internal review process, causing audit reports to be issued that should have been cleaned up internally before they were issued. Critics of the new standard worried the new requirements would lead to redundant audit work, driving unnecessary audit costs for public companies.

The standard is in effect for audits of interim and annual periods beginning after Dec. 15, 2009. When the SEC issued its order approving the new standard, it instructed the PCAOB to provide implementation guidance to address questions about how much documentation should be provided to comply with the review standard.

The resulting guidance addresses a single question in less than three pages. It says audit firms should not read language in the release adopting the standard to mean that they are required to provide documentation of all the interactions between the engagement quality reviewer and the engagement team, including those that take place before an audit deficiency is identified.

Instead, the PCAOB says, the new standard focuses on how to document interactions once a significant engagement deficiency is identified. The documentation should contain enough information “to enable an experienced auditor, having no previous connection with the engagement, to understand the procedures performed by the engagement quality reviewer, and others who assisted the reviewer, to comply with the provisions of this standard,” the PCAOB wrote.