Question

PCAOB Standard 5 requires auditors to evaluate the effectiveness of the audit committee as part of the assessment of the internal control. Briefly describe what factors auditors might consider in evaluating the effectiveness of the audit committee.

Answer 1

The following are the factors that might consider for evaluating effectivenss of the Audit Committee:-

1) Effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.

2) Eliminate unnecessary procedures. The PCAOB has removed the previous standard’s detailed requirements to evaluate management’s own evaluation process and removing the requirement to render an opinion on the adequacy of management’s process.

3) The PCAOB and the Securities and Exchange Commission (SEC) have closely monitored the implementation of AS2 to evaluate the effectiveness of public company auditors in applying the provisions to audits of large public companies already subject to Section 404 reporting requirements.

4) Auditing Standard No. 5 explicitly recognizes that external auditors can use the work of others, and\or receive direct assistance, in their audit of internal control over financial reporting. Using the work of others should improve efficiency.

5) As part of the planning process, the PCAOB encourages reliance by external auditors on the work of internal auditors to achieve enhanced audit efficiency. Among the factors to be considered in deciding whether it is appropriate to rely on internal auditors’ work is an assessment of the usefulness of their work.

6) The availability and reliability of a report of the compilation dates of the programs placed in production. (This information may be used as evidence that controls within the program have not changed.).

7) The nature and extent of audit effort required to address the matter, including the extent of specialized skill or knowledge needed or the nature of consultations outside the engagement team regarding the matter.

8) As a result of these factors, in the great majority of cases, the auditor has to rely on evidence that is persuasive rather than convincing.