Professional Liability Update

PCAOB Proposes New Auditing Standard on Confirmation

The Public Company Accounting Oversight Board (“PCAOB”) has approved for public comment a proposed audit standard regarding confirmation that would strengthen the requirements under the current auditing standard, AU sec. 330. The current standard on confirmation has been in place since the early 1990’s.

In a statement issued with the proposed standard, PCAOB Chief Auditor and Director of Professional Standards Martin F. Baumann said, “The proposed standard recognizes the importance of audit evidence obtained from independent third parties and, in doing so, strengthens and extends the requirements for using confirmations in the audit process.” PCAOB Acting Chairman Daniel L. Goelzer said the proposed new standard would “more explicitly incorporate consideration of the risk of material misstatement due to error or fraud into the selection, design and performance of confirmation procedures.”

Among the revisions in the proposed standard:

• The proposed standard expands the scope of receivables subject to confirmation to include receivables that arise from credit sales, loans or other transactions. The proposed standard also will require auditors to perform confirmation procedures for cash and other relationships with financial institutions. The Board added this requirement because of the importance of cash to a company’s liquidity and because properly designed confirmation procedures can provide audit evidence regarding other relationships with financial institutions, such as lines of credit, other indebtedness, compensating balance arrangements and contingent liabilities, including guarantees.
  
• The proposed standard recognizes electronic confirmations and responses, includes requirements related to risks applicable to confirmation in an electronic environment, and requires auditors to assess the reliability of electronic confirmation responses.
  
• The proposed standard requires auditors to evaluate disclaimers and restrictive language included in confirmation responses to determine whether such disclaimers or restrictive language affect the reliability of those responses.
  
• The proposed standard incorporates procedures that build upon the Board’s Proposed Auditing Standards Related to the Auditor’s Assessment of and Response to Risk, which require the auditor to determine whether any identified and assessed risks of material misstatement are significant risks and to perform audit procedures in response to significant risks.

The PCAOB is accepting public comments on the proposed standard until September 13, 2010. If adopted, the PCAOB will submit the new standard to the Securities and Exchange Commission for approval. The proposed standard can be read here.