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Tuesday, April 26, 2005

How Much Testing Is Enough? Cos. Struggle With Sampling

Section 404 of The Sarbanes-Oxley Act of 2002 requires that companies document and test their internal control over financial reporting. And, of course, the standard that auditors use to gauge the success of those efforts is known as Audit Standard Number 2, issued by the Public Company Accounting Oversight Board in June 2004.

But the PCAOB's AS No 2., officially called "An Audit of Internal Control Over Financial Reporting Conducted in Conjunction With an Audit of Financial Statements," does not specify exactly how much testing is enough.

Though in some cases auditors are directed to test controls over a "large portion" of the company's operations and financial position, the PCAOB has preferred not to provide details on what that means. Some auditors, for example, have assumed that a "large portion" means 60 percent or 75 percent of all controls, but the Board does not agree. "Auditing Standard No. 2 does not establish specific percentages that would achieve this level of testing," wrote the PCAOB in answer to one of many "frequently asked questions" published last year.

Instead of prescribing specific numbers, the Board decided to use a "principles-based" approach to the issue. "Therefore," continued the PCAOB FAQ, "Auditing Standard No. 2 leaves to the auditor's judgment the determination of what exactly constitutes a 'large portion.'"

posted by Brian Moran @ 9:13 AM   1 comments

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