On October 17, the Public Company Accounting Oversight Board (PCAOB) issued its preliminary views and requested public comment regarding the application of provisions of Auditing Standard No. 5 to audits of the internal controls of smaller public companies. In its release, the PCAOB identified several key areas that present unique challenges in connection with the audit of internal controls of smaller, less complex companies.

The PCAOB release stressed the importance of scaling the internal control audit to the size and needs of the particular client. For instance, while smaller companies may have less complex operations, with fewer business lines and less complex business processes and financial reporting systems, senior management of smaller public companies is more likely to be involved in the day-to-day operation of the business, thus increasing the risk of management override. Smaller companies with limited staffing may be incapable of segregating incompatible duties. On the other hand, fewer transactions, less complexity and centralization of function may allow the auditor’s obtaining a substantial amount of evidence about the effectiveness of internal control by simply testing entry-level controls. Generally, auditors with smaller clients were urged to contemplate each such factor when assessing overall effectiveness of internal controls.

The PCAOB will accept public comments on its preliminary views of on the auditing of internal controls of smaller public companies until December 17.

 http://www.pcaobus.org/Standards/Standards_and_Related_Rules/AS5/Guidance.pdf