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The Secret of PCAOB Auditing Standard 2201: How Does It Affect Auditors’ Work?
In today's corporate world, maintaining the effectiveness of internal controls has become more important than ever before, which also makes the auditor's work face new challenges. With the passage of the Sarbanes-Oxley Act in 2002, companies have been given greater transparency and accountability in terms of internal controls and their effectiveness. Under this circumstance, the PCAOB Auditing Standard 2201 launched by the Public Company Accounting Oversight Board (PCAOB) in 2007 has undoubtedly become an important cornerstone of the audit industry, affecting the audit process and methods.
What is entity level control?
Entity-level controls are important controls used by management to ensure that its instructions are carried out throughout the enterprise. These control measures help to deeply understand the risks of the enterprise and ensure that all operations of the enterprise are carried out in the right direction. Specifically, an entity usually refers to the entire company, which means the coordinated operations of all departments and management levels.
Background of PCAOB Auditing Standard 2201
As many accounting and auditing scandals surfaced, the U.S. Congress passed the Sarbanes-Oxley Act in 2002. Section 404 of the Act requires company management to evaluate the effectiveness of the company's internal controls and report publicly. This move not only enhanced corporate transparency, but also led to the birth of the PCAOB to audit and supervise public companies.
Main requirements of Auditing Standard 2201
Audit Standard 2201, introduced by the PCAOB in 2007, consolidates policies on auditing internal controls. Auditors must test entity-level controls that are critical to assessing the effectiveness of a company's internal controls. Based on the evaluation of the effectiveness of entity-level controls, the auditor may increase or decrease the scope of testing.
Entity-level controls are not only diverse, but their impact on the audit plan also varies with accuracy.
Common entity level controls
Entity-level controls cover many aspects, including governance structure, risk management, internal communication, etc. When establishing effective internal controls, enterprises can use the five major control components proposed in the COSO framework to guide their strategies, including control environment, risk assessment, information and communication, control activities, and supervision mechanisms.
Evaluate entity-level controls
Independent auditors are required to evaluate entity-level controls in accordance with SAS 109 issued by the American Institute of Certified Public Accountants (AICPA). The standard requires auditors to have a sufficient understanding of the five components of internal control to assess the risks of material misstatement of financial statements and to design appropriate audit procedures.
Management’s evaluation process
Management can evaluate entity-level controls through the following four basic steps:
- Identify risks: Use a top-down approach to identify and classify risks.
- Identify entity-level controls: Examine the operation of current entity-level controls and identify important controls that may be missing.
- Assess design and operational effectiveness: Consider the sensitivity of each control, reviewer competence, and operational consistency.
- Leverage entity-level controls: Follow effective entity-level controls to mitigate risk.
Through strong entity-level controls, management will have a more efficient control evaluation strategy.
The importance of entity level control
The strength of entity-level controls directly affects the overall operations of the organization and the accuracy of its financial statements. If these controls are weak or non-existent, it may lead to significant errors and weaknesses in internal control audits, and even affect stock prices and corporate image.
Conclusion
Therefore, enterprises must recognize the important role that entity-level controls play in maintaining internal control systems, and they need to be more vigilant about the effectiveness of these controls when conducting effective audits and risk management. How can entity-level controls be effectively used during the audit process to improve results and trust?
