Certain public companies may be required to have an audit conducted in accordance with standards issued by both the Public Company Accounting Oversight Board (PCAOB) and the Comptroller General, as contained in Government Auditing Standards (GAGAS). For example, auditors of lending institutions that participate in federally sponsored loan programs, such as those for housing and education, must meet the requirements of both sets of standards in conducting their work.
Government Auditing Standards may be used in conjunction with standards issued by the PCAOB, even though these standards are not incorporated into GAGAS. The use of the PCAOB’s framework for assessing control deficiencies, however, could result in inconsistencies in reporting on internal control under GAGAS. To facilitate reporting of internal control deficiencies identified during audits conducted under both PCAOB and GAGAS standards, the U.S. Government Accountability Office has provided the following guidance:
- Auditors should include in the GAGAS report on internal control any material weaknesses contained in the opinion on the effectiveness of the company’s internal control over financial reporting prepared based on PCAOB Auditing Standard (AS) No. 5, An Audit of Internal Control Over Financial Reporting Financial Reporting That Is Integrated with An Audit of Financial Statements.
- Auditors who prepare the GAGAS report using material weaknesses from their opinion on the effectiveness of the company’s internal control over financial reporting based on AS 5 should also include in their report any other control deficiencies that meet the definitions of “material weakness” or “significant deficiency” as defined in the American Institute of Certified Public Accountants’ Statement on Auditing Standards No. 112, Communicating Internal Control Related Matters Identified in an Audit.
- If auditors include in the GAGAS report the material weaknesses on the basis of the definition of “material weakness” contained in AS 5, the GAGAS report on internal control should clearly state that the PCAOB’s standards and definition were used, describe the scope of work performed, and provide appropriate definitions of applicable PCAOB terminology.
- Auditors are reminded that they are required to comply with all other relevant GAGAS requirements related to reporting deficiencies in internal control, including developing findings and providing recommendations for corrective action if findings are sufficiently developed, obtaining views of responsible officials, ensuring appropriate report distribution, etc.
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