PCAOB might Develop a Standard for Auditing of Revenue

In a conference last week, a member of the Public Company Accounting Oversight Board (PCAOB) said that PCAOB might develop a standard providing guidelines about audit of revenues.

Jay Hanson, a member of PCAOB, said that "Another audit area that we will need to turn to in the near future, although it is not yet on our standard-setting agenda, is auditing revenue. Revenue is probably the most important number on the financial statements for most investors, and it is one in which our inspectors frequently find problems. Revenue recognition also is a complex accounting area."

He also highlighted that the joint project of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (IASB) will bring significant changes to the way revenue is recognized. A converged accounting standard for the recognition of revenue is being developed in collaboration by these two standard-setting boards.

In his speech, Hanson also discussed the proposal of PCAOB for a new auditing standard for enhancing the reporting model of auditor. The proposed standard will suggest a auditor's reporting model that will provide additional information about the audit and the auditor to the users of the financial statements. Hanson pointed out that "This proposal, if adopted, would require auditors to go beyond the current model of providing only a pass/fail opinion on whether the company's financial statements are fairly stated (or whether internal controls are effective) and would require auditors also to discuss in their reports so-called 'critical audit matters' in order to provide investors and others with more insight into the audit".

Apart from these topics, Hanson also defined the most critical audit matters. According to him, the key audit matters were those matters that

- Involved the most complex and subjective judgments of the auditor

- Posed a very high degree of difficulty in obtaining sufficient audit evidence

- Posed very high difficulty for the auditor to form an audit opinion