Before Sarbanes-Oxley, the audit report required that the financial statements be presented in accordance with GAAP along with appropriate footnote disclosures. Now we have new rules of the road, and auditors are auditing not only the financial statements but management's assessment of internal control. The PCAOB to date has issued three new audit standards, the details of which can be accessed and downloaded from its web site. Audit Standard No. 1 deals with References in Auditors' Reports to the Standards of the Public Company Accounting Oversight Board. Standard No. 1 accepted the AICPA's Statement on Auditing Standards No. 95: Generally Accepted Auditing Standards. Essentially, new audit reports will state that they were conducted in accordance with the standards of the PCAOB. Audit Standard No. 2 deals with auditing internal control over financial reporting, and Audit Standard No. 3 covers audit documentation. We will discuss these new standards in more depth, especially Audit Standard No. 2, which deals with an audit of internal control.

Audit Standard No. 2 represents the biggest change to both preparers and auditors because it deals with compliance under Section 404, which requires management to assess internal controls over financial reporting. Auditors are required to audit management's assessment of internal control. It is helpful for preparers to understand the audit requirements since this will provide guidance on how to conduct their assessment and prepare for the audit.

Key elements of Standard No. 2 require the auditor to evaluate management's assessment of internal...