Outlook for inspections and new audit report content put in place
When the PCAOB issued the Inspections Outlook for 2019in December, the term “transformation,” a word more often found in religious contexts, was used to describe the wide sweeping reassessment of the approaches for planning, conducting and reporting on the Board’s periodic examinations of audits and auditors. While some of the anticipated results will address longer range aspects, a number are to be implemented in 2019.
Following up, on March 14, 2019, the Staff Inspections Outlook for Audit Committees (Outlook) was published, spelling out the Board’s more robust intent for engagement with audit committees, along with delineation of key areas of inspection focus, as well as suggested questions audit committees may want to ask the auditors during the year. The information will be useful for all auditors in considering where attention may be important to place in their own firms.
The key areas of focus for 2019 are:
- Technological developments
- Audit firms’ actions addressing past inspection findings
- Audit procedures on new accounting standards
- Audit firms’ use of Audit Quality Indicators (AQIs)
- Implementation of the new auditor’s reporting model requirements
- Audit firms’ systems of quality control
- Auditor independence
The above areas of quality control systems, independence, Audit Quality Indicators, and past inspection findings are bulwarks that undergird an effective audit process. Since their conceptual nature doesn’t tend to change, they may not get adequate ongoing attention by auditors or audit committees. The Outlook indicates that a fresh look is in order to assure that they are still functioning as intended.
Technological developments, new accounting standards, and new auditor’s reporting model are areas indicative of continual change, whether constant or at a more measured pace. Consequently, they require not just a fresh look, but in some cases new or deeper skills to assure reliable results.
New technologies, such as artificial intelligence, blockchain, cryptocurrency, and related cybersecurity risks require new and timely learning and/or specialists just to keep abreast. New accounting standards, such as revenue and lease accounting require a complete new mindset and in depth analysis to properly recast these key aspects of financial reports.
In June, 2017, the PCAOB issued a new standard, AS3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, that brought sweeping new changes, modernizing the auditor’s report and providing more useful information to users. Many of the changes, including new standardized language, format, and the length of auditor tenure, went into effect generally at the beginning of 2019. The most significant change, communication of critical audit matters (CAMs) will be phased in over the next year and a half, depending on company size.
To assist with the CAMs requirement, the PCAOB on March 18, 2019, issued three sets of Staff Guidance:
- Implementation of Critical Audit Matters: The Basics.
- Implementation of Critical Audit Matters: Staff Observations from Review of Audit Methodologies
- Implementation of Critical Audit Matters: A Deeper Dive on the Determination of CAMs
The Board stated that the CAMs were adopted “to inform investors and other financial statement users about significant matters in the audit and how they were addressed.” The standard defines a CAM as “any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex auditor judgment.”
The standard requires that the auditor identify the CAM, describe how the CAM was determined, how the CAM was addressed, and in which financial statement accounts or disclosures the CAM was considered. Also, required introductory language is provided for the CAM section of the auditor’s report.
Further details can be found at 2019 Staff Inspections Outlook for Audit Committeesand PCAOB Staff Provides Guidance in Advance of CAM Effective Dates.
(https://pcaobus.org/Inspections/Documents/2019-Staff-Inspections-Outlook-Audit-Committees.pdf) and (https://pcaobus.org/News/Releases/Pages/PCAOB-staff-provides-guidance-advance-CAM-effective-dates.aspx
Audit & Accounting Alert is a publication of Integra International intended to highlight emerging issues in the profession. The goal is to give Integra members an awareness of developments impacting the practice of Audit & Accounting enabling them to stay on the forefront of industry trends.This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors forspecific advice.
Editor Gerald E. Herter ~ HMWC CPAs & Business Advisors, 17501 E. 17th Street, Suite 100, Tustin CA