Remember Form AP? That’s the form that the PCAOB is now requiring audit firms to use to name individual audit engagement partners. The form will also disclose the names and Firm IDs, locations and extent of participation of any other accounting firms, outside of the principal auditor, that participated in the audit, if their work constituted 5% or more of the total audit hours. (See this PubCo post.) Should companies care? Yes, says the Center for Audit Quality: the disclosures made in Form AP can help audit committee members in satisfying their responsibilities to oversee the engagement audit firm as well as other audit participants.
Form AP disclosures regarding audit engagement partners are accessible in a searchable database on the PCAOB website. That means that a company and its audit committee members will be able to find out whether the company’s audit engagement partner is the lead engagement partner on other issuer audits. The CAQ suggests that “[a]udit committee members may want to refresh their knowledge of the audit partner’s qualifications, industry, and other experience, and to understand whether the audit partner is the lead engagement partner on other issuer audits. This information could help audit committee members fulfill their broader responsibilities to evaluate and oversee the external auditor.”
In addition, the CAQ observes, evaluating audit participants is also among the oversight responsibilities of audit committees, and Form AP can help in that task. To that end, the CAQ has developed “A Tool for Audit Committees,” designed to assist “audit committee members in their understanding of new auditor disclosure requirements from the [PCAOB] regarding audit participants. The tool can: (1) assist audit committees in discussing the role of audit participants with their engagement partner and company management; and (2) help prepare audit committee members to anticipate potential questions that may arise as a result of these new disclosures.”
For audit reports issued on or after June 30, 2017, Form AP must disclose the names and extent of participation of other accounting firms. The CAQ believes that audit committees may want to raise questions regarding these disclosures and has included sample questions for audit committees to consider. For example, audit committees may want to confirm that the disclosure regarding the participation of other accounting firms is consistent with the committee’s understanding based on earlier audit planning discussions and whether the other participating firms are members of the audit firm’s network. The committee may also want to make inquiry into which of the engagement team members has met with the other accounting firms and how often those meetings have occurred. Some of the CAQ’s sample questions are set forth below:
2. System of quality control
a. How does the firm network’s leadership, through its tone at the top, emphasize audit quality and integrity throughout its global network and among member firms? How is audit quality addressed with nonmember firms participating in the audit?
b. How does the firm’s network address quality control matters pertaining to ethics compliance, including independence, for other accounting firm(s) participating in the audit?
c. How does the audit firm’s system of quality control determine that other accounting firm(s) participating in the audit have the requisite competence and expertise related to PCAOB standards?”
3. Oversight of other accounting firm(s)
a. How does the engagement partner supervise the work of other accounting firm(s) and evaluate whether it has been performed in accordance with professional standards?…
d. Does supervision of and interactions with other accounting firm(s) vary if the other accounting firm is not a member firm? How does the signing partner take responsibility for their work?
e. Have other accounting firm(s) participating in the audit recently been subject to internal or external inspection related to work performed on the issuer audit? If so, what was the result of the inspection and how has it impacted the engagement team’s planned oversight of the other accounting firm(s)?…
g. Which of the other accounting firm(s), if any, are being used for the first time in the current year, and what incremental procedures are being performed to provide oversight of their audit work, if deemed necessary?
The CAQ also suggests that audit committees may want to consider the broader implications of these disclosures on other aspects of the company. For example, the investor relations department may need to consider how to address questions from investors, media or other stakeholders and develop a process for advising the audit committee of significant questions received. The CAQ also suggests that the committee may want to inquire about the impact of these disclosures on the audit firm’s social media policy and whether other audit participants are familiar with the firm’s policy.
