In this PCAOB staff inspection brief, issued at the end of last week, the PCAOB discusses its new strategic plan, which includes conducting “an ongoing dialogue” with audit committee chairs when their companies’ audits are subject to PCAOB inspection. The purpose is to provide the committees with “further insight” into the PCAOB process, including the inspections, and to obtain the views of committee chairs. The brief also outlines what audit committees should expect from the PCAOB’s 2019 inspections and provides a number of sample questions that audit committees may want to consider asking their auditors with regard to current inspection issues. The PCAOB expects to publish additional updates for audit committees regarding observations and findings.
The PCAOB reports that its 2019 inspections will focus on:
- Technological developments, including the audit response to cybersecurity risks.
- Audit firms’ actions addressing past repeat audit deficiencies.
- Audit procedures on new accounting standards.
- Audit firms’ use of Audit Quality Indicators (AQIs), including discussions of AQIs with audit committees.
- Implementation of the new auditor’s reporting model requirements (reporting of CAMs—see this PubCo post).
- Audit firms’ systems of quality control.
- Auditor independence, including recurring violations.
Reproduced below are the PCAOB’s sample questions for audit committees to consider, as appropriate, asking their auditors in connection with current inspection issues:
“Auditor Response to Identified Risks
- How have the current economic factors influenced the auditor’s risk assessment for the current year’s audit?
- How has the auditor considered the relevant economic factors that could affect the company’s ability to continue as a going concern?
- How has the auditor assessed potential risks of material misstatement related to the company’s technology systems, including cyber security, and how has it addressed those potential risks?
“Changes in Auditor’s Report
- What are the most substantive issues or learnings identified pursuant to the firm’s pilot testing and dry runs related to communicating CAMs in the auditor’s report?
- What items, if any, were considered ‘close calls’ but ultimately not identified as a CAM by the auditor? Why were these items not determined to be CAMs?
“Implementation of New Accounting Standards
- What are the auditor’s observations regarding the company’s implementation of the new revenue recognition standard?
- What is the auditor’s view of the company’s readiness to adopt new accounting standards pertaining to lease accounting and valuation of financial instruments, including credit losses (if relevant)?
- How does the firm’s quality control system promote audit quality?
- What are recent actions taken by the firm to strengthen its quality control system?
- Did the audit include the use of software audit tools? If so, how were these tools used and how did the use of these tools affect the risk assessment and the quality of audit evidence?
- How does the firm monitor compliance with the independence requirements of the PCAOB and SEC, including compliance with obtaining pre-approvals for non-audit services?
- How can the audit committee and management assist the auditor in complying with independence requirements?
“PCAOB Inspection Results and Corrective Actions
- If the firm has been inspected by the PCAOB, were there inspection findings? If so, what were those findings and what corrective actions has the firm taken?
- How has the firm’s inspection findings changed over time?
“Possible Indicators to Audit Quality
- Has the firm developed a definition of audit quality? If so, how is audit quality defined?
- Based on the firm’s definition, what are the key drivers of audit quality for the firm overall and for this audit engagement specifically?
- How does the firm identify, set targets for, and monitor those key drivers generally, and specifically with respect to this audit engagement?”