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Most Audit Firms Complying with PCAOB Communication Standard

Apr 6th 2016
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A majority of audit firms inspected in 2014 had included the requirements of the Public Company Accounting Oversight Board (PCAOB) standard on communications with audit committees into their practices, according to a report released on April 5.

These firms also introduced relevant practice aids or provided training to partners and staff as part of their compliance efforts with AS No. 16/AS 1301, Communications with Audit Committees.

In 93 percent of the audits inspected by the PCAOB that year for which the communication standard applied, no failures to comply with the requirements were identified. Preliminary findings from 2015 inspections show similar results, the PCAOB said.

In the 7 percent of audits that did not comply with the standard, the deficiencies did not by themselves result in an insufficiently supported audit opinion, according to the PCAOB, but “constituted departures from the requirements of the standard and indicated a potential defect in the firms’ systems of quality control.”

PCAOB inspections staff also found deficiencies related to other PCAOB rules and standards requiring communications with audit committees, such as communications concerning independence.

The standard on communications with audit committees went into effect for audits of fiscal years beginning on or after Dec. 15, 2012. The standard requires the auditor to communicate with the company’s audit committee regarding certain matters related to the conduct of an audit and to obtain certain information from the audit committee relevant to the audit.

“AS 1301 was adopted to improve the audit by establishing requirements that enhance the relevance, timeliness, and quality of the communications between the auditor and the audit committee,” the report states. “The enhanced communications should facilitate audit committees’ financial reporting oversight, fostering improved financial reporting and thereby benefit investors. Effective two-way communication between the auditor and the audit committee throughout the audit will assist in understanding matters relevant to the audit and is beneficial to achieving the objectives of the audit.”

Audit committee chairs generally indicated to PCAOB inspections staff that effective two-way communication with their auditors had occurred.

“Some audit committee chairs indicated there had been improvements after the effective date of AS 1301 related to the robustness and formality of communications with their auditors, including more in-depth discussions with the auditor about audit progress, significant risk areas, and audit findings,” the report states.

Other audit committee chairs noted that their auditors had been communicating the matters required under the standard even before the standard came into effect, and accordingly, they had not observed a significant change in their communications with their auditors in 2013.

“Most audit committee chairs stated that the significant risks, including fraud risks, communicated by the auditor and the planned scope of the audit were appropriate,” the report states.

Audit committee chairs also stated they focused their discussion on certain audit risks more applicable to the issuer, including revenue due to the presumed fraud risk, income taxes, emerging markets in foreign locations, and mergers and acquisitions.

“The communication between an audit firm and the audit committee is fundamental to a reliable and high-quality audit,” PCAOB Chairman James Doty said in a written statement. “I encourage auditors and audit committee members to read this report carefully.”


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