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PCAOB Looks to Improve Oversight of Other Auditors

Apr 13th 2016
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A proposal issued by the Public Company Accounting Oversight Board (PCAOB) on April 12 seeks to amend current auditing standards and introduces a new standard that pertain to an audit firm’s use of so-called “other auditors” that participate in the audit.

In many audits of large companies, other auditors – independent accounting firms or individual accountants – assist in the audit but are not part of the audit firm issuing the audit report.

The PCAOB’s proposal is intended to strengthen existing requirements and impose a more uniform approach to a lead auditor’s supervision of other auditors.

“Investors depend on the lead auditor to provide assurance that there are no material misstatements in audited financial statements or material weaknesses in internal control, no matter where those misstatements or weaknesses may reside,” PCAOB Chairman James Doty said in a written statement. “Today’s proposal is intended to improve the consistency in the quality of engagement partner oversight of other firms engaged to assist in the audit.”

PCAOB data indicate that other auditors are used in about 55 percent of audits performed by US global network firms and about 30 percent of audits performed by non-US global network affiliate firms. In addition, approximately 80 percent of Fortune 500 audits performed by US global network firms involved other auditors, according to a PCAOB analysis of data from Audit Analytics and Standard & Poor’s.

However, several factors can result in engagements that are not well managed and audit work that does not meet the objectives of the auditor’s role in the audit, according to the PCAOB.

“For example, the lead auditor and other auditors may work in countries with different business practices, languages, cultural norms, and market conditions,” the proposal states. “Also, different firms have different quality-control systems, and the professional training and experience of the lead auditor may differ from those of the other auditors. These factors can pose challenges in the coordination and communication between the lead auditor and other auditors, including misunderstandings regarding the audit effort needed to meet the objectives of other auditors’ work. Without adequate supervision by the lead auditor to address these challenges, deficiencies in other auditors’ work can result in deficient audits. Consequently, the lead auditor could issue its audit report without a proper evaluation of the work performed and the evidence obtained in the entire audit and, in some cases, without a reasonable basis for its opinion.”

The proposal spells out a lead auditor’s responsibilities for planning, supervising, and evaluating the work of other auditors. It is intended to increase the lead auditor’s supervision of the work of other auditors and to enhance the lead auditor’s ability to prevent or detect deficiencies in the other auditors’ work.

The following changes would be made to existing PCAOB auditing standards under the proposal:

AS 1201, Supervision of the Audit Engagement. Provide additional direction to a lead auditor on how to apply AS 1201’s principles-based supervision provisions to supervision of other auditors. The proposed amendments would prescribe certain procedures to be performed by the lead auditor in supervising other auditors’ work.

AS 2101, Audit Planning. Incorporate and update requirements of AS 1205, Part of the Audit Performed by Other Independent Auditors, to specify that they be performed by a lead auditor in an audit that involves other auditors. For example, the proposal would incorporate and revise requirements for determining a firm’s eligibility to serve as lead auditor in an audit that involves other auditors.

AS 1215, Audit Documentation. Require that a lead auditor properly document which specific work papers of other auditors the lead auditor has reviewed but not retained.

AS 1220, Engagement Quality Review. Require explicitly that the engagement quality reviewer evaluate the engagement partner’s determination of a firm’s eligibility to serve as lead auditor.

In addition, the PCAOB has proposed a new standard – AS 1206, Dividing Responsibility for the Audit with Another Accounting Firm. It would retain, with modifications, many of the requirements of AS 1205, including the requirement that a lead auditor disclose in its audit report which portion of the financial statements was audited by each other auditor.

The proposed standard would also require the lead auditor to do the following:

  • Obtain a representation from each other auditor that the other auditor is duly licensed to practice under the applicable laws of the relevant country or jurisdiction.
  • Determine whether each other auditor that would play a substantial role in the preparation or furnishing of the lead auditor’s report is, or is required to be, registered with the PCAOB.
  • Disclose the name of the other auditor in the lead auditor’s report.

The proposed standard would supersede AS 1205, the PCAOB noted.

Public comments on the proposal can be submitted through July 29.

Related article:

PCAOB Launches Post-Implementation Review Program


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