The PCAOB’s Standing Advisory Group (SAG) includes 42 representatives and experts from accounting, auditing, financial reporting, corporate finance, corporate governance regulatory bodies, public accounting, industry, and academia. Its primary purpose is to advise the PCAOB on the development of audit and related professional practice standards.
On June 18, 2015, the SAG met to discuss two significant standard setting projects:
- Auditor’s use of specialists; and
- Auditing accounting estimates and fair value measurements.
Auditor’s Use of Specialists
Three weeks prior to this meeting, PCAOB released a staff consultation paper (SCP) titled The Auditor’s Use of the Work of the Specialistthat raised a number of issues facing the audit profession as it relates to the nature and scope of auditors’ responsibility when using the work of a specialist. A panel of experts at the in-person meeting provided a spectrum of perspectives around these issues; however, the primary focus of the comments were around the distinction between who engages the specialist and the gaps that exist in the current standards.
There are two broad categories of specialists in the context of an audit: i) specialists who are either employed or engaged by the lead audit firm, or ii) specialists who are employed or engaged by the company under audit. Auditors who use the work of specialists who are either employed or engaged by the lead audit firm are considered auditor’s specialists, but must be evaluated and monitored under two different standards – Auditing Standard No. 10 and AU sec. 336, respectively. Auditors who review the work of specialist who are employed or engaged by the company under audit must do so according to the guidance in AU sec. 336.
These disparate standards present a number of different requirements auditors must concern themselves with when involving either employed or engaged specialists. Some (but not all) of the issues identified by the PCAOB are as follows:
- AS No. 10 requires ‘independence’ for specialists employed by the audit firm as compared to an ‘objectivity assessment’ for the auditor’s engaged specialist.
- AS No. 10 does not provide specific requirements for supervising the work of an auditor’s employed specialist.
- AU 336 requirements include language that may be considered to limit an auditor’s responsibility for a specialist’s work.
- AU 336 does not have any supervision guidance.
The PCAOB’s presentation to SAG presented a number of possible resolutions to address these issues. These include, inter alia, the following:
- Draft a new standard that would take the place of AS No. 10 and AU 336 for specialists employed or engaged by the auditor and incorporate requirements similar to those in the SEC independence rules.
- Rescind AU 336 and require the auditor to evaluate evidence provided by a company’s specialist in the same manner as evidence provided by others in the company.
- Amend AU 336 to include supervision guidance.
Each of the proposals was designed with the same end result – to improve the auditor’s oversight of specialists regardless of who engaged them or where they are employed.
Public comments on the SCP are due to the PCAOB by July 31, 2015.
Auditing Accounting Estimates and Fair Value Measurements
On August 19, 2014, the PCAOB issued a SCP on auditing accounting estimates and fair value measurements. The content of the SCP focused on several areas where the PCAOB felt standard setting may help improve audits. The comment period that followed the release of the SCP resulted in 40 comment letters which, along with the input received from the SAG, were distilled to several key considerations for the need of additional standard setting:
- Audit deficiencies noted by PCAOB and other audit regulators
- Changes in financial reporting frameworks
- Growing reliance on the work of third parties
- Concerns expressed by some over perceived inconsistencies in existing standards
- Greater emphasis on professional skepticism in a new standard
- More specific requirements to further address measurement uncertainty
After the release of the August 19, 2014 SCP, the SAG conducted an in-person meeting on October 2, 2014 where the empanelled group discussed the SCP and the current issues and concerns facing audit firms. While the PCAOB made progress on several of the concerns identified in the SCP, they came back to SAG during the June 18, 2015 meeting with refined questions in three areas where the PCAOB continues to conduct research: i) emphasizing professional skepticism; ii) addressing significant measurement uncertainty; and iii) use of third parties.
The PCAOB staff proposed alternatives to existing guidance that would emphasize professional skepticism. These alternatives, inter alia, include:
- Explicit requirement for auditors to identify which of the assumptions used by management are significant when testing management’s process.
- Revising terminology referring to ‘corroborating’ management’s estimate.
- Extend the requirements for the fraud discussion in AS No. 12 to more specifically address estimates.
The PCAOB staff also looked to address significant measurement uncertainties and the use of third parties with a similar more prescriptive approach. For measurement of uncertainties, the staff suggested amending AS No. 12 to include factors that may be relevant for auditors to evaluate the extent of measurement uncertainty. The suggestion also included a requirement for the auditors to evaluate how management considers alternative assumptions or outcomes for significant risks.
Finally, the PCAOB staff asked the SAG to consider enhancing or creating guidance that addressed issues surrounding the auditor’s use of third parties. While many of the third party concerns were addressed during the ‘auditor’s use of a specialist’ segment of the June 18, 2015 meeting, there were further discussions around auditor’s and management’s use of pricing services. The staff proposed several amendments or alternatives that broadened the auditor’s responsibilities for obtaining an understanding of management’s use of a pricing service. This includes, but not limited to, amending part of AS No. 12 to ensure auditors obtain an understanding of management’s processes used to develop accounting estimates. The staff also proposed developing standards that would better define the work auditors may do to determine if the work of pricing service is reasonable (e.g., grouping securities with similar characteristics and risk, acknowledging evidence provided by quoted market prices for exchange traded securities).
In each case, the goal of the staff is to provide better guidance to auditors that will result in improved auditor oversight.
A full recording of the June 18, 2015 SAG meeting as well as the prepared presentations can be found at the following link:
Mark Smith is the lead technical manager for the Forensic and Valuation Services team at the AICPA. His role focuses on staying current on developments in the multiple areas of valuation and how those developments impact CPAs and other qualified professionals. Before joining the AICPA, Mark worked in public accounting as an audit manager for SEC clients that were in the high tech and bio tech industries.