Auditing

January 1, 2013

  The Center for Audit Quality (CAQ) released two products with the interactions between external auditing firms and audit committees in mind, plus a Guide to PCAOB Inspections aimed at investors and capital market stakeholders.

A practice aid developed by the CAQ describes methods for enhancing the flow of information between audit firms and audit committees on audit inspections and quality-control matters. The CAQ, which is affiliated with the AICPA, also has released a tool to assist audit committees in annual evaluations of external auditors.

The practice aid, available at tinyurl.com/95szmxr, says that “transparent, candid communication … supports the audit committee’s role in overseeing the external auditor.” The practice aid says the CAQ supports interaction that is consistent with the objectives of the PCAOB’s August 2012 Release No. 2012-003, Information for Audit Committees About the PCAOB Inspection Process.

“Proactive engagement by auditors with audit committees regarding inspections and firm quality-control improvement initiatives should provide audit committees valuable insights into the firm’s quality-control program,” Cindy Fornelli, the CAQ’s executive director, said in a news release.

According to the practice aid, a firm should consider the following elements in developing a communications plan:

  • Whether the issuer’s audit was selected for inspection by the PCAOB and, if so, the status of the progress of that inspection;
  • Information about the firm’s responses to the PCAOB findings with respect to the issuer’s audit;
  • Whether any items described in the public part of a PCAOB inspection report on the company, including matters not involving the issuer’s audit, involve issues and audit approaches similar to those from the audit of the issuer’s financial statements;
  • Steps the firm is taking to address issues identified with respect to its system of quality control; and
  • Whether issues described by the PCAOB in general reports summarizing inspection results across groups of firms (also known as “4010 Reports”) relate to the audit of the issuer’s financial statements and internal controls over financial reporting, and how the firm is addressing those issues.


The PCAOB’s August release, available at tinyurl.com/cdlytcp, describes how its inspections of audit firms work and how to gather information from audit firms about those inspections.

Seven organizations, including the CAQ, developed the tool for aiding audit committees in evaluations of external auditors. The tool is designed to help audit committees make an informed recommendation to boards of directors on whether to retain their auditor.

Public company audit committees are responsible for hiring and monitoring auditors, and the tool provides guidance on how to perform those duties. The guidance also could be used by audit committees at private companies, not-for-profits, and government entities, as well as others who monitor external audit services, including company boards, oversight bodies, and even management.

The tool will operate in a space that has received significant scrutiny over the past few years. The European Union has been debating mandatory audit firm rotation requirements proposed by the European Commission. The PCAOB has been exploring the idea of mandatory audit firm rotation for public companies in its project aimed at enhancing auditors’ independence, objectivity, and professional skepticism.

In addition, a PCAOB standard regulating audit committees’ communications with external auditors was forwarded in August to the SEC for ratification.

The new evaluation tool states that public focus on how audit committees perform, including how they oversee external auditors, has increased significantly. The tool says audit committees should evaluate auditors annually to make an informed recommendation to the company board on whether to retain his or her services. The tool, available at tinyurl.com/8udarj2, says the evaluation should assess:

  • The auditor’s qualifications and performance.
  • The quality and candor of the auditor’s communications with the audit committee and the company.
  • The auditor’s independence, objectivity, and professional skepticism.


Sample questions in the tool highlight important areas for consideration. The guide also encourages audit committee members to evaluate the auditor’s performance throughout the audit process.

The CAQ’s Guide to PCAOB Inspections, available at tinyurl.com/cyuzog8, explains the objectives and process of inspections, the difference between a PCAOB inspection and an enforcement hearing, and the contents of inspection reports.


  Issued under the authority of the AICPA Auditing Standards Board, Statement of Position (SOP) 12-1, Reporting Pursuant to the Global Investment Performance Standards, supersedes SOP 06-1 of the same title and paragraphs 11.37–.42 of chapter 11, “Independent Auditor’s Reports and Client Representations,” of the AICPA Audit and Accounting Guide Investment Companies (as of May 1, 2012).

The SOP, available at tinyurl.com/9ly2b3u, provides guidance to practitioners for engagements to examine and report on aspects of a firm’s claim of compliance with the GIPS standards. It also provides guidance on engagements to examine and report on any of the firm’s composites and their associated compliant presentations.

The GIPS standards are voluntary guidelines designed to promote full disclosure and greater apples-to-apples comparisons by investment managers reporting their performance to existing and prospective clients.

SOP 12-1 is effective upon issuance.


  Technical Question and Answer (TPA) 9170.02, developed by the AICPA Accounting and Auditing Technical Hotline, has been issued to provide nonauthoritative guidance regarding whether the auditor, when performing an interim review in accordance with AU section 722, Interim Financial Information (AICPA, Professional Standards), is required to report on supplementary information when a client presents supplementary information along with interim financial statements. The TPA, available at tinyurl.com/3so64k8, also includes an example of a report based on the limited procedures applied in the review.

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