PCAOB inspection process explained in CAQ guide

BY KEN TYSIAC
November 6, 2012

PCAOB inspections are inevitable for firms that audit public companies.

Firms that audit more than 100 public companies are inspected yearly. Firms that audit fewer than 100 public companies are inspected at least once every three years.

A high-level overview of that process is provided by the Center for Audit Quality (CAQ), which is affiliated with the AICPA, in a newly released Guide to PCAOB Inspections. The 12-page guide aimed at investors and capital market stakeholders describes the objectives and process of inspections, the difference between a PCAOB inspection and an enforcement hearing, and the contents of inspection reports.

CAQ Executive Director Cindy Fornelli said the guide “offers a straightforward introduction to the PCAOB inspections program, which has a significant impact on the quality of public company audits and investor confidence in the integrity of audited financial statements.”

Key points in the guide include:

  • The importance of audit workpapers. The guide says they are central to the inspection because they should permit an experienced auditor who was not involved in the audit to understand the conclusions reached in the audit.
  • What happens if PCAOB inspectors believe there is an audit deficiency. An inspection team that believes an audit may not comply with PCAOB standards first communicates with the auditing firm. The inspection team will determine whether the firm’s response addresses the concern and whether to include the matter as a deficiency in the inspection report.
  • The role of professional judgment. The PCAOB generally expects that evidence supporting auditor judgments will be documented in the workpapers.
  • The difference between inspections and enforcement proceedings. PCAOB enforcement proceedings take place when the PCAOB believes a serious violation has occurred. Enforcement cases presented before hearing officers can result in firms or individuals receiving fines, suspensions, or permanent bans from public company auditing.

The CAQ also recently published a practice aid designed to enhance communication between audit committees and audit firms on audit inspections and quality-control matters. In addition, the CAQ was one of seven organizations that helped develop a recently released tool to assist audit committees in annual evaluations of external auditors.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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