Experts provided many thoughts on audit best practices during the AICPA Conference on Current SEC and PCAOB Developments in December, as a year of disruption drew to a close. Here are some highlights:
Comply with standards in procedures and documentation. A continued focus of the PCAOB's audit inspections in 2021 will be to review how audit professionals are completing and documenting procedures in compliance with standards. "For example, in some cases, obtaining evidence may comprise a copy in digital form, given the challenges of not being able to put your hands on a physical piece of paper," said PCAOB member Megan Zietsman. "And that may give rise to the need for consideration of procedures to support the validity of such evidence, and we'll be looking to see how auditors have responded to those kinds of challenges." Inspections will focus more intensely on industries that have been most adversely affected during the pandemic, including transportation, entertainment, hospitality, manufacturing, and retail. Areas such as remote auditing, time constraints, availability of information, and access to management that may have been affected by the pandemic also will receive increased attention.
Take care in examining forecasts. The pandemic made forecasts particularly challenging, so it's especially important for management to document its reasons for arriving at its forecasts. Auditors will have to ensure that the documentation has been prepared correctly and supports management's assumptions.
Assess risk carefully. Performing robust risk assessment procedures and understanding the client's business is as important as ever amid the pandemic. This includes understanding the impact of known and/or potential changes due to COVID-19 and other economic challenges, said George Botic, director of the PCAOB's Division of Registration and Inspections.
Include entity-specific information in critical audit matters disclosures. Analyses of the first critical audit matter (CAM) disclosures by auditors of public companies show that some of the disclosures contain "boilerplate" language that doesn't provide much useful information to investors. SEC Professional Accounting Fellow Jeffrey Joseph said at the conference that auditors' reports are more effective when they use entity-specific information. "Such language provides useful information to the users of the financial statements," he said. "For example, we have observed instances where the wording of the CAM describes the specific input and/or assumption driving a principal consideration, which we believe are useful when evaluating the judgments made in an audit."
Watch for incentives that may lead to fraud. Executives, directors, and auditors need to be alert to how midlevel employees perceive the pandemic's unique pressures, according to Kristin Rivera, CPA/CFF, the global forensics leader for PwC LLP. She advised management to be cautious when announcing directives to motivate employees to take the steps needed to ride out the crisis. "We may need to be extra cautious of how our words are being interpreted and implemented," Rivera said. "People feel an obligation to help the company pull through."
— By Joseph Radigan, a financial writer in New York, and Ken Tysiac, the JofA's editorial director. To comment on this article or to submit an idea for another article, contact Tysiac at Kenneth.Tysiac@aicpa-cima.com.
