PCAOB reproposes related-parties auditing standard

The PCAOB on Tuesday reproposed an auditing standard and amendments designed to improve the quality of auditing of related-party transactions and significant unusual transactions.

The reproposed standard is designed to increase the auditor’s focus on the evaluation of how a company identifies, accounts for, and discloses its relationships and transactions with related parties.

The reproposed amendments, meanwhile, are intended to help the auditor identify and evaluate a company’s significant unusual transactions. In addition, the reproposed amendments would require the auditor to perform new procedures as part of the process to assess the risk of material misstatement in the financial statements.

These procedures would give the auditor an understanding of a company’s financial relationships and transactions with executive officers, the PCAOB said. But the auditor would not be required to make any determination or recommendation regarding how reasonable the compensation arrangements are.

“The changes reflect our considered study of ways to make audits more efficient, more effective, and integrated with the overall audit approach,” PCAOB Chairman James Doty said.

Commenters generally supported the previous proposal, which the PCAOB released on Feb. 28, 2012, according to PCAOB Deputy Chief Auditor Greg Scates. But commenters also offered suggestions for improvements and adjustments, which are included in the new proposal, Scates said.

Several changes in the new proposal include:

• Clarifying the relationship of the proposal with the PCAOB’s existing risk assessment standards.
• A requirement to evaluate whether the company has properly identified its related parties and its relationships and transactions with related parties.
• Removing the requirement that each related-party transaction previously undisclosed to the auditor by management be treated as a significant risk.

The PCAOB’s existing standard, AU Section 334, Related Parties, would be superseded by the re-proposed standard. The reproposed amendments would amend other auditing standards, including AU Section 316, Consideration of Fraud in a Financial Statement Audit, and Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement.

Comments, due July 8, can be made at the PCAOB’s website. Two specific areas on which the PCAOB is seeking comment include the economic impact the proposal would have and the potential effect on emerging growth companies as defined by the Jumpstart Our Business Startups Act, P.L. 112-106.

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