PCAOB proposal would guide lead auditors in supervision of other auditors

By Ken Tysiac

The PCAOB voted Tuesday to propose rulemaking that would give lead auditors guidance for supervising audit work performed by other firms and individuals in multifirm audits.

The board is proposing amendments to its auditing standards that are designed to strengthen existing requirements and impose a more uniform approach to a lead auditor’s supervision of “other auditors.” “Other auditors” can be firms or individuals outside the firm that issues the audit report.

The proposal will be made available at the board’s website, where comments can be submitted through July 29.

Audits of multinational companies often include work by firms other than the one issuing the audit opinion. PCAOB oversight data indicate that other auditors are involved in about 55% of audits performed by U.S. global network firms and about 30% of audits performed by non-U.S. global network firms. And about 80% of audits of Fortune 500 companies performed by U.S. global network firms involve other auditors.

“This comes up regularly in multinational audits by firms of all sizes,” PCAOB Chairman James Doty said during an open meeting.

Other auditors may have different business practices, cultural norms, languages, and quality-control systems from the lead auditor. These factors can complicate the communication and coordination between the lead auditor and other auditors.

The PCAOB’s proposal is designed to help auditors overcome these challenges by increasing the lead auditor’s supervision of the work of other auditors and by enhancing the lead auditor’s ability to prevent or detect deficiencies in the other auditors’ work. The exposure draft proposes responsibilities for the lead auditor for planning, supervising, and evaluating the work of other auditors.

The proposal would direct the lead auditor’s supervisory responsibilities to the areas of greatest risk, consistent with the PCAOB’s risk-assessment standards. The proposal also would make it clear that an audit firm must itself audit a meaningful portion of the financial statements to act as lead auditor.

In addition, the proposal would require more-explicit procedures to prompt the lead auditor to bolster its involvement in the work of other auditors through effective communication and thorough evaluation of other auditors’ qualifications and work.

Existing PCAOB standards would change under the proposal in the following ways:

  • Auditing Standard (AS) 1201, Supervision of the Audit Engagement, would provide more direction to a lead auditor on how to apply the standard’s principles-based supervision provisions to supervision of other auditors.
  • AS 2101, Audit Planning, would incorporate and update requirements from AS 1205, Part of the Audit Performed by Other Independent Auditors, to specify that they be performed by a lead auditor in an audit that involves other auditors.
  • AS 1215, Audit Documentation, would require that a lead auditor properly document which specific work papers of other auditors the lead auditor has reviewed but not retained.
  • AS 1220, Engagement Quality Review, would require explicitly that the engagement quality reviewer evaluate the engagement partner’s determination of a firm’s eligibility to serve as lead auditor.

Audit responsibility

The PCAOB also is proposing a new standard, AS 1206, Dividing Responsibility for the Audit With Another Accounting Firm. The new standard would retain, with modifications, many of the requirements of current AS 1205, including the requirement that a lead auditor disclose in the audit report which portion of the financial statements was audited by each other auditor.

AS 1206 also would include new requirements that a lead auditor:

  • Obtain a representation from each other auditor that the other auditor is duly licensed to practice under the applicable laws of the relevant country or jurisdiction.
  • Determine whether each other auditor that would play a substantial role in the preparation or furnishing of the lead auditor’s report is—or is required to be—registered with the PCAOB.
  • Disclose the name of the other auditor in the lead auditor’s report.

The proposal would supersede AS 1205.

“The need for stronger standards in this area has become evident over the past few years,” PCAOB member Jeanette Franzel said. “In my view, the proposed requirements will help enhance audit quality in this area of increasing audit risk and significance to capital markets.”

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.

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