While supporting PCAOB proposals for new standards on auditing accounting estimates and using the work of specialists, the Center for Audit Quality (CAQ) submitted suggestions for improving the proposals.
The PCAOB proposals aim to:
- Emphasize that auditors need to apply professional skepticism and devote more attention to potential management bias when auditing accounting estimates.
- Strengthen requirements for auditors evaluating the work of a specialist employed or engaged by the audit client and apply a risk-based approach to supervising and evaluating the work of a specialist employed or engaged by the auditor.
The CAQ, which is affiliated with the AICPA, submitted comment letters to the PCAOB on these issues on Wednesday. The CAQ generally supported the PCAOB’s efforts in these areas but also urged changes to the proposals.
With regard to the auditing accounting estimates proposal, the CAQ wrote that obtaining sufficient appropriate audit evidence to determine whether accounting estimates are free from bias that results in a material misstatement should not be an explicit objective of the proposed standard.
The CAQ stated that including the consideration of bias as an objective could lead to confusion regarding the extent of work intended to be performed by the auditor under the PCAOB’s existing standards related to management bias.
In addition, the CAQ recommended that the PCAOB make it more explicit in the proposed standard that auditors should consider the results of their risk assessment procedures when determining the nature, timing, and extent of their testing procedures. The CAQ also suggested providing clarification on how the auditor could evaluate evidence from a combination of the three approaches that the auditor could employ to respond to the risks of material misstatement.
The CAQ also suggested that a holistic approach involving all members of the financial reporting supply chain would best meet the need for more transparency expressed by investors and other stakeholders. For example, the CAQ said additional transparency regarding accounting estimates, including fair value measurements, may be better addressed through corresponding changes to the financial reporting framework to enhance or expand financial reporting disclosures.
In the comment letter on evaluating the work of specialists, the CAQ:
- Suggested that auditors be required to evaluate the “objectivity” of a specialist rather than the specialist’s “relationship to the company.”
- Stated that the auditor may encounter matters beyond his or her expertise if required to evaluate whether data were “appropriately” used by the specialist, as suggested in the proposal.
- Said that unintended consequences may arise if auditors are required to apply the same auditing procedures to accounting estimates regardless of whether management uses an external specialist. For instance, if an auditor is unable to obtain access to a specialist’s proprietary model, the auditor may need to engage his or her own specialist to develop an independent estimate rather than testing the estimate developed by the company’s specialist. This could add significant costs with an uncertain increase in audit quality, the CAQ wrote.
- Encouraged multiple options of acceptable forms of communication with specialists on the work to be performed, with those options stated explicitly in the proposal.
- Expressed concern over the proposal’s plan to rescind PCAOB Audit Interpretation 11, which deals with the use of legal opinions as audit evidence.
The PCAOB will evaluate all the comments it receives as it works to develop final standards in these areas.
—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.