What PCAOB inspectors will look for in 2019

By Ken Tysiac

Systems of quality control, independence issues, and recurring deficiencies will be among the main areas of focus during PCAOB inspections of registered audit firms during 2019.

The PCAOB Division of Registration and Inspections staff on Thursday provided an outlook on the objectives and potential focus areas for its 2019 inspections of audits of issuers and brokers and dealers. The PCAOB suggested that auditors consider the information in the outlook when they plan and perform audits and review quality-control systems.

Key areas of focus for PCAOB inspectors, according to the document, will be:

  • Systems of quality control. Inspectors plan to analyze how firms' systems promote a culture of audit quality and respond to risks; review aspects of quality-control processes that are critical to audit quality; and understand if firms perform procedures to evaluate whether the companies they audit have appropriate fraud controls.
  • Independence. Inspectors plan to assess how firms maintain independence, in fact and appearance; educate professionals on independence requirements; monitor compliance with independence requirements; and assess the impact of nonaudit services on independence.
  • Recurring inspection deficiencies. Areas of repeated deficiency include auditing internal control over financial reporting; revenue recognition; allowance for loan losses; and accounting estimates, including fair value measurements. Inspectors plan to consider how firms identify the causes of deficiencies; the actions firms are taking to reduce these deficiencies; the actions they are taking to lead to higher audit quality in these areas; and how firms monitor the timing and progress of audit work.
  • External considerations. Inspection procedures will include evaluating firms' responses to elevated risks of material misstatement due to external considerations such as economic conditions and assessing firms' evaluation of audit evidence that potentially contradicts management assertions.
  • Cybersecurity risks. Inspectors will evaluate the audit procedures firms use to identify and determine whether cyber risks and breaches pose risks of material misstatement to companies' financial statements.
  • Software audit tools. Inspectors will examine whether firms are applying due care and professional skepticism when using software audit tools.
  • Digital assets. Inspectors will evaluate auditors' responses to risks associated with digital assets such as cryptocurrencies, initial coin offerings, and use of distributed ledger technology.
  • Audit quality indicators. Inspectors plan to consider how firms may be using audit quality indicators to monitor their audit work and staff deployment, and whether firms are discussing audit quality indicator results with audit committees.
  • Changes in the auditor's report. Inspectors will monitor firms' implementation activities with respect to the PCAOB's new auditor reporting standard, including pilot-testing and "dry runs" associated with firms' procedures for identifying and reporting "critical audit matters," which will be required to be reported for audits of large accelerated filers in audits for periods ending on or after June 30, 2019.
  • Implementation of new accounting standards. Inspectors will continue monitoring changes in firms' processes and procedures in light of new accounting standards for revenue recognition, lease accounting, credit losses, and financial instrument accounting.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.


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