The PCAOB’s inspections of audit firms in 2020 will continue to focus on areas that have been challenging for firms in recent years, George Botic, CPA, the PCAOB’s director of Registration and Inspections, said Wednesday.
During a presentation at the AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C., Botic said areas of focus for the PCAOB’s 2020 inspections will include a greater emphasis on the audits of larger issuers with higher market capitalization.
Topical areas of focus will include:
- A firm’s system of quality control.
- Auditor independence.
- Implementation of new standards.
- How firms address recurring audit deficiencies.
- Other areas such as digital assets, cybersecurity, and consideration of omitted procedures.
In the first quarter of next year, the PCAOB also expects to debut a new report format for its 2018 audit year inspections of the six largest U.S. firms. The report will maintain the traditional Part I and Part II sections. The format also will reduce boilerplate language.
“The new report format is designed to deliver the results of our inspections in a clear, easier-to-read format that goes directly to our findings and provides comparative information,” Botic said.
Botic also discussed effective practices the board has found through its research on critical audit matter reporting, systems of quality control, and multi-location auditing.
Critical audit matters
Botic suggested that the critical audit matter reporting process should include preparatory work, including practice runs, and utilize subject matter experts and tailored tools and resources.
He said developing and drafting critical audit matters early in the audit, affording plenty of time for review, can yield better results.
Reporting also can be assisted by oversight and involvement from national office resources as well as experts in tax, information technology, and other specialty areas early and throughout the determination and drafting process for critical audit matters, Botic said.
In the actual reporting of the critical audit matter, Botic said the description should reflect the procedures performed and documented in the auditor’s workpapers. He said auditors should make sure the wording is coupled with the audit work that was performed.
“Words obviously do matter,” he said.
Quality control best practices
An appropriately designed and effectively operating system of quality control is fundamental to audit quality, Botic said.
He said that reviewing inspection deficiencies and linking them to specific controls may help firms identify flaws in their tools, templates, guidance, or methodology. This linkage can also help firms discover policies and procedures that are not appropriately designed or operating effectively; as well as resource issues such as insufficient staffing, competing priorities, timing of work performed, lack of technical competence, or lack of industry expertise.
Botic said best practices for quality control systems include:
- Preparing narratives of a firm’s system of quality control processes or process flow map to a firm’s quality objectives and controls.
- Identifying where risks to quality exist.
- Documenting controls that are designed to mitigate risk, or mapping of controls against risks.
- Conducting real-time monitoring and measurement. “This allows for self-identification and correction of quality control deficiencies before they become systemic,” Botic said. “It is important for a system of quality control to assist the firm in self-identifying, assessing, and responding to risks in order to prevent instead of only detecting audit deficiencies.”
Multi-location audit tips
Audits performed in multiple locations by component auditors can be particularly challenging. Botic said best practices identified by the PCAOB include:
- Requesting a local engagement quality reviewer on work performed by all component auditors. “Although AS 1220, Engagement Quality Review, does not require an EQR to be performed on audits of components, an assignment of one may contribute to enhanced audit quality,” he said.
- Having forensic specialists assist with global risk assessment. These specialists can help identify fraud risks and assist in the design and execution of audit procedures.
- Using tools to assist with Form AP requirements. “We continue to see deficiencies in Form AP filings and Form AP compliance where component auditors’ work is not being reported adequately,” Botic said. “To aid in ensuring that Form AP is complete and accurate, some firms use timekeeping systems available to component auditors, which is then used to facilitate the Form AP reporting requirements.”
Quality is improving
Overall, Botic said, audit quality is improving. He cited Audit Analytics data that indicates a low level of restatements in recent years and said that the overall trend of deficiencies in inspections has decreased.
But he said there still are areas that need attention in the effort to improve audit quality. He said common deficiencies are observed in both U.S. and non-U.S. inspections, and that the PCAOB is seeing that not all firms have a well-defined, well-designed risk assessment process.
The PCAOB also has observed that firms need to improve their root-cause analysis when deficiencies occur. Finally, Botic said firms should consider positive events or tactics that might be a driver of audit quality.
“Doing so, I believe, would help prevent repeated deficiencies and [enable] further improvements in audit quality,” he said.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.