PCAOB's 2021 inspections target pandemic concerns, predictability

By Ken Tysiac

PCAOB inspections in 2021 will focus on the effects of the coronavirus pandemic on companies’ financial reporting while also becoming less predictable, according to resources the board published Tuesday.

As reported previously in the JofA, the board is focused both on pandemic-related audit challenges and a concern that firms may be disproportionately paying attention to areas of audits that are frequently inspected. The PCAOB published resources containing a general staff outlook and guidance for audit committees explaining the 2021 inspections focus.

The PCAOB also revealed that it expects inspections to continue remotely for the foreseeable future because of the pandemic.

Pandemic focus

Inspectors will select audits for review in industries that are experiencing big disruptions or high risks during the pandemic, such as transportation, entertainment, hospitality, manufacturing, certain aspects of the retail segment, and commercial real estate, including real estate investment trusts.

Inspections will focus on financial statement matters and other reporting matters that have been particularly affected by the pandemic, such as impairments, going concern assessments, allowance for loan losses, and increased risk of fraud.

The PCAOB’s inspectors will evaluate how auditors completed and documented procedures in compliance with auditing standards, considering factors such as:

  • Remote work;
  • Time constraints;
  • Availability of information; and
  • Access to public companies’ management.

New PCAOB requirements related to auditing accounting estimates and the use of specialists also will be evaluated.

Pandemic-related risks also have caused the PCAOB to decide to inspect a greater number of audits of custodial broker-dealers in 2021 than in the past.

Making inspections more unpredictable

The PCAOB also plans to become more unpredictable in its selection of engagements to review and the focus areas selected in those reviews. Although the board plans to select a similar number of audits to review compared with recent years, the percentage of audits selected randomly will increase significantly, especially for the largest firms.

More nontraditional areas of focus also will be selected for inspection because the PCAOB believes that over time the areas of inspection focus have become so predictable that firms are able to better anticipate areas to be inspected and potentially risk reducing attention to other important areas.

The board still plans to continue scrutinizing areas that pose higher risks of material misstatement in particular audits or are the subject of recurring deficiencies.

Areas of emphasis

Inspections in 2021 will emphasize the following areas:

  • How firms address audit areas with continued deficiencies;
  • Firms’ quality control systems;
  • Auditor independence;
  • Fraud procedures;
  • Critical audit matters;
  • Firms’ implementation of new auditing standards; and
  • Other areas such as supervision of audits involving other auditors, responding to cyber threats, and auditing digital assets.

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

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