PCAOB finalizes simplified quality control amendments

The PCAOB on Wednesday adopted previously proposed amendments to QC 1000, A Firm’s System of Quality Control, setting the stage for the board that oversees audits of public companies to consider a quality control-focused approach to future inspections.

“Strong, effective auditing standards underpin the PCAOB’s oversight, and QC 1000 is one of the most consequential standards that the board has ever adopted,” PCAOB chair Demetrios Logothetis said in a news release. “The targeted amendments adopted today — which were informed by stakeholder feedback during the implementation process and continued scrutiny of the standard’s costs and benefits — help us not only to fulfill our critical responsibility of getting QC 1000 right but also to establish a foundation for our proposed strategic goal of modernizing the PCAOB’s inspections with a QC-focused approach.”

Pending SEC approval — a standard part of the process related to PCAOB initiatives — QC 1000 and related amendments to PCAOB forms and the QC reporting rule will become effective Dec. 15. According to the news release, the amendments aim to improve alignment with other quality management standards where appropriate and seek to reduce compliance costs without compromising the PCAOB’s statutory mission to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports.

The amendments to QC 1000, first proposed in June, will:

• Rescind the “design-only” requirement so that QC 1000 imposes requirements only on firms that are required to comply with applicable professional and legal requirements with respect to any “engagement”;
• Provide increased flexibility in filling certain specified roles in the QC system by permitting roles to be assigned to non-firm personnel and divided among multiple individuals;
• Rescind the requirement to have an External QC Function;
• Narrow and simplify communication requirements relating to metrics that the firm communicates to external parties about its audit practice, firm personnel, or engagements;
• With respect to identified engagement deficiencies, require evaluation of whether similar engagement deficiencies exist on other engagements only if the identified deficiency resulted or could result in (i) a failure to obtain sufficient appropriate evidence to support the conclusion reached on an engagement or (ii) an inappropriate overall conclusion on the subject matter of an engagement;
• Revise the definition of QC deficiency to make clear that, when firms have implemented more than one quality response to address the same quality risk, they can take those other quality responses (e.g., compensating responses) into account when determining whether a QC deficiency exists;
• Allow firms to select the date as of which they annually evaluate the effectiveness of their QC system, rather than requiring firms to evaluate as of Sept. 30 each year;
• Revise the QC system evaluation conclusions to align more closely with the conclusions in other quality management standards, while retaining a structured process, including specified factors for consideration, to guide the evaluation; and
• Simplify the requirements for retention of QC system documentation and abbreviate the retention period from seven to five years.

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.