PCAOB Inspections Outlook for Audit Committees 2019

March 2019

As a supplement to the PCAOB’s prior guidance regarding its 2019 objectives and potential focus areas, the PCAOB has issued an Outlook for Audit Committees containing a list of sample questions to consider during engagement with the auditor throughout the audit cycle. For your convenience, we have added this new guidance to our initial December 2018 PCAOB Outlook alert and re-issued. We encourage audit committees, management and auditors to review this alert along with BDO’s insights.
 

Summary

In March 2019, the PCAOB issued an Outlook for Audit Committees, as a supplement to their prior Outlook on objectives and potential focus areas for planned 2019 inspections of audits of issuers and brokers and dealers. This supplement further outlines sample questions audit committees may consider relevant to pose to their auditors with respect to areas of focus that the PCAOB has indicated it will be pursuing during the 2019 inspections cycle.  The questions are arranged topically and include: 
 
  • Auditor Response to Identified Risks
  • Changes in Auditor’s Report
  • Implementation of New Accounting Standards
  • Quality Controls
  • Auditor Independence
  • PCAOB Inspection Results and Corrective Actions
  • Possible Indicators of Audit Quality 

In addition to the guidance below, the PCAOB further plans to provide an opportunity for audit committee chairs at certain companies whose audits are subject to inspections to engage in dialogue with the inspections staff, the purpose of which is to provide insight into the PCAOB’s process and obtain the audit committees’ views. The PCAOB expects to publish additional updates regarding their observations from these interviews with audit committees and inspections findings.
 

BDO Insight

PCAOB Chairman Duhnke has stated the audit committee is on the front lines with the PCAOB in promoting audit quality. He had previously outlined his views regarding the PCAOB’s intention to increase interaction with audit committees, citing the inspection process as a meaningful opportunity to do so. Within the same speech, Chairman Duhnke shared that the PCAOB plans to make incremental changes to how they report on inspection results applying both principles of relevance and timeliness in terms of getting more useful information to market more quickly to enable decision-making. As part of this, the PCAOB expects to take a more balanced approach to their inspection communications in not only publishing deficiencies observed but also sharing behaviors and practices observed that promote or enhance audit quality. BDO observes that this is consistent with discussions we are engaging in with the PCAOB board and staff. 
 

Audit Committee Questions for Auditors

Auditor Response to Identified Risks

  • How have the current economic factors influenced the auditor’s risk assessment for the current year’s audit?
  • How has the auditor considered the relevant economic factors that could affect the company’s ability to continue as a going concern?
  • How has the auditor assessed potential risks of material misstatement related to the company’s technology systems, including cyber security, and how has it addressed those potential risks? 

Changes in Auditor’s Report

  • What are the most substantive issues or learnings identified pursuant to the firm’s pilot testing and dry runs related to communicating CAMs in the auditor’s report?
  • What items, if any, were considered “close calls” but ultimately not identified as a CAM by the auditor?
  • Why were these items not determined to be CAMs? 

Implementation of New Accounting Standards

  • What are the auditor’s observations regarding the company’s implementation of the new revenue recognition standard?
  • What is the auditor’s view of the company’s readiness to adopt new accounting standards pertaining to lease accounting and valuation of financial instruments, including credit losses (if relevant)? 

Quality Controls

  • How does the firm’s quality control system promote audit quality?
  • What are recent actions taken by the firm to strengthen its quality control system?
  • Did the audit include the use of software audit tools? If so, how were these tools used and how did the use of these tools affect the risk assessment and the quality of audit evidence? 

Auditor Independence

  • How does the firm monitor compliance with the independence requirements of the PCAOB and SEC, including compliance with obtaining pre-approvals for non-audit services?
  • How can the audit committee and management assist the auditor in complying with independence requirements? 

PCAOB Inspection Results and Corrective Actions

  • If the firm has been inspected by the PCAOB, were there inspection findings? If so, what were those findings and what corrective actions has the firm taken?
  • How has the firm’s inspection findings changed over time? 

Possible Indicators to Audit Quality

  • Has the firm developed a definition of audit quality? If so, how is audit quality defined?
  • Based on the firm’s definition, what are the key drivers of audit quality for the firm overall and for this audit engagement specifically?
  • How does the firm identify, set targets for, and monitor those key drivers generally, and specifically with respect to this audit engagement? 
 

Next Steps

We encourage audit committees, management and our audit professionals to remain abreast of the PCAOB’s focus and communications. For convenience, we have re-attached our insights with respect to the PCAOB’s initial 2019 inspections outlook to complement the above guidance. Additionally, the Center for Audit Quality will be releasing an update in early April 2019 to its External Auditor Assessment Tool to aid the audit committee in its oversight responsibilities of the external auditor.

For more information on how BDO is delivering on audit quality, we encourage you to review our most recent voluntary Audit Quality Report and speak to your engagement team leaders with any questions you may have. We anticipate release of our 2019 Audit Quality Report later this summer.

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CONTACT:

 
Phillip Austin
National Assurance Managing Partner, Auditing
 
Amy Rojik
National Assurance Partner
 
Blake Wilson
Chief Compliance & Ethics Officer