PCAOB Spotlight: Staff Observations and Reminders during the COVID-19 Pandemic

December 2020

Improving audit quality through inspections remains a priority for the PCAOB. As such, the PCAOB is publicly sharing observations made during the COVID-19 pandemic from recent inspections of auditor reviews of interim financial information that may additionally benefit audit committees and management to inform current year financial reporting, controls and disclosures and enhance communications with the auditors during the audit cycle.
 
In December 2020, the PCAOB issued a second Spotlight: Staff Observations and Reminders during the COVID-19 Pandemic to share select staff observations from recent inspections of reviews of interim financial information and audits. It also shares important reminders for auditors, as well as management and auditor committees, to consider as they plan and conduct audits and reviews of interim financial information in the current environment. This publication supplements and builds on the previous PCAOB Spotlight, COVID-19: Reminders for Audits Nearing Completion, issued in April 2020.
 

PCAOB Staff Observations

The PCAOB adjusted the 2020 inspections approach at the onset of the pandemic to review audit firm internal guidance and select a sample of engagements with either interim periods ending prior to June 30, 2020 or off-cycle yearends between March 31, 2020 and June 30, 2020 to allow for consideration of the impact of COVID-19 on audit work performed.

Observations Related to Firms’ Quality Control Systems - Firms emphasized communication, need for consultations, importance of performing quality audits, exercising skepticism and maintaining integrity; while providing various resources to support challenges to working remotely. This included modifying monitoring programs to support engagements in industries that were significantly impacted by COVID-19.

Observations from Reviews of Interim Financial Information and Audits – No instances of non-compliance with interim auditing standards were noted. The PCAOB did note the following:
  • increased interactions among engagement teams with firm industry leads, national offices and audit committees
  • increased consultations around changes to quantitative and qualitative factors impacting materiality
  • in many instances, auditors focused analytical procedures and inquiries on going concern and potential for impairment of goodwill and other long-lived assets
  • increased use of fraud and forensic specialists in reviewing higher risk areas
  • earlier planning for inventory observations and use of dry runs with management to test technology
  • use of virtual technologies to communicate and simulate working and supervisory abilities
 

Reminders and Key Takeaways

Overarching RemindersThe responsibilities of auditors for (1) identifying, assessing, and responding to risks of material misstatement, (2) audit committee communications, (3) the auditor’s report, and (4) quality control considerations all continue to be applicable for all audits performed in the current environment.

Reviews of Interim Financial Information – Evolving circumstances or new information may surface from one quarter to the next that may materially impact interim reporting. For example, changes in circumstances regarding the impairment of assets or adaptations of the company’s control and reporting processes may require the auditor to perform additional procedures and may also cause the company to need to provide additional disclosures, including material modifications regarding changes in ICFR.

Risk Assessment and Materiality – Ongoing COVID-19 impacts and economic uncertainty may impact the auditor’s initial risk assessment as well as consideration of fraud risks. This may be particularly true of:
  • Estimates largely based on forecasts of future events
  • Management override of controls where staffing and other changes may reduce segregation of duties
Auditor materiality and tolerable misstatement levels should be reviewed against earnings, financial condition and cash flows. Changes to the nature, timing and extent of audit procedures may be necessary and should be communicated to the audit committee on a timely basis.

Internal Control Over Financial ReportingPermanent or temporary changes in the operations of the company may impact processes, flow of transactions and controls – e.g., reassignment of control owners or “workarounds” – which may in turn impact the auditor’s approach to internal control testing.

Accounting Estimates – New auditing standards for auditing accounting estimates are in effect for 2020 calendar year end audits. As reminders, auditors are to:
  • Evaluate whether there is a reasonable basis for management’s assumptions
  • Evaluate significant assumptions against management’s consideration of relevant evidence
  • Consider whether assumptions were based on past experience vs. current market information or expected future events
  • Consider whether the company’s intent and ability to carry out a course of action may be limited by economic uncertainty
  • Assess, under new auditing standards also effective for 2020 audits, whether specialists may be needed in the development of accounting estimates
Supervision, Staffing and Review – Audit committees and management may expect that uncertainties may require increased involvement of more senior or experienced members of the engagement team as well as the engagement quality reviewer. Alternative means of supervision for other locations may also be necessary due to limits on travel and physical observation.

Auditor Independence – The current environment may result in situations impacting auditor independence – e.g., unpaid auditor fees or calls for non-audit services.

Other Information – The SEC has indicated that companies may need to consider additional COVID-19 disclosures to be included in other information which contains the financial statements. Auditors are expected to read other information contained in certain documents within audited financial statements or within reviewed interim financial information to consider whether the other information or its presentation is materially inconsistent with the financial information – e.g., COVID-19 disclosures included within the Risk Factors section of MD&A.

Broker Dealers – Market volatility negatively impacting assets and fees may cause increased fraud pressures. Additionally, necessary modifications and changes in controls related to broker dealer operations may impact compliance with financial responsibility rules.


Next Steps

We encourage management, auditor committees and auditors continue to monitor both guidance distributed by the PCAOB, as well as the SEC, along with BDO’s Center for Corporate Governance and Financial Reporting resources and educational programming.
 

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