PCAOB Spotlight on Staff Priorities for 2023 Inspections

Overview

Is your auditor and audit committee prepared for areas that will be the focus of PCAOB inspections? 

On April 17, 2023, the PCAOB (the Board) issued Spotlight: Staff Priorities for 2023 Inspections outlining their priorities for 2023 inspections. The 2023 inspection plan primarily covers the review of 2022 fiscal year-end audits and focuses on various financial reporting and audit risks, particularly those resulting from new or emerging business risks influenced by both internal and known external factors that were present during 2022, such as volatility in financial and commodity markets due to inflation, interest rates, and currency fluctuations; disruptions in supply chains; ongoing impact of the remote/hybrid work environment and other risk factors.

The Board reviews a large number of filings in their inspection process and the spotlight highlights their approach to selecting which audits to inspect and reflects key areas of financial statement reporting that companies and their auditors should consider when performing their audits. 

The planned areas of PCAOB focus in 2023 include: 

Additionally, the staff continues to deploy a “target team” of inspectors to gather information. The target team was established in 2019 to execute in-depth reviews across audit firms gathering information that extends beyond traditional inspection procedures. This year’s target team focus will include risks related to digital assets, first year audits, multi-location audits, and significant or unusual events or transactions. Additionally, as a part of ongoing efforts to enhance inspections, the report notes that the number of audits reviewed will increase.

BDO Insight

Reminders for Audit Committees

The role and responsibilities of the audit committee are constantly evolving due to various external factors and regulatory requirements. The audit committee’s priorities should take into consideration the inspection areas that the PCOAB has identified. In addition, the PCAOB reminds audit committee members of the importance of audit execution, auditor independence, and the audit firm’s quality control system in driving audit quality for the protection of investors.

Audit committees need to be confident in their expectations that their auditors will hold audit quality to the highest standard of performance. Audit quality has been a top priority for the Board over the past several years – especially, with the November 2022 proposal of QC 1000, A Firm’s System of Quality Control. While comments received in response to this proposed standard are currently under review, firms are actively preparing for this standard to go into effect. BDO is committed to maintaining high audit quality and has been preparing voluntary public audit quality reports that provide further information about our people, processes, innovations, and quality control system. Please refer to our 2022/2021 Audit Quality Report.

Reminders for Auditors

Step one in any audit is ensuring that the auditor comprehends the public company or broker-dealer’s business and environment. It is essential to understand the events, conditions, and activities that might impact the risks of material misstatement and especially, material misstatement due to fraudulent activities. The potential for fraud should be at the forefront of decision making. These risks can drastically impact the audit work performed and the auditor’s duty to ensure that evidence is appropriate and sufficient. 

With the current economic and geopolitical environment being so volatile, economic implications for inadequate financial reporting and noncompliance with laws and regulations need to be considered.

Digital transformation is a necessity and unavoidable. Auditors need to prepare for the risks that come with technological advancement and increasing frequency of cybersecurity attacks. Breaches may require modification to the planned audit approach and therefore, make designing and performing audit procedures to address cybersecurity risk an evolving area of focus for auditors and regulators. 

As always, audit teams need to keep top of mind the importance of exercising due professional care as well as professional skepticism. It’s important to embrace a framework, such as BDO’s Professional Judgment Framework, as auditors define matters, specify objectives, identify possibilities, gather and analyze information, reach conclusions and reflect upon their judgment process. It’s the auditors’ responsibility to perform the iterative actions of coaching, consulting, avoiding traps and biases, documenting, and communicating. If the auditor combines this process with their technical and industry-specific knowledge, they should have the tools necessary to safeguard against evolving risks, implement adequate procedures, and make high-quality judgments. At the end of the day, it’s all about risk mitigation. 

Next Steps for All

We encourage audit committees and management to review the PCAOB’s guidance and engage one another as well as the auditor in dialogue about the specific facts and circumstances relevant to the organization’s business that may impact the execution of the audit and overall quality of the audit and resulting financial statements.

We invite you to explore additional resources of interest and educational programming via the BDO Center for Corporate Governance and BDO Center for Accounting Standards & Reporting Matters.