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Proposed Changes to Audit Supervision Guidance to Clarify Lead Auditors’ Responsibilities

The PCAOB has scheduled a meeting to consider issuing a proposal to strengthen standards related to a lead auditor’s supervision of other accounting firms participating in a client audit. The proposed rules are expected to augment various auditing standards and add a standard that requires lead auditors to obtain statements from other auditors certifying their licensing from foreign authorities.

The PCAOB on April 12, 2016, is expected to vote on a proposal aimed at strengthening standards related to a lead auditor’s supervision of other accounting firms participating in a client audit.

In particular, the PCAOB is planning to amend Audit Standard (AS) 1201, Supervision of the Audit Engagement, (AS 10) , to provide more instruction to the lead auditor on how to apply the standard. AS 1201, is currently principles-based and deals with supervisions of other auditors.

The proposed amendments are expected to prescribe the procedures lead auditors will have to perform when supervising other auditors’ work, according to sources who are familiar with the audit regulator’s deliberations.

The proposal is also expected to amend AS 2101, Audit Planning , (AS 9) , to update the requirements from AS 1205, Part of the Audit Performed by Other Independent Auditors, (AU Section 543), to specify that they be performed by a lead auditor in an audit that involves other auditors, the sources said. For example, the proposal will incorporate and revise requirements for determining a firm’s eligibility to serve as lead auditor in an audit that involves other auditors.

The board also wants to amend AS 1215, Audit Documentation , (AS 3) , to require that a lead auditor properly document which specific work papers of other auditors the lead auditor has reviewed, but not retained. It would also amend AS 1220, Engagement Quality Review , (AS 7) , to require explicitly the engagement quality reviewer to evaluate the engagement partner’s determination of a firm’s eligibility to serve as lead auditor.

The board is also planning to propose a new standard — AS 1206, Dividing Responsibility for the Audit with Another Accounting Firm, that will define the term “other auditor.” Foreign affiliates of U.S. firms will be considered other auditors under the proposed definition.

The board plans to retain the guidance in AS 1205, with some changes, including the requirement that a lead auditor disclose in its audit report which portion of the financial statements was audited by each other auditor.

Proposed AS 1206 will require lead auditors to obtain a representation from each other auditor that the other auditor is licensed by a foreign authority; determine each other auditor’s registration status with the PCAOB; and disclose the name of the other auditor in the lead auditor’s report.

“In many audits, important audit work is performed by accounting firms or individual accountants outside the firm issuing the audit report,” the PCAOB said when it announced the meeting. “This proposal would address the lead auditor’s responsibilities with respect to those other auditors that participate in the audit.”

As more companies in the U.S. and overseas expand their international operations, regulators have paid more attention to the accounting firms hired to handle portions of large audits. A lead auditor hired by the company often recruits other firms to examine the financial reports for satellite offices, which may be prone to a higher risk of misstatement.

U.S. global network firms use other auditors in about 55 percent of audits. The percentage is more significant among the biggest companies, with audits of about 80 percent of the largest 500 companies involving work from other firms.

In recent years, PCAOB inspectors have frequently identified problems in “referred” work in cross-border audits. In particular, the audit regulatory board found that the lead audit firm did not sufficiently supervise and review the staff and other auditors at other firms or affiliated firms.

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