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PCAOB Staff Is Making Rapid Progress on Subsequent Events Project

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

The Public Company Accounting Oversight Board (PCAOB) staff has been making progress on a mid-term standard-setting project related to subsequent events, according to a recent update, and it might be moved to the board’s short-term agenda this year.

“The staff is analyzing relevant information and developing a proposal for the Board’s consideration,” according to a January 16, 2025, notice.

The staff seems to be moving rapidly on this project—subsequent events and other matters arising after the date of the auditor’s report—considering that it got added as a new project to the PCAOB’s mid-term agenda only a couple of months ago in early November 2024.

The goal of this project is to consider “updates to interim standards that address auditor responsibilities related to (i) certain events occurring between the balance sheet and the auditor’s report date and (ii) certain matters arising after the auditor’s report date, such as subsequently discovered facts and reissuance of the auditor’s report.”

The standards in question are Auditing Standard (AS) 2801, Subsequent Events, AS 2905, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report, and certain other interim standards.

AS 2801 describes auditor responsibilities for certain events occurring after the balance-sheet date but before the financial statements are issued.

AS 2905 addresses auditor responsibilities when the auditor becomes aware of facts that may have existed at that date which might have affected the auditor’s report had the auditor then been aware of such facts.

The PCAOB wants to revise the standards because current rules are substantially as written by the AICPA, which were adopted by the board on a temporary basis in April 2003.

In the project page, the PCAOB explains that since these standards were drafted by the AICPA, there have been the following changes in the auditing environment:

  • requirements related to the identification and evaluation of subsequent events have been added to the applicable financial reporting frameworks;
  • risk assessment and auditor reporting standards were adopted by the PCAOB in 2010 and 2017, respectively; and
  • advancements in technology have led to greater availability and use of both information in electronic form and technology-based audit tools.

“Staff analysis will take into account observations from the Board’s oversight activities, audit firms’ methodologies, academic research, recent reporting trends, the activities of other standard setters and regulators, and information from investors and other stakeholders,” the PCAOB said.

Inventory

The staff has also been making progress on the inventory project. In May 2024, the staff moved it from mid-term to the short-term agenda. A proposal is expected this year.

In mid-November, the project page was updated to provide more details about it.

The goal of this project is to update AS 2510, Auditing Inventories, in connection with the interim standards project to reflect changes in the auditing environment. Auditors have long observed the company’s counting of inventory.

“The procedures performed during the observation can be an important source of evidence obtained as part of an audit of a company’s financial statements and, if applicable, internal control over financial reporting,” the PCAOB said.

This standard was also adopted on an interim basis from the AICPA in 2003, and it provides guidelines for the auditor in observing companies’ inventories.

“The auditor’s requirements within AS 2510 are some of the oldest among those currently codified within PCAOB standards,” the agenda states.

“This project is considering potential revisions to existing requirements, taking into account observations from the Board’s oversight activities, Standards and Emerging Issues Advisory Group, audit firms’ methodologies, academic research, recent reporting trends, the activities of other standard setters and regulators, and information from investors and other stakeholders,” the PCAOB said.

In a discussion paper presented during a meeting of the Standards and Emerging Issues Advisory Group in November 2023, the staff provided some preliminary thinking on how they believe the standards should be revised.

For example, the staff is thinking about making the standards that are scalable for all audits based on their nature and circumstances.

During the COVID-19 pandemic lockdown, some auditors used drones to perform inventory observations. And the staff wants to know how technology is being used today or potentially in the future, and whether virtual observations could “completely substitute for in person attendance, or should they be used in combination with attending inventory counts in person.”

Another issue in question is the use of a third-party in the inventory process.

More companies have been increasingly using custodians, public warehouses, and third-party count services.

“If a company uses a third-party custodian, public warehouse, or third-party count service, then the auditor would typically consider whether the audit plan needs to be modified to obtain sufficient and appropriate audit evidence over the existence of inventory,” the discussion paper said.

Among other matters, the staff wants to know what procedures are performed by the auditor when a company uses a third-party count service.

 

This article originally appeared in the January 28, 2025, edition of Accounting & Compliance Alert, available on Checkpoint.

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