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Unanimous PCAOB Adopts Standards to Strengthen Lead Auditor’s Supervision of Other Auditors

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Several years after first issuing a proposal, the PCAOB on June 21, 2022, unanimously voted to adopt a standard that strengthens the requirements for lead auditors that supervise other accounting firms and accountants working on the audit.

This is the first standard-setting meeting for the reconstituted board led by Erica Williams, who became chair in January.

“Enhancing the lead auditor’s supervision of other auditors, including through better coordination and communication, should result in increased investor protection by improving the lead auditor’s ability to prevent or detect deficiencies in the work of other auditors before the audit report is issued,” Williams said at the meeting.

The board’s effort on the standard comes as companies increasingly have global operations where other accounting firms may take part in the audit. PCAOB member Duane DesParte noted that multiple auditors were used last year in 26 percent of all public company audit engagements. And almost 30 percent of those audits involved five or more other audit firms.

But the increased prevalence of using the work of other auditors create more challenges for the lead auditor.

“Adding other auditors into the process requires careful consideration and clear communications between all auditors involved in the audit,” Williams said. “And when miscommunication occurs or when there are misunderstandings about the nature, timing, and extent of the other auditor’s procedures, audit quality will likely suffer.”

Moreover, the board said it is adopting heightened requirements because the PCAOB’s inspections of audit firms found recurring deficiencies in audits involving other auditors.

New and Revised Standards

The PCAOB is rescinding interim Audit Standard (AS) 1205Part of the Audit Performed by Other Independent Auditors. But parts of AS 1205 are included in a new standard, AS 1206, that applies to infrequent situations where the lead auditor divides responsibility for an audit with another accounting firm, said PCAOB staff member Stephanie Hunter.

AS 1201Supervision of the Audit Engagement, requires that the engagement partner determine whether the firm’s participation in the audit is sufficient for the firm to issue an audit report of the company’s consolidated financial statements.

The lead auditor must determine the engagement’s compliance with independence and ethics requirements. The lead auditor must understand the other auditor’s knowledge of the requirements and experience in applying them.

Further, the changes require that the lead auditor obtain and review written affirmations regarding the other auditors’ policies and procedures related to those requirements and a description of certain auditor-client relationships related to independence.

Moreover, the rule changes require the lead auditor to understand the knowledge, skill, and ability of other auditors’ engagement team members to assist the lead auditor with the planning and supervision.

The lead auditor must also obtain a written affirmation from other auditors that their engagement team members possess such skill and ability to perform assigned tasks.

To promote clear communication, lead auditors must inform other auditors about the scope of their work and identify risks of material misstatement and certain other key matters. The lead and other auditors must communicate about the audit procedures to be performed and any changes needed to the procedures.

In addition, the amendments require the lead auditor to obtain and review written affirmations from other auditors about their performance of work in accordance with the lead auditor’s instructions and to direct other auditors to provide certain documentation about their work.

New AS 1206, Dividing Responsibility for the Audit with Another Accounting Firm, requires the lead auditor to determine that audit procedures were performed regarding the consolidated or combined financial statements of the business units audited by the referred-to auditor in the company’s financial statements, according to PCAOB staff member Andrew Cleve.

The new standard requires the lead auditor to obtain the referred-to auditor’s written representation that it is independent and duly licensed to practice. The lead auditor must disclose in the audit report the magnitude of the portion of the financial statements and, if applicable, internal controls audited by the referred-to auditor.

The standards also emphasize that other auditors are responsible for doing their work with due professional care.

The rule revises AS 1215Audit Documentation, to state that other auditors must retain documentation, and their documentation is subject to the requirements related to subsequent modification.

The standards also address in certain audits, in which auditors other than the lead auditor perform audit procedures on the financial statements of a company’s investees for certain investments accounted for by the company under the equity method.

The final rules are in PCAOB Release No. 2022-002, Planning and Supervision of Audits Involving Other Auditors and Dividing Responsibility for the Audit with Another Accounting Firm.

Release No. 2022-002 will take effect for audits for fiscal years ending on or after December 15, 2024. The SEC, which oversees the board, must approve the PCAOB’s decision before the standard becomes effective.

Project History

The audit regulator first issued the proposal in April 2016 in Release No. 2016-002Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard—Dividing Responsibility for the Audit With Another Accounting Firm.

Then the PCAOB sought additional comments in September 2017 in Release No. 2017-005Supplemental Request For Comment: Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard—Dividing Responsibility for the Audit With Another Accounting Firm.

Instead of finalizing the proposal, the PCAOB again sought more comments in September 2021 with the publication of Release No. 2021-005Second Supplemental Request for Comment: Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard—Dividing Responsibility for the Audit with Another Accounting Firm. (See PCAOB will Likely Not Need Third Request for Extra Comment on Proposed Rule Related to Lead Auditor’s Supervision of Other Auditors in the January 6, 2022, edition of Accounting & Compliance Alert.)

The PCAOB said that the final changes take into account recent practice developments in the lead auditor’s oversight of other auditors work, including the greater use of technology.

 

This article originally appeared in the June 22, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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