On Friday, the SEC approved updated PCAOB standards that apply to audits involving multiple audit firms. The standards require lead auditors to plan, supervise & evaluate the work of other auditors, by:
– Specifying certain procedures for the lead auditor to perform when planning and supervising an audit that involves other auditors; and
– Applying a risk-based supervisory approach to the lead auditor’s oversight of other auditors – so that the higher-risk areas in the audit are prioritized.
If you’re like me, your eyes glaze over when it comes to accounting standards. But there’s some info in here that will be relevant to anyone advising audit committees. First, the amendments require the lead auditor to collect independence & relationship info from the contributing auditors – so be on the lookout for that. The PCAOB also amended AS 1301 – regarding communication by the lead auditor to the audit committee about the overall audit strategy. In addition to the lead auditor communicating all participants in the audit to the audit committee, this excerpt from the 185-page adopting release gives more color on what the PCAOB expects those enhanced discussions to address:
Investors also may benefit from the amendments indirectly. For example, under existing standards, the auditor is required to communicate to the audit committee its overall audit strategy, significant risks, and results of the audit, including work performed by other auditors, among other things. Because of the lead auditor’s enhanced involvement in the work of other auditors, the quality of communications with audit committees could also be enhanced, specifically as it relates to risks of material misstatements in the financial statements related to the component(s) of the company audited by the other auditor(s).
Such enhanced discussions with the audit committee could improve the audit committee’s oversight of the audit by highlighting areas where audit committees and companies should increase attention to ensure the quality of their financial statements, including related disclosures. This increased attention by audit committees and companies could result in higher quality financial reporting, which benefits investors.
The PCAOB first proposed these requirements 2016, with supplemental requests for comment in 2017 and 2021. There’s some lead-time on the compliance date – the amendments will take effect for audits of financial statements for fiscal years ending on or after December 15, 2024.
– Liz Dunshee