Many firms, especially larger, multi-national companies, require more than one accounting firm or outside accountant to perform their audits. In fact, the vast majority of SEC registered companies use multiple auditors for their audits. The lead auditor has the sometimes-difficult task of planning, supervising, and evaluating the work of all auditors – ensuring consistency and accuracy for the final report. The Public Company Accounting Oversight Board (PCAOB) just announced their plans to make this job easier and lessen avoidable audit deficiencies.
Because of the PCAOB’s oversight activities, they know that the supervision of other auditors is an issue for many firms. The involvement of multiple auditors – who may have different audit practices, quality-control systems, and even languages and cultural norms, especially in international audit situations – can complicate the communication and coordination between the lead auditor and other auditors.
The goal of the PCAOB’s proposed changes is to help lead auditors overcome these challenges by increasing their supervision of the work of other auditors and enhancing their ability to prevent or detect deficiencies in the other auditors’ work.
Proposed Accounting Standard Changes
The proposal includes amendments to current standards as well as a brand new standard that will direct the lead auditor’s supervisory responsibilities to the areas of greatest risk and specify that taking on the role of lead auditor requires that they audit a meaningful portion of the financial statements. Additionally, the PCAOB is offering specific procedures that will help the lead auditor strengthen its involvement in the work of other auditors through enhanced communication and detailed evaluation of other auditors’ qualifications and work.
The following changes would be made to existing PCAOB standards:
- Auditing Standard (AS) 1201, Supervision of the Audit Engagement – provides additional direction to a lead auditor on how to apply AS 1201’s principles-based supervision provisions to supervision of other auditors’ work, including specific procedures to be performed by the lead auditor
- AS 2101, Audit Planning – incorporates and updates requirements from AS 1205, Part of the Audit Performed by Other Independent Auditors, to specify that they be performed by a lead auditor in an audit that involves other auditors – which, in effect, revises the eligibility requirements of those who can serve as lead auditor in a multi-auditor situation
- AS 1215, Audit Documentation – requires that a lead auditor properly document which specific work papers of other auditors they have reviewed but not retained
- AS 1220, Engagement Quality Review – explicitly requires that the engagement quality reviewer evaluate the engagement partner’s determination of a firm’s eligibility to serve as lead auditor
New Accounting Standard
- Further, the lead auditor would also be required to:
- In addition, a new standard, AS 1206, Dividing Responsibility for the Audit With Another Accounting Firm, is being proposed that would supersede AS 1205. It would still include the requirement that a lead auditor disclose in the audit report which portion of the financial statements each auditor audited, just as in AS 1205.
- Obtain a representation from each other auditor that they are duly licensed to practice under the applicable laws of the relevant country or jurisdiction
- Determine whether each other auditor who would play a substantial role in the preparation or furnishing of the lead auditor’s report is—or is required to be—registered with the PCAOB
- Disclose the name of the other auditor(s) in the lead auditor’s report
Comments on the new proposal and accounting standard amendments are being accepted by the PCAOB through July 29.
The PCAOB’s proposed changes to make these accounting standards stronger will empower the lead auditor to create uniformity and prevent audit deficiencies in the final audit opinion. This will ultimately enhance overall audit quality for companies that utilize multiple auditors. If you would like more information or if your company is seeking assistance with a financial statement audit, JLK Rosenberger can help. Call our public company audit team at (949) 860-9902 or click here to e-mail us