Just in time for the start of audit season, the Public Company Accounting Oversight Board (PCAOB) has published reorganized auditing standards. This new framework should make the audit process more efficient. In addition, the PCAOB identified several emerging issues during its November meeting that warrant special attention this year.
Streamlined auditing standards
In September, the Securities and Exchange Commission gave the green light to the PCAOB’s reorganized auditing standards in Release No. 34-75935, Order Granting Approval of Proposed Rules to Implement the Reorganization of PCAOB Auditing Standards and Related Changes to PCAOB Rules and Attestation, Quality Control, and Ethics and Independence Standards. The SEC release said the reorganized standards will be effective on December 15, 2016. But they can be used before that date, given that the reorganization introduces no major changes to financial reporting or audit work.
The reorganized standards use a topical structure and an integrated, four-digit numbering system, as described in the PCAOB’s Release No. 2015-002, Reorganization of PCAOB Auditing Standards and Related Amendments to PCAOB Standards and Rules.
“Auditors and other users will no longer have to jump back and forth between what we called interim standards and PCAOB-issued standards,” PCAOB Chairman James Doty said when the board voted. “The reorganization does not make additional work for auditors. Rather, it should make professional practice easier.”
The reorganization also involves rescinding some standards the board feels are no longer needed. The amendments include updates to the standards’ section numbers, cross references and titles of certain standards.
The revised format organizes the standards by such topics as:
- General standards that cover broad auditing principles and activities,
- SEC filing requirements, and
- Nonaudit work that’s part of a financial statement audit.
Each of these categories includes subcategories to organize similar topics, such as standards related to auditor communications in the general standards category.
The PCAOB’s Standing Advisory Group (SAG) met just after the reorganized audit standards were published. It discussed the need to keep auditing standards relevant in light of advances in technology. The standards were written before sophisticated analytical tools were available, when auditors had to pore over original source documents and manual ledgers to check for suspicious activities and errors.
Today, sampling software can process data in a fraction of the time it takes a person to verify the same information. An example of this technology is the SEC’s Accounting Quality Model, a tool that helps reveal fraud by identifying company financial statements with certain characteristics — such as key words or financial statement metrics — that stand out from their industry and peers.
Of course, the SAG pointed out that the audit standards don’t need to be rewritten every time technology changes — and analytical tools can’t completely replace traditional auditing methods. Rather, it’s important for audit firms to stay atop the latest technology advances while continuing to use old-fashioned audit techniques, such as sending out confirmation letters and reviewing original source documents.
Another emerging audit issue that the SAG discussed was the auditor’s responsibilities when internal and external whistleblowers make fraud allegations against a company. In most cases, companies will need to hire attorneys to handle whistleblower and other reporting hotline matters. If illegal acts are material to a company’s financial statements, its annual audit report will likely need to inform management and the board, as well as disclose the details on whether the company has taken appropriate remedial measures.
Other emerging issues
The advisory group highlighted several other issues that may affect audits of 2015 financial statements, including:
- The use of specialists for accounting estimates, such as allowances for doubtful accounts, impairments of long-lived assets and valuations of financial and nonfinancial assets,
- Proposed amendments to the concept of materiality, the cornerstone in financial reporting,
- Implementation of the landmark revenue recognition standard, Accounting Standards Update 2014-09, Revenue from Contracts with Customers, which was delayed for a year but many companies continued to be unprepared for, and
Recently, the chairman of the Auditing Standards Board (ASB), Michael Santay, listed cybersecurity as one of its current projects, calling it the “number-one topic in all the boardrooms.” Unlike the PCAOB, the ASB — which is part of the American Institute of Certified Public Accountants — sets standards for auditors of private companies.
Expect changes this audit season
Whether your company is public or private, don’t be surprised when your audit team asks about these hot topics. You might need to provide different information than in previous years — and your auditor may use different audit procedures or modify some of the footnote disclosures in your 2015 financial statements.
Sidebar: New fair value credentials in the works
In 2016, the American Institute of Certified Public Accountants (AICPA) plans to launch fair value credentials to help auditors more efficiently assess fair value estimates during financial statement audits. In the spring, the AICPA plans to unveil credentials related to valuing businesses and intangible assets. If all goes as planned, another new credential for valuing financial instruments will come out in the fall.
The AICPA hasn’t announced whether these credentials will be in the form of a new acronym or a special symbol that’s added to a professional’s existing valuation credentials. But the goal is to teach designated valuators how to most effectively document their assumptions and analysis to facilitate the audit process. In the coming months, the AICPA plans to develop performance frameworks, fair value technical guidance, exams, experience and education requirements, and quality review guidance for these new credentials.
When the new AICPA credentials become available, your auditor may request that you hire a valuator who specializes in performing valuations for financial reporting purposes.