Wednesday, April 13, 2016

PCAOB proposes stricter requirements when lead auditors use the work of other auditors

By Jacquelyn Lumb

The PCAOB has unanimously approved a proposal that would strengthen a lead auditor’s supervisory requirements over other auditors that participate in the audit and a new standard governing the division of responsibilities with other auditing firms. The work performed by other auditors can be significant—approximately 40 percent of total assets and revenues of publicly listed companies are outside of the country of the signing auditor, according to the Board, and inspections have revealed a need to strengthen current practices.

Frequent use of other auditors. Chief Auditor Martin Baumann noted in opening remarks that the use of other auditors is common for large company audits performed by U.S. global network firms. He cited PCAOB data that other auditors are used in about 55 percent of the audits performed by the global networks and about 30 percent of the audits performed by non-global network firms. About 80 percent of Fortune 500 audits performed by U.S. global network firms include the use of other auditors.

Since other auditors may perform a significant share of an audit, it is critical that the lead auditor provide the necessary supervision. Inspections have identified deficiencies in the work of other auditors that the lead auditors did not identify or did not address. The proposal would amend the standards on supervision, audit planning, documentation, and engagement quality review, and would introduce a new standard on dividing the responsibility for an audit with another firm.

Amendments to standards. The amendment to the standard on supervision would outline the procedures the lead auditor should perform in supervising the other auditors’ work. The amendment to the audit planning standard would specify the tasks that must be undertaken by the lead auditor and would revise the requirements for determining a firm’s eligibility to serve as the lead auditor in an audit that involves other auditors.

The engagement quality reviewer would be required to evaluate the engagement partner’s determination of a firm’s eligibility to serve as lead auditor. The audit documentation standard would be revised to require that the lead auditor document the work papers of other auditors that were reviewed but not retained.

New standard. Under the newly proposed standard, the lead auditor would be required to disclose in the audit report the portions of the financial statements that were audited by other auditors. The lead auditor also would be required to obtain a representation from the other auditors that they are licensed to practice in their jurisdictions; determine whether they are or should be registered with the PCAOB if they play a substantial role in the audit, and disclose their names. This standard, if adopted, would supersede AS 1205, Part of the Audit Performed by Other Independent Auditors.

PCAOB Chair James Doty said that many engagement partners do a good job of overseeing the work of other audit firms, but inspections have also revealed engagements that were not well managed and where the work performed by the other auditor did not meet the objectives required by its role in the audit. The proposal would require the lead auditor to play a greater role in overseeing the other auditors, through communication, access to the work papers, and the evaluation of the auditor’s qualifications and work.

The comment period will be open through July 29, 2016.