By John Filar Atwood
The SEC has approved amendments to PCAOB standards that address audits involving multiple audit firms. To address challenges created by working across firms, the amendments specify procedures for the lead auditor to perform when planning and supervising an audit that involves other auditors, and apply a risk-based supervisory approach to the lead auditor’s oversight of outside auditors.
The changes, which include amendments to existing standards and the adoption of a new standard, were approved by the PCAOB in June. It was the first standard setting recommendation considered and approved by the newly constituted Board.
Commission support. SEC Chair Gary Gensler backed the updated standards which he believes will enhance audit quality. He noted that the improved standards were needed given the rise in the use of multiple audit firms due to the growing complexity and international operations of public companies.
Gensler cited a PCAOB releaser indicating that in 2021, 26 percent of issuer audit engagements used multiple auditors, and more than half of large accelerated filer audits used multiple auditors. Given the challenges of a multi-firm audit, he said, robust standards are needed to guide how lead auditors supervise, communicate with, and coordinate with outside auditors.
The amendments also garnered the support of SEC Commissioner Mark Uyeda who commended the PCAOB for its thorough approach to this rulemaking. He noted that the Board provided three separate opportunities for public feedback spanning more than five years, and considered all 64 comments that it received.
New requirements. Among other things, the amendments require the engagement partner to determine whether his or her firm’s participation in the audit is sufficient for the firm to carry out the responsibilities of a lead auditor. The amendments include considerations for the engagement partner to make that determination and require that the decision be reviewed by the audit’s engagement quality reviewer.
The lead auditor must obtain and review written affirmations regarding the other auditors’ policies and procedures related to independence and ethics requirements. The lead auditor also must review an outside auditor’s compliance with those requirements, and obtain a description of certain auditor-client relationships related to independence.
A lead auditor will now be required to understand the knowledge, skill, and ability of the other auditors’ engagement team members who assist with planning and supervision, and obtain a written affirmation from other auditors that their team members possess the necessary knowledge, skills, and ability to perform assigned tasks.
The lead auditor is required to supervise other auditors under the Board’s standard on audit supervision and to inform other auditors about the scope of their work, identified risks of material misstatement, and certain other key matters. The lead auditor also must 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 standard. In situations where the lead auditor divides responsibility for a portion of the audit with another audit firm and therefore does not supervise the work performed by that firm, the PCAOB created a new standard requiring the lead auditor to determine that audit procedures were performed regarding the consolidation or combination of financial statements of the business units audited by the referred-to auditor into the company’s financial statements.
The new standard also requires that the lead auditor 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 size of the portion of the financial statements and internal controls audited by the referred-to auditor.