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PCAOB Posts Staff Preview of 2018 Inspection Observations

May 06, 2019

On May 6, 2019, the Public Company Accounting Oversight Board (PCAOB) issued the Staff Preview of 2018 Inspections Observations. This staff preview includes, for the first time, good practices regarding efforts to improve audit quality. It also addresses areas of common deficiencies, observations on technology, and implementation of new accounting and auditing standards and rules.

The preview includes observations of U.S. and non-U.S. audit firms, inspected both annually and triennially.

Highlights of good practices observed include:

  • Expanding accountability and revising training programs
  • Establishing a network of specialized professionals to address emerging risks

Areas of deficiencies observed in 2018 include:

  • Internal Controls of Financial Reporting and Revenue Risk Assessment
  • Accounting estimates such as Allowance for Loan and Lease Losses (ALLL)

Review the Staff Preview on the PCAOB's website.

Cybersecurity: A call for auditors to lean in

May 02, 2019

On May 2, 2019, Kathleen M. Hamm, Public Company Accounting Oversight Board (PCAOB) Member, gave the speech "Cybersecurity: Where We Are; What More Can be Done?", at the Baruch College 18th Annual Financial Reporting Conference.

In her speech, Ms. Hamm discusses an emerging area for PCAOB oversight: cybersecurity. Specifically, she explores the dangers posed by cyber and how cybersecurity presents a threat to the financial reporting system and capital markets. she also shares her thoughts on what more audit professionals can do to strengthen the cybersecurity and resiliency of the financial reporting system.

Review the full speech on the PCAOB's website.

Audits of less complex entities

Apr 29, 2019

On April 29, 2019, the International Auditing and Assurance Standards Board (IAASB) published a Discussion Paper, "Audits of Less Complex Entities: Exploring Possible Options to Address the Challenges in Applying the International Standards on Auditing (ISAs)". Comments are requested by September 12, 2019.

The IAASB seeks to further understand the challenges of using ISAs in audits of less complex entities—and views about possible actions to address these challenges.

The IAASB recognizes the global call for action to address issues of complexity, length, understandability, scalability, and proportionality related to using the ISAs. Continuing the debate on these strategic issues, the Discussion Paper explores how the IAASB, and others, could further support auditors working in increasingly evolving environments.

Review the press release and Discussion Paper on the IAASB's website.

In-Brief – Feedback from outreach session: barriers to effective and efficient audits of less complex entities

Apr 26, 2019

On April 26, 2019, the Auditing and Assurance Standards Board (AASB) released an overview of the joint efforts of the AASB and CPA Canada to identify and address the challenges that practitioners face when auditing less complex entities.

On November 30, 2018, the AASB and Chartered Professional Accountants Canada (CPA Canada) staff jointly hosted an outreach session that brought together some 30 practitioners to discuss the barriers to effective and efficient audits of less complex entities (LCEs).

The AASB and CPA Canada are considering the feedback received in working together to understand how the challenges that practitioners face when auditing LCEs can be overcome through standards activities, development of implementation guidance, and/or technology initiatives.

Review the In Brief on the AASB's website.

CMA publishes final recommendations on the UK audit market

Apr 18, 2019

On April 18, 2019, the Competition and Markets Authority (CMA) published its final report on its statutory audit services market study. The report details four recommendations: audit committee scrutiny, mandatory joint audit, an operational split, and a five-year review of progress by the regulator.

Recommendation 1: Audit committee scrutiny

The goal of greater scrutiny by the new regulator would be to increase accountability and increase the focus on audit quality. The recommendation includes:

  • Giving the regulator powers and a requirement to mandate minimum standards for the appointment and oversight of auditors.
  • Giving the regulator powers and a requirement to monitor compliance with those standards, including the ability to require reporting or to place an observer on a Committee.
  • Remedial action by the regulator where necessary, such as issuing public reprimands or direct statements to shareholders.

The CMA notes that this would be complemented by implementing recommendations from the BEIS Select Committee on transparency of fees and a requirement for the auditor to present at the AGM.

Recommendation 2: Mandatory joint audit

The goal of this remedy is to address choice and resilience problems. The recommendation includes:

  • Legislation to give the regulator flexible powers to implement a joint audit regime and adapt it over time. The CMA believes key elements of this remedy would be:
    • Mandatory joint audit, including at least one non-Big Four firm, for most FTSE 350 companies (with certain exemptions for very simple entities or the largest and most complex entities, as well as those that choose a non-Big Four auditor).
    • Gradual introduction enabling adaptation over time, with companies making the transition no later than when their next tender arises.
    • Each firm receiving work that is substantial and relatively equal, representing at least 30% of the audit fee.
    • No changes to the existing liability framework.
  • The regulator should have the power to appoint peer reviewers for companies that are not included in the joint audit remedy (which should not be one of the Big Four, unless reviewing an auditor that is outside the Big Four).
  • The regulator should monitor the health of the Big Four audit firms, in the event of a risk of failure of one of the firms, using additional powers or taking executive control to limit the movement of clients to the other Big Three.

The CMA notes that joint audit will need to be implemented carefully to take into account challenger firms’ ability to grow and should be monitored and refined as appropriate by the regulator.

Recommendation 3: Operational split

The goal of this remedy is to strengthen the focus of auditors on delivering good audits, to remove the distraction of non-audit work, and to give audit practices incentives to bid competitively for more audits. The recommendation includes:

  • Legislation to give the regulator powers to design the specific details of the operational split and to refine it over time. The CMA believes key elements of this remedy would be:
    • No profit sharing between the audit and non-audit practices, with audit partner remuneration linked to the audit practice only.
    • Separate financial statements.
    • Transparent transfer pricing, checked by the regulator, particularly for the use of non-audit specialists on audits.
    • The audit practice to include audit-related services and regulatory reporting requirements.
    • A separate CEO and board for the audit practice, with a majority of independent non-executive directors answerable to investors in audited companies and to the regulator. This board should be responsible for remuneration, career progression and quality standards and should conduct an AGM and produce an annual report.

The CMA notes that whilst an international structural split cannot be undertaken by the UK Government alone, the regulator and / or the government should initiate that debate at an international level.

Recommendation 4: Review of progress

The CMA recommends that the regulator should review the effectiveness of the remedies, initially after a five year implementation period.

The CMA’s recommendations have been made to Government to be taken forward through legislation, rather than the CMA putting in place its own order. This is partly to enable the Government to assess how other reforms proposed under, for example, the Kingman Review into the regulator the Financial Reporting Council, and the Brydon Review into the quality and effectiveness of audit, would work together with the CMA’s remedies.

Review the press release and final report on the CMA website. 

In-Brief podcasts – Quality management

Apr 12, 2019

On April 12, 2019, the Auditing and Assurance Standards Board (AASB) released two podcasts on Quality Management at the firm and engagement Level.

The podcasts include:

In-Brief podcast – The new approach to quality management and how it can benefit you

  • This podcast and podcast script provides a plain and simple overview of the components of the system of quality management, and how the new risked-based approach in ISQM 1 can benefit you.

In-Brief podcast – Key highlights of the AASB’s Exposure Draft on quality management at the firm and engagement level

  • This podcast and podcast script provides a plain and simple overview of the key highlights of the AASB’s Exposure Draft on Quality Management at the Firm and Engagement Level.


AASB Exposure Draft – Quality Management at the Firm and Engagement Level, Including Engagement Quality Reviews

Apr 05, 2019

On April 5, 2019, the Auditing and Assurance Standards Board (AASB) issued an Exposure Draft proposing the adoption of ISQM 1, ISQM 2 and ISA 220 (Revised), with appropriate Canadian amendments, if any. Stakeholders are invited to comment until June 7, 2019.

The AASB proposes, subject to comments received following exposure, to adopt with appropriate amendments:

  • proposed International Standard on Quality Management (ISQM) (formerly International Standard on Quality Control (ISQC)) 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements;
  • proposed new ISQM 2, Engagement Quality Reviews;
  • proposed International Standard on Auditing (ISA) 220, Quality Management for an Audit of Financial Statements;

and related conforming and consequential amendments.

Review the Exposure Draft on the AASB’s web­site.

CAQ issues updated version of its publication on audit quality disclosures

Apr 02, 2019

On April 2, 2019, the Center for Audit Quality (CAQ) released an updated version of its publication “External Auditor Assessment Tool.”

The External Auditor Assessment Tool is designed to assist audit committees in carrying out their responsibilities of appointing, overseeing, and determining compensation for the external auditor. The tool contains sample questions to help committees in four specific areas:

  • quality of services and sufficiency of resources provided by the engagement team;
  • quality of services and sufficiency of resources provided by the audit firm;
  • communication and interaction with the external auditor; and
  • auditor independence, objectivity, and professional skepticism.

The tool also includes a sample form and rating scale for obtaining input from company personnel about the external auditor, as well as resources for additional reading.

For more information, see the press release on the CAQ’s website.

AASB Annual Plan – 2019-2020

Apr 01, 2019

On April 1, 2019, the Auditing and Assurance Stan­dards Board (AASB) pub­lished its Annual Plan for 2019-2020. This Annual Plan sets out the Board’s key activities in 2019-2020, in order to help it achieve the objectives in its five-year Strategic Plan for 2016-2021.

The AASB is in the fourth year of its current Strategic Plan.

As part of its activities in 2020-2021, the AASB plans to:

  • monitor, participate, and respond to international developments, including the Monitoring Group consultation on Strengthening the Governance and Oversight of the International Audit-Related Standard-Setting Boards in the Public Interest;
  • monitor the use of emerging technologies in financial reporting and audit;
  • progress several key audit standards projects, including those relating to the following: auditor reporting (combined reporting and disclosure of the audit engagement partner’s name); considering revisions to CAS 600, Group Audits; issuing the revisions to CAS 315, Identifying and Assessing the Risks of Material Misstatement, and the changes to the Quality Management standards;
  • progress standards for engagements other than audits of financial statements, including those related to the following: approve revised standards for Agreed-upon Procedures; issue a revised standard for Compilation Engagements; issue revised standards for performance audits in the Public Sector; and issue a revised standard on Reporting on Controls at a Service Organization.    

For further details, refer to the Annual Plan on the AASB's web­site.


SEC makes announcement about exhibits containing immaterial, competitively harmful information

Apr 01, 2019

On April 1, 2019, the U.S. Securities and Exchange Commission (SEC) posted to its website an announcement on the new rules and procedures in the Commission’s recently issued final rule “FAST Act Modernization and Simplification of Regulation S-K.”

The announcement addresses issues related to exhibits containing immaterial and competitively harmful information. Specific topics discussed in the announcement include (1) new rule requirements related to the identification of where information has been omitted from a filed exhibit, (2) the review process for registrant filings for compliance, and (3) transition issues.

The SEC recently adopted new rules that permit registrants to file redacted material contracts without applying for confidential treatment of the redacted information provided the redacted information (i) is not material; and (ii) would be competitively harmful if publicly disclosed. Those rules will become effective upon their publication in the Federal Register, which is expected to be on April 2, 2019.

For more information, see the SEC announcement on the SEC’s Web site.

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