The PCAOB on June 1, 2017, published Release No. 2017-003, Proposed Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists, shortly after board members voted unanimously to propose strengthening the requirements for auditors when they use the work of a lawyer, appraiser, actuary, engineer, or other type of professional from a field other than accounting.
The audit regulatory board wants comments submitted by Aug. 30.
As the use of financial estimates has grown in financial reporting, so has the frequency with which accountants employ the work of valuation specialists, actuaries, and appraisers, and the PCAOB has found an uneven quality to the audits of the specialists’ work.
“If auditors do not appropriately evaluate management’s estimates and properly oversee the work of specialists’ work, they may perform an insufficient audit, potentially harming investors,” PCAOB member Steven Harris said.
Release No. 2017-003 proposes amending Auditing Standard (AS) 1105, Audit Evidence, formerly AS 15, and AS 1201, Supervision of the Audit Engagement, formerly AS 10. The board is also proposing to replace AS 1210, Using the Work of a Specialist, formerly AU Section 336, and retitle it as AS 1210, Using the Work of an Auditor-Engaged Specialist.
Under current PCAOB standards, an accounting firm’s in-house specialists are subject to supervision under AS 1201, and auditors' responsibilities with respect to other specialists—either employed by company management or engaged by the auditors—are covered by AS 1210.
As a result, the PCAOB said the requirements that apply to auditors’ in-house specialists differ from the requirements that apply to external specialists, even though they both serve similar roles in helping auditors obtain and evaluate audit evidence.
AS 1210 imposes the same responsibilities for auditors with regard to specialists a client uses when preparing its financial statements the specialist’s auditors rely upon when examining the statements. But the two classes of specialists have fundamentally different roles, the PCAOB said. The board added that it found substantial inconsistency in auditors’ reviews of the specialists’ work.
Moreover, PCAOB inspectors continue to find instances where auditors fail to evaluate the assumptions clients’ specialists have made for fair value measurements, fail to consider contradictory evidence, or do not address issues raised by an auditor's specialist.
The PCAOB said the proposal strengthens the requirements for evaluating the work of a client’s specialists and apply a risk-based approach to supervising and evaluating the work of the specialists who work at an accounting firm and those from the outside who are brought in as contractors.
“The proposed changes may improve the auditor's ability to detect material misstatements in the financial statements and promote an improved, uniform approach to supervision of an auditor's specialists,” the PCAOB said.
For the work of a client’s specialist, the PCAOB is proposing to supplement the requirements in AS 1105 to address circumstances when the auditor uses the work of a client’s specialist as evidence for the audit. It would align with the proposed requirements in auditing accounting estimates.
For the work of an auditor’s specialist, the PCAOB is proposing to increase the requirements for applying a risk-based supervisory approach to in-house specialists and extend the requirements to auditor-engaged specialists. The board would also add requirements for informing the auditor’s specialist of the work to be performed and reviewing and evaluating the specialist’s work.
Release No. 2017-003 also proposes amending the requirements for assessing the knowledge, skill, and ability of an auditor’s specialists. It also changes the requirements for assessing the objectivity of an auditor-engaged specialist to describe objectivity as the ability to exercise impartial judgment on all issues related to the specialists’ work in the audit.
The proposal builds upon the May 2015 Staff Consultation Paper No. 2015-01, The Auditor’s Use of the Work of Specialists.
The PCAOB also issued a companion proposal dealing with auditing accounting estimates in Release No. 2017-002, Proposed Auditing Standard—Auditing Accounting Estimates, Including Fair Value Measurements and Proposed Amendments to PCAOB Auditing Standards. (See Auditors’ Responsibility for Accounting Estimates May Increase With Proposed Standard in today’s edition of Accounting & Compliance Alert.)
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