The Public Company Accounting Oversight Board is planning to make some changes in how it conducts inspections of audit firms this year, and where it will focus.
Many of the changes come in response to the continuing COVID-19 pandemic, according to a
“Given the COVID-19 pandemic, we expect to continue to conduct inspections remotely for the foreseeable future,” said the PCAOB staff report.
The PCAOB developed its inspection plans this year with two main objectives in mind: to respond to the financial reporting and audit risks posed by the COVID-19 pandemic, and to reduce the predictability of inspections. The board plans to select audits for review in industries that seem to be experiencing especially significant disruptions or elevated risks during the pandemic, such as transportation, entertainment, hospitality, manufacturing, certain aspects of the retail segment and commercial real estate, including real estate investment trusts.
“When selecting individual areas of audits to review, our inspections will focus also on certain financial statement items and other reporting matters that have been particularly affected by the pandemic, such as impairments, going concern assessments, allowance for loan losses, and the increased risk of fraud,” said the report. “When conducting our reviews, we will evaluate how auditors completed and documented procedures in compliance with our standards, considering such factors as remote work, time constraints, availability of information, and access to public companies’ management. We will also evaluate auditors’ compliance with the new requirements relating to auditing accounting estimates, and if applicable, the use of specialists.”
The PCAOB also intends to pick more non-traditional focus areas for inspection. “Over time, the selection of inspection focus areas may have become more predictable such that firms are able to better anticipate areas to be inspected and place more audit emphasis on those areas, potentially at the risk of reducing attention to other important audit areas,” said the PCAOB. “We therefore plan to increasingly select certain non-traditional financial statement areas for review. We will, of course, also continue to target areas that we believe pose higher risks of material misstatement in particular audits, or that are the subject of recurring audit deficiencies.”
The PCAOB staff thinks that approach will encourage firms to more consistently try to do quality audits on all public companies, and discourage an approach that might only focus on audits or areas that could be viewed as more likely to be selected for review as part of a PCAOB inspection.
The PCAOB also plans to put more emphasis this year on how firms address audit areas with continued deficiencies, firms’ quality control systems, auditor independence, fraud procedures, critical audit matters, firms’ implementation of new auditing standards, and other areas including supervision of audits involving other auditors, responding to cyber threats and auditing of digital assets.
