The Public Company Accounting Oversight Board (PCAOB) and the UK’s Financial Reporting Council (FRC) have recently announced their areas of focus for upcoming inspections and supervisory reviews of audit engagements.
The PCAOB regulates audits of public companies and SEC-registered brokers and dealers. The FRC regulates auditors, accountants, and actuaries and sets the UK’s Corporate Governance and Stewardship Codes.
All auditors, not just those addressed by the announcements, may want to consider these focus areas, along with the supporting discussions in the announcements, in their pursuit of strengthening audit quality, especially when considering risks and other significant matters when planning their upcoming audits engagements.
PCAOB
In December 2023, the PCAOB issued an inspection staff report that set forth priorities for 2024 inspections. The report notes that the PCAOB plans to increase the number of engagements selected of annually inspected firms as a response to increased risks in certain industries. Also, inspection procedures are to be expanded on every selected engagement to determine compliance with standards related to independence, fraud, audit findings, audit committee communications, engagement quality review, audit documentation, and Form AP reports. Furthermore, an additional focus will be placed on audit firms’ culture of integrity and audit quality.
Business Risks.
The inspection program considers overall business risks in the audits inspected. Certain of these business risks would include:
- Financial statements that include higher inherent risks due to estimates related to complex models and processes, fraud, and presentation and disclosures affected by complex business activities
- Supply chain disruptions and increasing costs
- Credit availably issues, inflationary environments, and high interest rates
- Rapidly changing technology
- Geopolitical conflicts
Selections and Prioritized Industries.
While he PCAOB’s selection of inspection engagements consider risk, some are selections are also made randomly. In addition, sections will also be focused on certain other matters such as:
- Merger and acquisition activities and business combinations
- Audits of certain broker-dealers
- Non-traditional audit areas
Selections will continue to emphasize industries and sectors with specialized accounting and/or those that might be impacted by economic and geopolitical environment volatility and uncertainty. In addition, selections will prioritize three industry sectors—financials, information technology, and others that apply industry or sector specific accounting.
Inspection Considerations.
The PCAOB notes that the inspection process will focus on risks and other considerations that should be important to auditors when they plan and perform risk assessments and audit procedures such as the following:
- Recurring deficiencies
- Understanding the company and its environment
- Evaluating audit evidence
- Use of other auditors
- Going concern
- Critical audit matters
- Challenges and recurring deficiencies in audits of broker-dealers
Also, the PCAOB will focus on technology-related areas given the risks of technology, such as whether auditors have appropriate knowledge and skills to address the rapid pace of technological evolution. The PCAOB indicates that its inspections will take aim on three technology-related areas: digital assets, cybersecurity, and the use of data and technology.
Questions for Audit Committees.
The staff report also includes an updated list of questions for audit committees that can be used in discussions with their auditors or otherwise considered by committees regarding their audit engagement.
| Practical Consideration: The PCAOB staff report “Spotlight: Staff Priorities for 2024 Inspections and Interactions with Audit Committees” can be found at pcaobus.org. |
FRC
For corporate reporting reviews and audit quality inspections, the FRC announced its 2024-2025 areas of supervisory focus which include priority sectors.
Priority Sectors.
The FRC indicated the following priority sectors for selection of company accounts and audits:
- Construction and materials
- Food producers
- Gas, water and multi-utilities
- Industrial metals and mining
- Retail
In addition, the financial services sector remains a focus for reviews and will be included in annual selections.
Areas of Focus.
The following are areas of focus by the FRC in its program of corporate reporting reviews and audit quality inspections:
- Risks in the current economic environment such as going concern, recoverability, impairment, and tax asset/liability recognition
- Cash flow statements
- Implementation of IFRS 17 on insurance contracts
- Climate related risks
SOURCE: Thomas Reuters
