Audit regulators are starting to percolate some new guidance that would tell auditors to think and act a little more like detectives when auditing financial statement disclosures and to say more about their work in their audit reports.
The Public Company Accounting Oversight Board is meeting with its advisory groups in the coming weeks to get their input on whether it might be time to update rules regarding an auditor's duty to audit financial statement disclosures and the contents of the audit report. The PCAOB is exploring how changes in accounting standards and recent market events have exposed some weaknesses in the current auditing and reporting approaches.
The board will share with its Investor Advisory Group and its Standing Advisory Group the results of some research and observation about how financial statement disclosure requirements have changed in recent years, how they have become more difficult to audit, and whether auditing standards should be rewritten to address the concerns. The PCAOB is giving some thought to whether auditors should think and act a little more like detectives, using more skepticism and looking for evidence outside the company's accounting system to support management assertions. The board also will map out the latest calls for change in what information auditors should include in the audit report, including a directive from the Treasury Advisory Committee on the Auditing Profession to clarify what auditors can and can't do to detect fraud.
In an agenda paper to tee up discussion on the auditing of disclosures, the PCAOB says disclosure requirements in recent years have become more objectives-based, more qualitative, and more complex, making them hard to control and hard to audit. Controls around such disclosures more often are manual rather than automated, which naturally increases the risk of material misstatement.
The PCAOB says from an auditing perspective, such disclosures need to be audited by “experienced auditors who understand the company, its industry, and the relevant disclosure requirements.” Auditors need to use plenty of professional skepticism and be alert for events or conditions that might contradict what management asserts in its disclosures. That might mean auditors should be required to perform some different audit procedures to get the audit evidence they need, the PCAOB says. “For example, the evidence needed to evaluate a particular disclosure might come from sources outside the company's accounting system or possibly from sources outside the company,” the PCAOB says.
The board will meet with its Investor Advisory Group on March 16 and its Standing Advisory Group on March 24 to explain its ideas and seek input and feedback. With the SAG, the PCAOB also plans to explore whether efforts to update the framework many companies use to establish internal control over financial reporting would suggest auditing standards should be updated as well.
The board also has scheduled an open meeting to hear a presentation from its chief auditor's office on potential changes to the auditor's reporting model and to discuss the development and publication of a concept release as an initial step in writing a new standard.
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