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Financial Reporting and Regulatory Update

Third Quarter 2019

From the PCAOB

SEC approves new PCAOB standards on auditing estimates and using the work of specialists

On July 1, 2019, the SEC approved PCAOB adoption of 1) the new standard to enhance the requirements that apply when auditing accounting estimates, including fair value measurements, and 2) amendments to the auditing standards to strengthen requirements for auditors using the work of specialists in an audit.

The SEC also approved the application of both standards to the audits of EGCs as necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation.

The new standard and amendments are effective for audits of financial statements for fiscal years ending on or after Dec. 15, 2020. The PCAOB has created implementation pages addressing the new estimates standard and the amendments on the auditor’s use of the work of specialists

Subsequent to the approval by the SEC, the PCAOB issued, on Aug. 22, 2019, four staff guidance documents to provide information on the new estimates and specialists audit requirements. These documents detail aspects of the new standard and improvements made to integrate the risk assessment requirements when auditing accounting estimates, including fair value measurements. The documents also describe features of the new requirements that apply when auditors use the work of specialists and when they use the work of a company specialist as audit evidence.

The four staff guidance documents are:

New resources on CAMs

The PCAOB released, on July 11, 2019, two new resource documents that give audit committees and investors information about the requirement for auditors to communicate critical audit matters (CAMs) in the auditors’ reports. The new resources are “Audit Committee Resource: Critical Audit Matters” and “Investor Resource: Critical Audit Matters.”

The audit committee resource is intended to inform audit committees in engaging with their auditors on the CAMs requirements. It includes an overview and basics of CAMs as well as PCAOB staff responses to frequently asked questions. It also provides questions audit committees might consider asking their auditors.

The investor resource gives investors information about changes to the auditor’s report and understanding the auditor’s report, includes FAQs about CAMs, and covers the implementation of the standard.

Annual broker-dealer inspection report

On Aug. 20, 2019, the PCAOB released its annual report on 2018 inspections of broker-dealer auditors. The report includes observations from inspections during 2018, insights into applicable standards, and examples of effective procedures. The report highlights that the percentage of deficiencies for audit and attestation engagements remained high and that continued improvement is needed. The PCAOB believes that auditors could achieve significant positive impact on audit quality if they: 

  • Focus on improving their quality control systems
  • Increase their knowledge and understanding of PCAOB standards
  • Focus on improving their testing of internal controls when employing controls-reliance audit strategies and for examination engagements

The PCAOB also noted this report should help broker-dealer owners and audit committees or equivalents as they oversee the work of their auditors.