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  • Writer's pictureDaniel Goelzer

PCAOB 2024 Inspection Priorities: More Inspections and a Focus on Firm Culture

The Public Company Accounting Oversight Board’s inspection staff outlined its 2024 inspections priorities and its plans for interactions with audit committees in Spotlight: Staff Priorities for 2024 Inspections and Interactions With Audit Committees.  In a December 20 press release, the Board explains that the staff report “highlights key risks, like high interest rates, and other considerations, like audit areas with recurring deficiencies, that auditors should be focused on when planning and performing audit procedures.”  The report also suggests eleven questions audit committees should ask “to hold firms accountable to high standards when hiring and overseeing the audit process.”  (For a discussion of the Board’s 2023 inspection priorities, see 2023 PCAOB Inspections Will Prioritize Fraud, Financial Services, and Crypto, May-June 2023 Update.)

 

Key Features of the 2024 Inspection Program

 

The PCAOB’s 2024 inspections will primarily review fiscal year 2023 audits; for calendar year companies, these audits will generally have been completed during the first quarter of 2024.  In the 2024 inspection cycle, the PCAOB plans to increase the number of engagements selected for review at the largest audit firms – those that have more than 100 public company audit clients and are required to be inspected annually.  (For comparison, in the 2021 inspections – the most recent year for which the PCAOB has released reports – the Board inspected an average of 55 engagements at the four largest U.S. firms.)   

 

As in prior years, the inspection staff will select some engagements for review based on the perceived risk associated with the audit, while some engagements will be selected randomly.  Among other considerations, inspectors will emphasize selecting audits of companies that have engaged in mergers and acquisitions or business combinations.  In addition, the selection process will prioritize audits of companies in three sectors:

 

  • Financials.  The staff offers this reason for focusing on the Financials sector: “Regional banks experienced significant disruption in 2023 due to certain high-profile bank failures. The failure of an auditor to properly understand the business and management’s strategy degrades the ability to appropriately and diligently exercise professional skepticism and professional judgment.” 

  • Information technology.  Companies in this sector include technology, hardware, and the semi-conductor industry. The report states that these companies “have financial statement accounts, disclosures, and related internal controls that tend to be complex due to revenue recognition, other significant judgments, and contractual arrangements with customers.”  In addition, “the risk of fraud due to management override, although not unique to this sector, is often heightened given earnings pressures. Disruptions to the supply chain can also impact revenue recognition.” 

  • Sectors that apply industry-specific or sector-specific accounting. Inspectors will also focus on companies in sectors that apply sector-specific accounting and in sectors that “hold assets that may have declined in value, such as collateralized commercial real estate debt.”

 

2024 Inspection Considerations

 

Once a company’s audit is selected for inspection, inspectors will review audit areas that present risks or other considerations that should be important when the auditor is planning and performing audit procedures.  The report lists seven such topics and warns auditors that they “may want to consider additional focus in these areas as they plan their audit procedures.”

 

  • Broker-dealer audit challenges.  In addition to inspecting public company audits, the Board inspects audits of securities broker-dealers that are registered with the SEC.  In 2024, the broker-dealer inspection program will focus on challenges and deficiencies identified in prior broker-dealer audit inspections.  These are discussed in Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers (August 10, 2023). 

  • Recurring deficiencies.  Inspectors will consider audit areas in which they have frequently found deficiencies in past inspections.  These areas include audit work related to revenue and related accounts; accounts affected by business combinations; inventory; long-lived assets, including goodwill and intangible assets; equity and equity-related transactions; and testing controls with a review element.  The Board’s most recent statement describing recurring inspection deficiencies is discussed in 2022 PCAOB Inspections Preview Says 40 Percent of Audits Reviewed Had Deficiencies, July 2023 Update

  • Evaluating audit evidence.  Inspectors will consider whether the auditor exercised professional skepticism in evaluating audit evidence. “Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. * * *  Gathering and objectively evaluating audit evidence requires the auditor to consider the sufficiency and appropriateness of the evidence.” 

  • Understanding the company and Its environment.  The report states: “We plan to continue assessing how the auditor’s understanding of the public company and the auditor’s evaluation of significant changes in the public company from prior periods, including changes in the public company’s internal control over financial reporting, affect the risks of material misstatement.” 

  • Use of other auditors.  In engagements where audit firms in addition to the principal auditor had significant involvement, the inspection staff will review the principal auditor’s review and supervision of the work of the other firms. 

  • Going concern.  The auditor is required to evaluate the ability of the company to continue as a going concern.  In cases where there were potential challenges in making this determination, PCAOB inspectors will review the going concern evaluation. 

  • Critical audit matters (CAMs).  Compliance with the CAM requirements will be a 2024 inspection priority because the average number of CAMs discussed in audit reports has decreased and the number of reports that include only one CAM has increased.  In addition, the inspection staff has found deficiencies in CAM disclosure and evaluation.

 

Technology-Related Considerations

 

The report states that a challenge arising from new technologies is “ensuring that auditors have the appropriate knowledge and skills to efficiently and, perhaps more importantly, effectively incorporate or address these new technologies in their audit.”  Accordingly, inspections will focus on three technology-related areas -- digital assets, cybersecurity, and use of data and technology in the audit.

 

As to digital assets, inspectors will prioritize selecting for review audits of companies that have material digital asset holdings and transactions.  Audits of such companies require “(1) an appropriate risk assessment, (2) understanding of the control environment, including information technology controls, (3) an understanding of the controls over the existence and ownership of the digital assets, including ongoing safeguarding of private keys, and (4) an appropriately planned audit response.” See Spotlight, Inspection Observations Related to Public Company Audits Involving Crypto Assets (June 2023).

 

For all inspected engagements, the PCAOB staff will ask the audit firm to explain how cybersecurity risk was considered and incorporated into the audit.  In the case of inspections of audits of companies that experienced a cyber incident, inspectors will review how the auditor evaluated the company’s response, any resulting modifications to the audit, and the company’s cyber incident disclosures.

 

Auditors are expanding their use of technology in performing audits. Accordingly, the PCAOB’s inspectors “will evaluate the use of technology related to audit procedures, particularly focusing on instances where technology is used in procedures to respond to identified risks of material misstatement” in all inspections.

 

Review of Large Firm Culture

 

In its 2024 inspections, the Board will deploy a team to evaluate culture at the six large global network firms.  Culture refers to a firm’s “tone at the top” – whether senior leadership promotes and embraces “a culture of integrity and audit quality.”   This undertaking will involve interviewing firm personnel and evaluating documents.  The report describes the reason for the new initiative as follows:

 

“Audit firms continue to face challenges delivering quality audits as evidenced by (1) the increasing trend of audit deficiencies in recent years and (2) deficiencies identified that have recurred for numerous years. We are interested in why these deficiency trends are not improving and whether audit firms’ cultures are playing a role in this failure to improve.” 

 

Interactions with Audit Committees

 

During its 2024 inspections, the PCAOB staff will, as in past years, invite the audit committee chairs of public companies whose audits are selected for review, and are performed by a large, annually inspected firm, to engage in a dialogue with the inspections staff.  The inspections staff will afford a similar opportunity to audit committee chairs of a sample of companies that are audited by smaller, triennially inspected, firms. For a discussion of the PCAOB’s most recent report on staff conversations with audit committee chairs, see No Surprises, Please. 2022 PCAOB Conversations with Audit Committee Chairs, October 2023 Update.

 

Audit Committee Questions

 

The 2024 staff priorities report suggests eleven inspection-related questions that audit committee members may want to consider or discuss with their auditor. According to December 20 press release, the questions “are designed principally to further two-way communication on topics such as auditor understanding of the business, fraud, going concern, other auditors, CAMs, and the company’s use of technology.”   Example of these questions include:

 

  • How does the audit firm ensure that audit engagement team members have the appropriate understanding of our business so they can effectively perform their assignments? 

  • How would you, the auditor, commit fraud in our organization, and if you were an employee or member of management, what would you do to prevent it? 

  • If portions of the audit were outsourced to a shared service center, how did the auditor determine that service center personnel executed the procedures appropriately? 

  • What is the audit firm’s use of technology? What was applied during the audit? 

  • What is the auditor’s candid impression of the audit committee’s oversight of the internal audit function and how the internal audit plan addresses the company’s significant risks?

 

Comment:  The 2024 inspections priorities Spotlight provides audit committees with insight into why the PCAOB selected the company’s engagement for review and why, if selected, inspectors concentrated on some aspects of the audit and ignored others. In addition, the Spotlight may help the audit committee in understanding their auditor’s work plan, since auditors are likely to devote special attention to areas of PCAOB inspection emphasis.  Indeed, as noted above, the Spotlight explicitly advises auditors “to consider additional focus” in areas that are 2024 inspection priorities. Similarly, since the Spotlight reflects the PCAOB’s assessment of enhanced audit and financial reporting risks, it may also aid committees in their oversight of the company’s financial reporting by providing a catalog of accounting and reporting issues that are challenging in the current environment. Finally, the eleven suggested audit committee questions could provide a useful basis for dialogue with the company’s auditor.

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