The Public Company Accounting Oversight Board’s inspection staff describes its priorities for 2025 in Spotlight: Staff Priorities for 2025 Inspections and Interactions With Audit Committees (2025 Priorities Report). An accompanying PCAOB press release states that the 2025 Priorities Report “highlights risks and other considerations the staff believes auditors should consider when planning and performing their current and upcoming audits, as well as sectors and industries that PCAOB inspection staff will prioritize.” The report also includes suggested questions for audit committees to consider in their auditor oversight role. For a discussion of last year’s inspection priorities, see PCAOB 2024 Inspection Priorities: More Inspections and a Focus on Firm Culture, January 2024 Update.
Selections and Prioritized Sectors/Industries
In 2025, the staff will select audits for inspection in industries and sectors (1) with specialized accounting or that may be negatively impacted by uncertainties and volatility in the economic and geopolitical environment, (2) where the Board has previously found a higher number of deficiencies, or (3) where public companies are more likely to have a going concern risk. Inspectors will prioritize audits of companies in three sectors: Financial, Real estate, and Information technology.
In addition to these industry considerations, the inspection staff will emphasize the selection of --
Audits of public companies engaging in merger and acquisition activities or business combinations due to the typical complexities of the accounting and related audit procedures.
Audits of broker-dealers that file compliance reports and others that provide customers with various investment opportunities, such as introducing brokers.
Audits of public companies that have changed their supply chain or logistics. Such changes can increase audit risk due to related changes in internal controls, complexities unique to operating in new locations, and challenges associated with the valuation of inventory and the impairment of existing facilities.
2025 Inspection Considerations
In engagements selected for inspection, the staff plans to focus on audit areas that pose a heightened risk to audit quality. The 2025 Priorities Report describes seven such audit areas:
Audit Execution Challenges. Execution challenges include efforts to decrease audit hours, such as “determining a more aggressive, or higher, materiality level * * * and scoping of multi-location audits.” The staff will also “inquire about the use of technology in audit procedures, particularly focusing on instances where technology is used in procedures to respond to identified risks of material misstatement.”
New Auditing Standards. Several new or amended PCAOB standards will be effective for audits performed in 2025, and, in the staff’s view, this “presents an enhanced risk that firms will not properly apply those standards.” These new or amended standards include AS 1201, Supervision of the Audit Engagement, AS 2101, Audit Planning, and AS 1206, Dividing Responsibility for the Audit with Another Accounting Firm. In addition, AS 2310, The Auditor’s Use of Confirmation is effective for audits of fiscal years ending on or after June 15, 2025.
Critical Audit Matters. The PCAOB is seeking to understand why the number of critical audit matters (CAMs) included in audit reports has declined. Accordingly, the staff will select for inspection some audits where the auditor reported a single CAM or no CAMs.
Use of Technology by Public Companies. The inspection staff will focus on audits of public companies that have experienced cybersecurity incidents and review how the auditor may have modified its audit approach in response. Inspectors “will also review the disclosures made by the public company or broker-dealer in compliance with the SEC cybersecurity incident disclosure requirements and other information regarding the public company’s cybersecurity risk management.” The staff also believes that the use of artificial intelligence in operational or financial reporting processes could create new risks and will “be alert broadly for public companies that disclose significant investment in AI.”
Crypto Assets. The inspection staff will focus on audits of public companies and broker-dealers with material crypto asset holdings or significant transactions related to crypto assets. Audit risks associated with crypto include challenges in testing the existence of and rights to crypto assets, testing controls, and considering the risk of fraud and other illegal acts.
Quality Control. As in prior years, 2025 inspections will include procedures to test audit firm compliance with the PCAOB’s quality control standards. In 2024, the PCAOB adopted a new quality control standard, QC 1000. While QC 1000 does not take effect until December 15, 2025, inspection teams will review firms’ preparations for the new QC standard. See PCAOB Adopts Enhanced Quality Control Standard for Audit Firms, May-June 2024 Update.
Culture at Audit Firms. Since 2023, the inspection program has included a team that evaluates the culture at the six largest U.S. firms. This initiative will continue in 2025. For a report on the findings of the culture initiative, see PCAOB Reports on the Link Between Audit Firm Culture and Audit Quality in this Update.
2025 Target Team
Since 2016, the annual inspections program has included a “target team” -- a group of inspectors that conducts reviews across many audit firms focusing on emerging audit risks. In 2025, the target team will review (1) audits that use shared service centers, (2) engagements where work is referred into the U.S. by other auditors, and (3) use of software audit tools. For the most recent report on the work of the target team, see 2023 PCAOB Target Team Report: Crypto, Multi-Location Audits, and Significant Transactions, September-October 2024 Update.
Interactions with Audit Committees
The 2025 Priorities Report states that the staff “plan[s] to continue to seek opportunities to interact with the audit committee chairs on some public company audits selected for review.” (This appears to be a step back from prior practice. Last year, the staff stated that it would invite the audit committee chairs of inspected public companies whose audits are performed by a large audit firm to engage in a dialogue with the inspection staff and would afford a similar opportunity to audit committee chairs of a sample of companies that smaller firms audit.) For a discussion of the PCAOB’s most recent report on staff conversations with audit committee chairs, see In 2023 PCAOB Conversations with Audit Committee Chairs, the Economic and Audit Environments Were Top of Mind, July 2024 Update.
Questions for Audit Committees
The 2025 Priorities Report includes suggested questions that the staff believes audit committee members may want to consider and discuss with their auditor.
Beyond what auditors are required to communicate to the audit committee, are there any aspects of the company’s internal control over financial reporting that management could enhance or strengthen to ensure management overrides relate to appropriate exceptions or atypical transactions are appropriately recorded and appropriately communicated?
Which audit issues that were especially challenging were not disclosed as CAMs? What consideration was given to disclosing these issues CAMs?
Did the company have any transactions or business risks that the auditor scoped out of the audit based on planned materiality? If so, what were they?
Are there any areas of the audit where the company can facilitate, or further facilitate, the audit team’s use of technology to streamline testing or to improve the efficacy of the testing?
Do the audit workpapers contain any personal or confidential information that is unnecessary to retain as audit evidence or that can be removed prior to finalizing the audit documentation?
It is important for auditors to understand the company so they can perform their assignments well and, as such, we appreciate retention within the audit team where appropriate and possible so that knowledge grows and deepens. Are there any members of the audit team that did not return this year? If so, why did they not return? What is the experience of any new staff assigned to the engagement? Are they new to the audit firm? What parts of the audit did they work on? What assistance and supervision are in place for new team members?
Audit Committee Takeaways
The 2025 Priorities Report may be useful to audit committees in several ways:
It provides audit committees with insight into how the PCAOB selects audits for review and why, if selected, inspectors concentrate on certain aspects of the audit.
The report may help the audit committee understand their auditor’s work plan since auditors are likely to devote special attention to areas of PCAOB inspection emphasis.
Because the 2025 Priorities Report reflects the PCAOB’s assessment of enhanced audit and financial reporting risks, it may also aid audit committees in identifying challenging company accounting and reporting issues.
The suggested audit committee questions provide a useful basis for dialogue with the company’s auditor.
Comentarios