We Have Some Questions for You. The PCAOB Releases a New Audit Committee Resource
The Public Company Accounting Oversight Board has issued a new publication for audit committees. The Board describes Spotlight: Audit Committee Resources “as a timely reference point for auditors, audit committee members, investors, and others.” The publication contains a series of questions that audit committees might consider asking “as part of their engagement and discussion with their auditors, including how the auditors are responding to the financial reporting and audit risks posed by the current economic environment.”
The questions in Audit Committee Resources are organized under six headings: Fraud and Other Risks, Initial Public Offerings and Mergers & Acquisitions, Audit Execution, How Firms Comply with Auditor Independence Requirements, Firms’ Quality Control Systems, and Technology. Below are examples of the suggested questions in each of these areas.
Fraud and Other Risks (five suggested questions). Example:
How have economic factors (e.g., supply chain disruption, inflation) influenced the auditor’s risk assessment for the current year’s audit?
This section also includes several questions that refer to the impact of the war in Ukraine on the audit.
Initial Public Offerings and Mergers & Acquisitions (two suggested questions). Example:
How has the auditor considered the accounting implications of the key provisions in the debt and equity instruments that are issued to founders, sponsors, and private and public investors? (As noted in Fueled by SPACs, Restatements Surge, June-July 2022 Update, SEC guidance concerning the accounting treatment of warrants issued by special purpose acquisition companies triggered numerous restatements last year.)
Both questions in this section relate to SPACs.
Audit Execution (three suggested questions). Example:
What is the audit firm doing to attract and retain talent to ensure that all engagement team members have appropriate levels of competency, degree of proficiency, training, and supervision?
How Firms Comply with Auditor Independence Requirements (two suggested questions). Example:
What are the audit firm’s policies or procedures for identifying, evaluating, and addressing any threats to independence that may impact the services provided to the company? What process is in place to ensure any regulatory independence violations are properly communicated to the audit committee?
As noted in Acting Chief Accountant Speaks Out on Auditor Independence, June-July 2022 Update, the SEC is currently emphasizing auditor independence issues, including audit committee oversight of independence.
Firms’ Quality Control Systems (three suggested questions). Example:
What are the open quality control criticisms in the nonpublic portion of the audit firm’s recent [PCAOB inspection] reports, and what are the audit firm’s plans to remediate those criticisms?
Technology (seven suggested questions). Examples:
What is the auditor’s view on management’s cybersecurity risk assessment approach, overall cyber assessment, and conclusions?
Are there any complexities (e.g., multiple systems) or concerns (e.g., data security) at the company preventing the use of technology by the auditor?
The Technology questions are grouped under three subheadings: Auditing Digital Assets, Responding to Cyber Threats, and Use of Data and Technology in the Audit.
Comment: The PCAOB’s suggestions are a useful starting point for a dialog with the auditor on these six important topics. In each area, additional questions would be easy to formulate, depending on the company’s specific circumstances. As the PCAOB points out, many of the suggested questions could also be posed to management as part of the audit committee’s oversight of the company’s financial reporting and internal controls.