Rule Field Test Foretells Crunch in Closing the Audit
Field testing of a proposed expansion of the auditor’s report suggests the new requirements will produce a new crunch in the closing phase of the audit, and auditors will need some additional guidance to assure they focus on the most significant issues that need to be addressed.
The Center for Audit Quality presented the findings of its field study to the Public Company Accounting Oversight Board, which wants to require auditors to include in their audit report some information about what they see and do during the course of the audit. The proposal would require auditors to disclose “critical audit matters,” or those issues where auditors encountered the greatest difficulty in reaching their audit conclusions.
The CAQ field test determined auditors will need to ramp up audit activity primarily during the wrap-up phase of the audit after going through the audit to determine what the CAMs actually were and how they should be communicated and reported. “This could occur at a time when auditors, management and audit committees are focused on a number of other issues in connection with a particular filing, and the finalization of CAM communications may delay, or cause distractions in, the resolution of these issues,” wrote Cindy Fornelli, executive director of the Center for Audit Quality, in her report to the PCAOB. She’s suggesting the PCAOB take a close look at the costs and benefits of the proposal given the added audit effort it will require as critical filing deadlines approach.
The field test also determined auditors would benefit from more explicit guidance in the proposed standard to direct auditors to focus on materiality in determining what might constitute a CAM or potential CAM to disclose and explain. The study found big spreads in the number of CAMs that different auditors would identify on different engagements, with potential CAMS ranging from 1 to 45 and actual CAMs numbering zero to eight.
The test also led the CAQ to conclude that auditors searching for possible CAMs should be directed to narrow their focus on issues that are communicated to the audit committee to make the exercise more effective and more efficient. The results show audit engagement teams determined that 98 percent of all the CAMs ultimately identified during the course of the field testing were issues that had previously been communicated to the audit committee. The CAQ says auditors will benefit from some clarification around how to effectively communicate factors that were most important to determining that a particular matter was in fact a CAM, which might help promote consistent application of the final standard.
The CAQ says it is supportive of the PCAOB’s efforts to update the auditor’s reporting model, which it believes will have a significant impact on capital markets. “Certain enhancements would make the PCAOB proposal more practical and better aligned with the board’s stated objectives,” said Fornelli in a statement.
The field test involved participation of public company accounting firms of various sizes, the CAQ said, to gather first-hand observations about the effects of the proposal and perspectives on the time and effort that may be involved in implementation. Field testing of the proposal as it relates to CAMs included 51 companies representing diverse industries and market capitalizations.
Source: comlpianceweek
