Auditing and Assurance

Discuss the changes to the audit reporting model.

 

 

Public Company Accounting Oversight Board proposed (PCAOB) various changes in the auditor’s report. These changes are proposed by PCAOB to make the report more reliable source for the investors. After the financial crises, investors need more explanation on every decision of the company. In August 2013 board of PCAOB make necessary proposals in the model of auditor’s report. These standards are proposed by PCAOB with a objective of providing more information to investors, so that investors can take sound decisions.

PCAOB proposed two new standards of auditing which are:

• Proposal to provide more information by auditor on “critical audit matters” was proposed by the PCAOB.
• Proposal to review and evaluate other information by auditor was proposed by the PCAOB (PCAOB, 2013).

Proposal related to critical audit matters was accepted, and this proposal requires the explanation in the audit report regarding the critical audit matters which arise at the time of audit. CMA are those matters which are arise at the time of audit of financial statements and required to be communicated to the audit committee and any matter related to:

• Accounts and any other matter which are important for the financial statements.
• Any matter which are challenging and complex in nature (PCAOB, 2016).

Many new requirements were introduced by the board for this proposal which includes:

1. Many new important components are added in the definition of a matter which is critical in nature.
2. Critical audit matters include only those matters which are challenging and complex in nature.
3. Explanation was given in the report which mentions how these critical audit matters are explained in the report.
4. Change the requirement of documents for this proposal (PCAOB, 2016).

PCAOB also suggest some other improvements in the auditor’s report which not only clear the confusion related to role and responsibility of the auditor in case of financial audits but also state the information related to auditor, such as:

• Statement related to independence of auditor.
• Statement related to tenure of auditor.
• Statement in which auditor’s address his report to the shareholders and directors of the company.

These standards proposed by PCAOB include many changes, because of which auditor’s report become more specific to the audit of the company. These standards are mainly adopted by the audits which are conducted under PCAOB standards. These standards are not applicable on those audits of dealers which are required to report under the Securities Exchange Act of 1934 Rule 17a-5 (PCAOB, 2016). Many organizations support the PCAOB efforts such as Center for Audit Quality (CAQ) also support the proposals made by PCAOB. Executive director of CAQ said that proposal for expanding the auditor’s reporting was a right move. Fornelli further said that the most important components of audit model were to provide information by auditor on “critical audit matters” to the committee.

Weakness of the model

Board member of CAQ, Lewis Ferguson said that these proposals preserve the role of management. According to Ferguson disclosure of financial information and other information is the management’s duty. This proposal will lead to confusion in the role and responsibility of auditor. Other board members said that these proposals were create trouble because of additional information related to tenure, independence of auditor (Journal of Accountancy, 2016).

With the help of this proposal PCAOB try to make changes from the pass/fail model which was used from many years. These proposals are designed in such a way so that auditor’s can review the work of other auditors, and also find deficiencies in the audit work. These proposals impose various duties on the lead auditors.

Proposed changes in model

Changes proposed by PCAOB model have many limitations because proposed changes want many more disclosures in the auditor’s report on which auditor’s have to apply their own judgment. PCAOB also proposed to make disclosure regarding CAM without communicating to the management, which increase the chances of fraud committed by management.

These changes are proposed by the business person, but generally these reports are mostly used by the investors. Therefore, it is necessary that investor’s opinion must be taken before making these changes.

 The PCAOB are also proposing new standards that are AS1206, which focus on the responsibilities of lead auditor such as:

• Lead auditor is responsible to obtain information from other auditor, whether other auditor have license under the laws applied to that country or not.
• Lead auditors have to mention the name of the auditor in their report.
• Confirm that the other auditor who play important role in the preparation of report is associated with the PCAOB or not (Ken Tysiac, 2016).

References:

PCAOB, (2013). PCAOB Proposes a New Auditing Standard to Enhance the Auditor's Reporting Model. Retrieved on 25^th September 2016: https://pcaobus.org/News/Releases/Pages/08132013_OpenMeeting.aspx.

PCAOB, (2016). PCAOB Reproposes Standard to Enhance the Auditor’s Report for Investors with Refined Requirements for Critical Audit Matters. Retrieved on 25^th September 2016: https://pcaobus.org/News/Releases/pages/pcaob-reproposes-auditors-report-051116.aspx.

PCAOB, (2016). Fact Sheet: Auditor's Reporting Model Reproposal. Retrieved on 25^th September 2016: https://pcaobus.org/News/Releases/Pages/Fact-Sheet-Reproposal-Auditors-Report-051116.aspx.

PCAOB, (2016). PCAOB Release No. 2016-003 May 11, 2016. Retrieved on 25^th September 2016: https://pcaobus.org/Rulemaking/Docket034/Release-2016-003-ARM.pdf.

Journal of Accountancy, (2016). PCAOB refines auditor’s reporting model proposal. Retrieved on 25^th September 2016: http://www.journalofaccountancy.com/news/2016/may/pcaob-refines-auditors-reporting-model-201614421.html.

Ken Tysiac, 2016. PCAOB proposal would guide lead auditors in supervision of other auditors. Retrieved on 25^th September 2016: http://www.journalofaccountancy.com/news/2016/apr/pcaob-other-auditors-standard-201614218.html.