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PCAOB interim analysis on critical audit requirements

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Public Company Accounting Oversight Board (PCAOB) has issued a report that provides an overview of the initial impact of disclosing critical audit matters (CAM) on key stakeholders. CAM communications are considered to inform investors and other financial statement users about matters that require especially challenging, subjective, or complex auditor judgment and the auditor’s response to those matters.

Key findings from the staff analysis
The staff of the PCAOB’s Office of Economic and Risk Analysis has performed several studies to gain an initial understanding of audit firm and audit engagement team responses to the CAM requirements, investor use of CAM communications, and audit committee and preparer experiences related to CAM implementation and their key findings are as follows:

  • Auditing firms have made significant efforts to support implementing the initial CAM requirements.
  • CAMs communicated in the auditor’s report is in the development stage but still beneficial for many investors.
  • The analysis report pointed out that extensive preliminary preparations, including the pilot programs and dry run programs carried out by the audit firms, provided the issuer with an overall smooth experience.
  • Among participating partners who responded to the PCAOB staff’s survey, more than one-third reported that the issuer made changes to disclosures of financial statements or other company reports due to CAM. As a result, it will be part of the post-implementation follow-up review to explore CAM’s impact on company disclosures further.
  • Some investors who responded to PCAOB staff surveys stated that they used CAM to better understand auditors’ work and the company’s disclosures. However, PCAOB staff pointed out that the full benefits of CAM communications for investors may take longer to be realized (for example, as investors become more aware of CAM and comparative CAM data becomes available between issuers and over time).
  • Another concern is that, due to the additional effort required to determine, communicate, and document CAMs, auditors would take longer to issue their reports; initial CAM implementation is associated with an increase in the time to publish audit reports.

Why is this important?
As per AS 3101, The auditor’s report on financial statements when the auditor expresses an unqualified opinion, including the implementation of the requirement for auditors to report CAM, is the most significant change in auditors’ reports in 70 years. The interim analysis report and technical documents are part of PCAOB’s continuous assessment of the overall impact of CAM requirements on the main stakeholders in the audit process. 

Despite the PCAOB’s basic view that it has found no significant casual consequences from achievement of the CAMs  necessity for large accelerated filers, there still are several potential consequences that organizations should monitor as these requirements come into result for all the other companies during this coming year-end.  PCAOB expects additional costs related to increased time needed to prepare and review the information provided in the CAMs. In addition, auditors may choose to perform more audit procedures related to areas reported as CAMs (even though the attestation requirements in those areas did not change due to the addition of CAM disclosure), with a resulting cost implication for both auditors and issuers.

It it also interesting to see if the items describes as CAMs are used by the SEC as a guide in developing questions presented in comment letters to registrants, and how that dynamic, if personified, impacts the attorney-auditor-client interactions in drafting and issuing securities filings. Likewise, the PCAOB may assemble CAM data as a source of input for determining the  scope of its inspections process, although CAMs reported to data involvefinancial reporting risk areas well known to the PCAOB.

What’s next?
PCAOB expects to publish more reports in 2022 to provide insights on any changes observed by staff in CAM communications and to provide information on the initial impact of CAM conveyed in smaller issuers’ audit reports. Since some effects of CAM requirements can take several years to fully manifest, the PCAOB expects to issue a more comprehensive post-implementation review in 2024.

AJSH is registered with PCAOB, USA and assists its clients with providing audit and assurance services for over a decade to various clients in the United States, including broker-dealers. We serve different broker-dealer firms registered in the United States w.r.t their audits under Rule 17a-5 under the Securities Exchange Act of 1934 (FINRA Audit). If you have any questions or wish to know more about interim analysis on critical audit requirements of PCAOB, kindly contact us.


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