PCAOB and Standards

Question 1

PCAOB 5 primary responsibilities

Answer 1

1. Registration of public accounting firms
2. Inspections of registered public accounting firms
3. Standard setting
4. Enforcement
5. Funding

Question 2

What did Title I of SOX do?

Answer 2

Gave the PCAOB standard setting authority

Question 3

What did Title II of SOX do?

Answer 3

Established independence requirements (5 year rotation, services can’t provide, no taking management positions, etc)

Question 4

What did Title III of SOX do?

Answer 4

Made management take responsibility for the financials and make it illegal to influence the audit

Question 5

What did Title IV of SOX do?

Answer 5

Enhanced financial disclosures, including those about internal controls

Question 6

How often must audit firms be inspected?

Answer 6

Annually if more than 100 issuers (clients) and every three years if smaller

Question 7

What documentation requirements does Standard No. 3 have?

Answer 7

1. Documentation to support engagement complied with PCAOB standards
2. Documentation to support basis for auditor’s conclusions regarding each financial statement assertion
3. Documentation that shows how the accounting records reconcile with the financials

It’s okay for some documentation to be kept in a central repository for the firm

Additional requirements include keeping records for 7 yrs, having records be complete and final within 45 days after report release date, and not deleting any records after this documentation completion date

Question 8

What are the requirements put in place by Standard No. 4 regarding reporting on whether a material weakness continues to exist?

Answer 8

NOT a requirement to do this

If you do, management has a number of requirements:

1. accepting responsibility for IC effectiveness over reporting
2. evaluating effectiveness of controls that address the weakness
3. asserting that the controls identified are achieving their objective
4. supporting these statements with evidence and documentation (including a written report)

Question 9

Standard No. 5 details the requirements for auditing internal controls. What are the parts of the report on internal controls?

Answer 9

Combined report on controls and financials: Introduction, scope, definition, inherent limitations, and opinion

Separate report - add reference paragraphs in each report that references the other report

Question 10

What requirements does Standard No. 6 put in place regarding evaluating the consistency of financial statements?

Answer 10

Change in accounting principle:

1. make sure principle is GAAP
2. the accounting for the change is consistent with GAAP
3. disclosures related to the change are adequate
4. co justified that the new method is preferable

Add an explanatory paragraph to the auditor’s report if a material misstatement in prior year’s statements was corrected

Question 11

What requirements does Standard No. 7 put in place regarding evaluating engagement quality reviews?

Answer 11

1. Associated person conducts review (objective, if from firm they should be a partner but don’t have to be if from another firm, competent enough that they could have served as engagement partner, two year cool off period if audited that client before)
2. Discuss significant assumptions and conclusions with engagement partner and review documentation
3. Fail review if team failed to obtain sufficient appropriate evidence, reached an inappropriate overall conclusion, created an inappropriate report, or is not independent

Question 12

How do the PCAOB financial statement assertions differ from the assertions presented by SAS?

Answer 12

The PCAOB focuses on the five traditional financial statement assertions ; the resulting current AICPA standard classifies 13 assertions into three categories: account balances at the period end (4 assertions); transactions and events for the period (5 assertions); and presentation and disclosure (4 assertions)

PCAOB

1. Existence
2. Completeness
3. Rights and Obligations
4. Valuation or allocation
5. Presentation and disclosure

Question 13

What requirements does Standard No. 16 put in place regarding communication with the audit committee?

Answer 13

(1) communicate to the audit committee the auditor’s responsibilities regarding the audit and establish an understanding of the terms of the audit engagement with the audit committee
(2) obtain information from the audit committee relevant to the audit
(3) communicate to the audit committee information about the strategy and timing of the audit
(4) provide the audit committee with timely observations about the audit that are significant

Question 14

What topic does Standard No. 17 address?

Answer 14

Auditing supplemental information - generally common sense requirements

Question 15

What topic does Standard No. 18 address?

Answer 15

Related party transactions - also generally common sense requirements

Question 16

What types of control deficiencies might an auditor find?

Answer 16

Deficiency in design - improperly designed to meet objective
Deficiency in operation - not operating as designed

These could lead to either a material weakness (IC not effective) or significant deficiency (less serious than a material weakness)

Question 17

When auditing internal controls, what approach is appropriate per Standard No. 5?

Answer 17

a top-down approach that starts with financial statement assertions and then works backwards