PCAOB: Auditing Standards - Audit Risk, Audit Planning, ect.

Question 1

Standards covered in this section

Answer 1

A. PCAOB Auditing Standard No. 8, “Audit Risk”
B. PCAOB Auditing Standard No. 9, “Audit Planning”
C. PCAOB Auditing Standard No. 10, “Supervision of the Audit Engagement”
D. PCAOB Auditing Standard, No. 11, “Consideration of Materiality in Planning and Performing an Audit”
E. PCAOB Auditing Standard, No. 12, “Identifying and Assessing Risks of Material Misstatement”
F. PCAOB Auditing Standard, No. 13, “The Auditor’s Responses to the Risks of Material Misstatement”
G. PCAOB Auditing Standard, No. 14, “Evaluating Audit Results”
H. PCAOB Auditing Standard, No. 15, “Audit Evidence”

Question 2

Structural Differences

Answer 2

These PCAOB Auditing Standards are applicable to integrated audits of an issuer’s financial statements and the internal controls over financial reporting—in contrast these AICPA’s Statements on Auditing Standards focus solely on audits of non-issuers’ financial statements

Question 3

PCAOB Auditing Standard No. 8, “Audit Risk” –

Answer 3

1. Auditor’s objective—to conduct the audit of financial statements in a manner that reduces audit risk to an appropriately low level.
2. “Reasonable assurance” means reducing audit risk to an appropriately low level—the auditor must plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements due to error or fraud.
3. The auditor should assess the risks of material misstatement at two levels: (1) at the financial statement level (where the risk of material misstatement is pervasive and potentially involves many assertions); and (2) at the assertion level (where the risk of material misstatement involves inherent risk and control risk).

Question 4

PCAOB Auditing Standard No. 9, “Audit Planning”

Answer 4

1. Auditor’s objective—to plan the audit so that the audit is conducted effectively.
2. “Planning the audit includes establishing the overall audit strategy for the engagement and developing an audit plan, which includes, in particular, planned risk assessment procedures and planned responses to the risks of material misstatement. Planning is not a discrete phase of an audit but, rather, a continual and iterative process that might begin shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit.”
   a. Overall strategy—involves rather high level audit resource allocation issues involving the scope, timing, and direction of the audit (guides the development of the more specific audit plan).
   b. Audit plan—deals with the planned nature, timing, and extent of the risk assessment procedures, the tests of controls, the substantive procedures, and any other procedures required to comply with PCAOB standards.
3. Engagement partner responsibilities—”The engagement partner is responsible for the engagement and its performance. Accordingly, the engagement partner is responsible for planning the audit and may seek assistance from appropriate engagement team members in fulfilling this responsibility.”

Question 5

PCAOB Auditing Standard No. 10, “Supervision of the Audit Engagement

Answer 5

1. Auditor’s objective—to supervise the audit engagement so that the work is performed as directed and supports the conclusions reached.
2. The extent of supervision required varies with the engagement’s circumstances, including the size and complexity of the company, the nature of the work assigned to engagement personnel, the capabilities of each engagement team member, and the risks of material misstatement. (The extent of supervision should be commensurate with those risks.)
3. Engagement partner responsibilities—”The engagement partner is responsible for the engagement and its performance. Accordingly, the engagement partner is responsible for proper supervision of the work of engagement team members and for compliance with PCAOB standards, including standards regarding using the work of specialists, other auditors, internal auditors, and others who are involved in testing controls.”

Question 6

PCAOB Auditing Standard, No. 11, “Consideration of Materiality in Planning and Performing an Audit”

Answer 6

1. Auditor’s objective—to apply the concept of materiality appropriately in planning and performing audit procedures.
2. The auditor should plan and perform the audit to detect misstatement that, individually or in the aggregate, would result in material misstatement of the financial statements.
3. The auditor should use the same materiality considerations for planning the audit of internal control over financial reporting as for the audit of the financial statements.
4. The materiality level for the financial statements should be expressed as a specified amount to determine the nature, timing, and extent of audit procedures.
5. The auditor should determine tolerable misstatement for purposes of assessing risks of material misstatement at the account or disclosure levels.

Question 7

PCAOB Auditing Standard, No. 12, “Identifying and Assessing Risks of Material Misstatement”

Answer 7

1. Auditor’s objective—to identify and appropriately assess the risks of material misstatement, thereby providing a basis for designing and implementing responses to the risks of material misstatement.
2. The auditor should perform risk assessment procedures sufficient to provide a reasonable basis for identifying and assessing the risks of material misstatement and designing further audit procedures.
3. These risk assessment procedures should include (a) obtaining an understanding of the company and its environment; (b) obtaining an understanding of internal control over financial reporting; (c) considering information from the client acceptance/retention evaluation, planning activities, prior audits, and other engagements for the company; (d) performing analytical procedures; and (e) inquiring of the audit committee, management, and others within the company about the risks of material misstatement.
4. The auditor should begin by identifying and assessing the risks of material misstatement at the financial statement level and then work down to the significant accounts and disclosures and their relevant assertions.

Question 8

PCAOB Auditing Standard, No. 13, “The Auditor’s Responses to the Risks of Material Misstatement”

Answer 8

1. Auditor’s objective—to address the risks of material misstatement through appropriate overall audit responses and audit procedures.
2. Overall responses—the auditor should consider (a) making appropriate assignments of responsibilities based on capabilities of team members; (b) providing appropriate supervision; (c) incorporating a degree of unpredictability in planned procedures; (d) evaluating the company’s selection and application of significant accounting principles (especially in subjective areas); and (e) determining whether it is necessary to make pervasive changes to the nature, timing, and extent of audit procedures.
3. Responses involving the nature, timing, and extent of audit procedures - the auditor should address the assessed risks of material misstatement for each relevant assertion of each significant account and disclosure.
   a. There are two categories of audit procedures performed in response to the assessed risks of material misstatement: (1) tests of controls; and (2) substantive procedures.
   b. The auditor should perform substantive procedures that are responsive to any identified “significant risks” (including fraud risks).
   c. In responding to fraud risks, the auditor should address the risk of management override of controls by examining journal entries, reviewing accounting estimates for biases, and evaluating the business rationale for significant unusual transactions.

Question 9

PCAOB Auditing Standard, No. 14, “Evaluating Audit Results”

Answer 9

1. Auditor’s objective—to evaluate the results of the audit to determine whether the audit evidence obtained is sufficient and appropriate to support the opinion.
2. The auditor must reach a conclusion as to whether sufficient appropriate audit evidence has been obtained to support the opinion.
3. The auditor should consider all relevant audit evidence (whether it corroborates or contradicts the financial statements) and evaluate the following:
   a. The results of analytical procedures performed as the overall review.
   b. Misstatements (other than “trivial” ones) accumulated during the audit (with emphasis on uncorrected misstatements).
   c. The qualitative aspects of the company’s accounting practices, including potential for management bias.
   d. Conditions identified related to fraud risk.
   e. The presentation of the financial statements (including disclosures) relative to the applicable financial reporting framework.
   f. The sufficiency and appropriateness of the evidence obtained.

Question 10

PCAOB Auditing Standard, No. 15, “Audit Evidence”

Answer 10

1. Auditor’s objective—to plan and perform the audit to obtain appropriate audit evidence that is sufficient to support the opinion.
2. Sufficient appropriate audit evidence.
   a. Sufficiency relates to the QUANTITY of evidence required—the amount of evidence needed increases as the risk of material misstatement increases; the amount of evidence needed decreases as the quality of the underlying evidence increases.
   b. Appropriateness relates to the QUALITY of evidence, which involves (1) relevance and (2) reliability.
3. Financial statement assertions are factual representations that are implicitly or explicitly made by management—the PCAOB identified the five traditional financial statement assertions previously presented in a now-superseded Statement on Auditing Standards.
   a. Existence—that the assets or liabilities exist at a given date or that the recorded transactions have occurred during a given period.
   b. Completeness—that there are no omissions of transaction or accounts that should have been recorded.
   c. Rights and obligations—that the company has the rights to the assets and the obligations for the liabilities at a given date.
   d. Valuation or allocation—that the financial statement elements are presented at appropriate amounts relative to the applicable accounting framework.
   e. Presentation and disclosure—that the elements of the financial statements are properly classified, described, and disclosed relative to the applicable accounting framework.

Question 11

Note about differences for Auditing Evidence

Answer 11

The PCAOB’s discussion about these five traditional financial statement assertions is a relatively major difference compared to the AICPA’s Statement on Auditing Standards dealing with audit evidence. The SAS presents the discussion of assertions in three categories: (1) account balances at the period end (four assertions); (2) transactions and events during the period (five assertions); and presentation and disclosure (four assertions).

The Auditing Standards Board replaced an earlier SAS that had focused on the five traditional financial statement assertions in order to make U.S. auditing standards more consistent with International Standards on Auditing.

The PCAOB AS addressed the alternative treatments of assertions: “The auditor may base his or her work on financial statement assertions that differ from those in this standard if the assertions are sufficient for the auditor to identify the potential misstatements… “

Question 12

Summary of Differences

Answer 12

Summary of fundamental differences between the PCAOB risk assessment standards and the AICPA Auditing Standards Board risk assessment standards.
A. The PCAOB risk assessment standards apply to integrated audits of issuers (encompassing both the company’s financial statements and internal control over financial reporting), whereas the AICPA risk assessment standard apply solely to audits of non-issuers’ financial statements.
B. The PCAOB standards tended to provide a bit more specific guidance in certain areas (such as the engagement partner’s responsibilities) that were originally addressed in somewhat more general terms in the AICPA standards; however, the AICPA’s clarified auditing standards are now very similar to PCAOB auditing standards in these areas.
C. A more significant difference involves the treatment of “assertions” in their respective standards dealing with the topic of audit evidence - the PCAOB focuses on the five traditional financial statement assertions (as presented in an earlier SAS that has since been superseded in an attempt to align U.S. auditing standards more closely with international standards); the resulting current AICPA standard classifies 13 assertions into three categories: (1) account balances at the period end (for which there are four assertions); (2) transactions and events for the period (for which there are five assertions); and (3) presentation and disclosure (for which there are four assertions).