PCAOB on communications with audit committees

Question 1

What are the four objectives of the auditor related to communications with audit committees that are identified in PCAOB auditing standards?

Answer 1

1. )Communicate responsibilities and establish an understanding of the engagement’s terms.
2. )Obtain information from the audit committee relevant to the audit.
3. )Communicate information about the strategy and timing of the audit.
4. )Provide the audit committee with timely observations about significant audit matters.

Question 2

What specific matters should be communicated to the audit committee about the auditor’s evaluation of the quality of financial reporting?

Answer 2

1. )Qualitative aspects of significant accounting policies
2. )Assessment of critical accounting policies and practices
3. )Conclusions about critical accounting estimates
4. )Significant unusual transactions (and the business rationale)
5. )Conformity with the applicable financial reporting framework
6. )New accounting pronouncements affecting financial reporting
7. )Alternative accounting treatments discussed with management

Question 3

Describe the PCAOB requirements as to the timing of the auditor’s communications with an entity’s audit committee.

Answer 3

The required matters should be communicated on a timely basis, and prior to the issuance of the auditor’s report.

Question 4

What is the meaning of the term “critical accounting estimate”?

Answer 4

An accounting estimate where (1) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (2) the impact of the estimate on financial condition or operating performance is material.

Question 5

What four matters should be communicated to an issuer’s audit committee related to the entity’s accounting policies, estimates, and significant unusual transactions?

Answer 5

1. )Significant accounting policies and practices
2. )Critical accounting policies and practices (and why they are considered critical)
3. )Critical accounting estimates (and management’s processes and significant assumptions)
4. )Significant unusual transactions (outside the normal course of business)

Question 6

Describe the PCAOB requirements as to the form of the auditor’s communications with an entity’s audit committee.

Answer 6

The communications may be oral or in writing, unless otherwise specified. For example, an engagement letter is obviously a written communication.

Question 7

What is the meaning of the term “critical accounting policies and practices”?

Answer 7

A company’s accounting policies and practices that are both most important to the portrayal of the company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain