The Public Company Accounting Oversight Board (PCAOB) will pay increased attention to how auditors are addressing changing risk landscapes because of the current economic environment during its 2022 inspections.
The PCAOB signaled its plan as part of a spotlight document released June 30. The organization will continue to focus on audit areas with continued deficiencies—e.g., revenue recognition, accounting estimates, and internal control over financial reporting—in addition to tailoring its inspections to reflect areas of heightened volatility during the relevant period.
Increased attention during 2022 inspections will be paid toward widespread disruptions in supply chains and other continued negative effects of the Covid-19 pandemic, increased volatility in financial and commodity markets because of fluctuations in interest rates and inflationary trends, and heightened staff turnover at audit firms. The PCAOB will also scrutinize audits involving initial public offerings and mergers and acquisitions (i.e., special purpose acquisition companies) for fraud risks and potential independence violations.
The organization acknowledged it will select for inspection audits of public companies in industries that “inherently pose higher audit risks due to the complexity and judgmental nature of the financial statement accounts and related internal controls.” These include banking, energy, and information technology.
Regarding supply chain and Covid-19 risks, the PCAOB said it will focus on how auditors address unreasonable assumptions affecting the timing and amount of revenue recognition, complexities regarding existence and valuation of inventory, and business uncertainties that might affect a public company’s ability to continue as a going concern. For staff turnover, the PCAOB wants to ensure audit firms have implemented policies and procedures to assign professionals with appropriate qualifications to audit engagements and will prioritize selecting engagements where the lead engagement partner is new to the engagement to verify.
The PCAOB also noted the need for auditors to remain aware of developments regarding Russia’s invasion of Ukraine and the potential for resulting economic issues that could affect more companies.
The PCAOB in November released the results of its 2020 inspections for the largest U.S. audit firms, including the Big Four.