Auditors have new rules to follow in auditing accounting estimates and in relying on the work of specialists to arrive at audit opinions.
The Public Company Accounting Oversight Board adopted a long-awaited new standard that replaces three prior standards to bolster the approach auditors must take when scrutinizing accounting estimates, including fair value. The standard directs auditors to focus on estimates with greater risk of material misstatement.
Prodding auditors to apply more professional skepticism, the standard will compel auditors to pay closer attention to the potential for management bias in establishing estimates. The new standard also gives auditors more explicit direction on auditing fair values of financial instruments that are based on information provided by third-party pricing sources.
“The new standard is risk-based and scalable,” said PCAOB Chairman William Duhnke in a statement to support adoption. “It neither prescribes detailed procedures for the auditor to perform nor the extent of those procedures in each circumstance. Rather, it requires that the auditor respond to assessed risks and provides direction for testing estimates based on those risks. The new standard builds on our existing risk assessment requirements and focuses the auditors’ efforts on those estimates with greater risk of material misstatement.”
Where auditors rely on other third-party specialists to form their audit opinions, the PCAOB also adopted amendments to existing standards to strengthen requirements. The amendments distinguish between specialists employed by the auditor compared with those provided by the company whose financial statements and internal controls over financial reporting are being audited.
Both areas, particularly auditing accounting estimates, have commonly cropped up as trouble spots during PCAOB inspections of audit firms over the past several years. The board began exploring new rules in those areas as early as 2014.
The Securities and Exchange Commission must approve both rules before they can become effective. Both are scheduled to take effect for audits of financial statements for fiscal years ending on or after Dec. 15, 2020.
The SEC recently approved the 2019 budget of the PCAOB at $273.7 million, of which $228.5 million will be assessed to public companies. The remaining $34.4 will be assessed to broker-dealers, whose audits the PCAOB also oversees.