Audit regulators are refining their proposed standard that would raise the bar on how audit firms supervise outside auditors, asking for a new round of public comment on some planned changes.

The Public Company Accounting Oversight Board issued a revised proposal that would amend some existing standards and introduce an entirely new standard, all intending to establish more specific requirements for how auditors supervise other auditors outside the principal firm who assist with engagements. The board is asking for a new round of public comment before finalizing the rule and submitting it to the Securities and Exchange Commission for its consideration and approval.

It’s not uncommon for a U.S.-based firm performing a U.S.-based audit to rely on auditors in other jurisdictions to perform some portion of a financial statement audit. Often firms rely on overseas affiliates, for example, to perform audit work at subsidiaries or divisions of U.S. parent companies located in those offshore locations.

Through its inspection process, the PCAOB has learned firms take different approaches to supervise such work, some putting more effort into overseeing that work than others as inspectors have called out problems with those types of audits. The board’s original proposal in 2016 contemplated a new standard to govern the division of audit responsibility across separate firms while also amending existing standards on audit supervision, audit planning, audit documentation, and engagement quality reviews. 

The PCAOB says its original proposal drew general support but also a number of questions that suggested the language could use some modification or clarification. Questions surrounded issues like the lead auditor’s participation and the outside auditors’ qualifications, the communication between auditors and supervision of multiple tiers of auditors, the division of responsibility especially when audits involve different financial reporting frameworks, as well as documentation and post-audit reviews.

James Doty, chair of the PCAOB, says the proposal directs the lead auditor’s supervisory responsibilities to the areas of greatest audit risk, consistent with existing risk assessment standards. The proposal would direct the lead auditor's supervisory responsibilities to the areas of greatest risk, consistent with our risk assessment standards. It would also require more communication by the lead auditor, as well as a more robust evaluation of the other auditor's qualifications and work,” he said during an open meeting to issue the new proposal.

The new round of comment is focused on changes to strengthen existing requirements for the lead auditor's involvement in the work of other auditors and to establish a more uniform approach to a lead auditor's supervision of other auditors, said Doty.

“Inspections have reviewed engagements that are not well managed, and where work performed by other auditors does not meet the objectives of that auditor's role in the audit,” he said. “The proposed refinements are intended to clarify what, in my view, is a risk-based and scalable approach to improving the quality of audits involving other auditors.”

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