The Public Company Accounting Oversight Board staff issued a report Tuesday emphasizing the importance of casting a more critical eye when auditing a company’s financial statements.
The staff’s spotlight report reminds auditors of the need to critically assess their own firm’s capabilities and get a better understanding of the company they’re auditing. The report stresses the importance of performing audit work with due professional care and professional skepticism, especially at times when there are changes in economic conditions or other factors affecting the company.
The report comes at a time when uncertainty about the economy abounds as interest rates grow steadily, putting pressure on corporate America after a series of high-profile banking failures at Silicon Valley Bank and Signature Bank last month, the bankruptcy filing this week of retail chains Bed Bath & Beyond and David’s Bridal, and a series of layoffs in the tech and media industries.
“The application of professional skepticism — an attitude that includes a questioning mind — is critical to planning and performing high-quality audits and ensuring investors are protected,” said the report. “To apply professional skepticism effectively, auditors should have the necessary industry expertise and knowledge of the companies they audit. Although an auditor’s specialist can assist an auditor in various aspects of an audit, the auditor is required to have sufficient knowledge of the subject matter being addressed to properly supervise the engagement. Without the necessary expertise, firms should not accept such engagements.”
Before audit firms accept a new client or continue an existing relationship, the report suggests it’s critical to determine whether it already has in place or can get more capacity to plan and perform the audit in compliance with PCAOB standards.
“The auditor’s determination is informed, in part, by obtaining a sufficient understanding of the prospective or existing client’s business to an extent that enables the firm to make a reasoned assessment of the firm’s capacity to properly plan and perform the work,” said the report.
The report cites examples such as changes in a company’s operational strategy like investments in digital assets that might create new business risks and lead to changes to staffing and other resources like audit software in order to properly do the audit.
The process of gaining an understanding of a company’s business continues after a firm decides to accept an audit engagement.
“An audit engagement should be properly planned to be conducted effectively,” said the report. “Under PCAOB standards, audit planning involves establishing the overall audit strategy for the engagement and developing an audit plan, which includes risk assessment procedures and responses to risks of material misstatement.”