PERSPECTIVES ON AUDIT QUALITY

Transcription

1 PERSPECTIVES ON AUDIT QUALITY December 2014 Page 1 LEARNING OBJECTIVES At the conclusion of this program, participants will be able to: Describe the PCAOB's and the auditor's respective roles in enhancing audit quality Cite current and continuing PCAOB areas of focus and project stages Identify potential opportunities to improve financial reporting structures and oversight Page 2 1

2 PRESENTERS Wendy Hambleton, National SEC Practice Leader, BDO USA, LLP Jay Hanson, Board Member, Public Company Accounting Oversight Board Amy Rojik, National Assurance Director, BDO USA, LLP Chris Smith, National Accounting & Audit Professional Practice Leader, BDO USA, LLP Page 3 AGENDA Setting a Tone for Audit Quality Perspectives on Audit Quality: Panel Discussion Economic Analysis Accounting and Auditing Cross-Over Audit Committee Outreach On the Horizon Q&A Resources Page 4 2

3 SETTING A TONE FOR AUDIT QUALITY PCAOB Overview and Emphasis on Audit Quality Page 5 DISCLAIMER The views I express are mine and do not necessarily reflect the views of the Board as a whole, other Board members, or members of the Board s staff. Page 6 3

4 PCAOB MISSION The PCAOB mission is to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports. The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection. Page 7 PCAOB FOUR MAIN RESPONSIBILITIES 1. Registration of public accounting firms that audit public companies or broker-dealers; 2. Inspections of registered public accounting firms; 3. Setting auditing standards for the audits of public companies and broker-dealers; and 4. Investigations and disciplinary proceedings in cases where auditors may have violated certain provisions of the securities laws or applicable standards or rules. Page 8 4

5 PCAOB AUDIT QUALITY INITIATIVES Root Cause Analysis Quality Control Standards Audit Committee Outreach Audit Quality Indicators Page 9 PERSPECTIVES ON AUDIT QUALITY Panel Discussion Page 10 5

6 ECONOMIC ANALYSIS JOBS Act Requirements PCAOB Staff Guidance issued Center for Economic Analysis Baseline and other important considerations Page 11 ACCOUNTING AND AUDITING CROSS-OVER: REVENUE RECOGNITION ASC 606 Revenue from Contracts with Customers issued in May 2014 A single, principle-based revenue standard for U.S. GAAP and IFRS that replaces almost all existing U.S. GAAP and IFRS guidance The new revenue standard aims to improve accounting for contracts with customers Effective o Public entities 12/15/2016 o Nonpublic entities - 12/15/2017 and interim periods within annual periods beginning after 12/15/2018 Refer frequently to BDO s Revenue Recognition Resource Center on BDO.com Page 12 6

7 ACCOUNTING AND AUDITING CROSS-OVER: REVENUE RECOGNITION PCAOB Staff Audit Practice Alert No. 12, Matters Related to Auditing Revenue in an Audit of Financial Statements Issued to highlight certain PCAOB auditing requirements related to significant auditing deficiencies observed by PCAOB inspection staff applicable to both planning and performing procedures PCAOB Alert 12: Page 13 ACCOUNTING AND AUDITING CROSS OVER: GOING CONCERN FASB ASU , Presentation of Financial Statements Going Concern Effective - 12/15/2016 Applies to all entities except those using liquidation method of accounting Management determines whether substantial doubt exists regarding going concern presumption. BDO Flash Report: Page 14 7

8 ACCOUNTING AND AUDITING CROSS OVER: GOING CONCERN PCAOB Staff Audit Practice Alert No. 13, Matters Related to the Auditor s Consideration of a Company s Ability to Continue as a Going Concern Issued in response to FASB ASU Auditors shall continue to follow existing auditing guidance*: PCAOB AU 341/ AU-C 570 *The PCAOB currently intends to issue a Staff Consultation Paper at end of 2014/early 2015 PCAOB Alert 13: Page 15 AUDIT COMMITTEE OUTREACH Initiative to enhance outreach began in 2012 Audit committees have a lot of responsibilities PCAOB shares common goals with audit committees Our goal: A dialog to better understand needs of audit committees and to share relevant information Page 16 8

9 AUDIT COMMITTEE OUTREACH: AUDIT QUALITY INDICATORS (AQIs) CAQ AQI Initiative Developed an approach for auditors to communicate potential AQIs that would be complementary to existing audit committee communications Potential AQIs are centered around: Engagement team knowledge, experience & workload Firm leadership & tone at the top Monitoring Auditor reporting BDO Flash Report: Page 17 AUDIT COMMITTEE OUTREACH: AUDIT QUALITY INDICATORS (AQIs) PCAOB AQI Initiative To inform PCAOB regulatory process and policy making with additional insight into the status and trends of audit quality Possibly provide ACs, investors, management, audit firms, other regulators, and the public with AQIs, providing insight into audit quality for there decisions and policy-making Provide firms with additional incentives to compete based on audit quality Page 18 9

10 EXAMPLES OF PROMISING AQIs Inputs Staffing leverage Partner workload Staff utilization Industry expertise Outsourcing to service centers Processes Tone at the top: survey of firm personnel Audit firm internal quality review results PCAOB inspection results Senior personnel compensation rewards for audit quality Results Frequency and impact of financial statement restatement for errors Timely reporting of internal control weaknesses Reasonable warning of going concern Material frauds discovered and reported Trends in Board and SEC enforcement proceedings 19 Page 19 AQI USES: POSSIBLE QUESTIONS Area Customers Unit of account Collection and dissemination Phasing and scoping Possible Questions Should engagement teams discuss AQIs with audit committees? Should the public receive AQIs? Audit industry? Audit firm? Audit engagement? Issuer industry? Who should collect and disseminate AQIs? Voluntary or mandatory? Should the provider of AQIs provide context? What are the drivers of costs and benefits? Should steps be phased-in over time? Should some audit firms or audits of some issuers be exempt? 20 Page 20 10

11 AUDIT COMMITTEE OUTREACH: RELATED PARTIES In June 2014, the Board adopted Auditing Standard No. 18 (AS 18), Related Parties, amendments regarding significant unusual transactions, and other amendments to PCAOB auditing standards. The standard and amendments address: Evaluating a company s identification of, accounting for, and disclosure of, relationships and transactions between the company and its related parties. Identifying and evaluating a company s significant unusual transactions. Obtaining an understanding of a company s financial relationships and transactions with its executive officers, as part of the auditor s risk assessment process. AS 18 will be effective for audits of F/S for fiscal years beginning on or after December 15, 2014, including reviews of interim financial information within those fiscal years. 21 Page 21 AUDIT COMMITTEE OUTREACH: INTERNAL CONTROLS Significant auditing deficiencies in audits of internal control that have been cited frequently in PCAOB inspection reports include deficiencies where the audit firm did not: Identify and sufficiently test controls that are intended to address the risks of material misstatement; Sufficiently test the design and operating effectiveness of management review controls that are used to monitor the results of operations; Obtain sufficient evidence to update the results of testing of controls from an interim date to the company's year-end (i.e., the roll-forward period); Sufficiently test controls over the system-generated data and reports that support important controls; Sufficiently perform procedures regarding the use of the work of others; Sufficiently evaluate identified control deficiencies. 22 Page 22 11

12 AUDIT COMMITTEE OUTREACH: FRAUD PCAOB Standing Advisory Group Meeting, Nov , 2014 Panelist presentations and SAG discussion The Auditor s Approach to Detecting Financial Statement Fraud Auditor Incentives and Behavior-Related Considerations Regarding Fraud Detection Lessons Learned from other Disciplines Auditor Knowledge and Skills regarding Fraud Detection 23 Page 23 ON THE HORIZON Page 24 12

13 AUDITOR S REPORTING MODEL OVERVIEW Background Auditor s Reporting Model -- key concepts Disclosure of critical audit matters Documentation of all matters that would appear to meet definition for disclosure, not just those actually disclosed Auditor tenure, independence, other clarifications Other information standard Read and evaluate performance standard (as opposed to read and consider ) for annual reports New reporting of results 25 Page 25 AUDITOR S REPORTING MODEL: CURRENT AND NEXT STEPS Public meeting held April Comment period ended May 2, 2014 Commenters expressed general support auditor s report more informative for users for making Investors: Supportive of CAM s but want more information on areas of high financial statement risk Companies and Audit Committees: concern that auditors should not be source of original information Auditors: reviews are mixed with large firms generally more supportive; firms suggest limiting communicated to audit committee CAM s to matters Next Steps: PCAOB Staff is currently analyzing comments and drafting reproposal for Board s consideration 26 Page 26 13

14 KEEPING CURRENT WITH PCAOB ACTIVITIES PCAOB Website PCAOB contact information - info@pcaobus.org Sign up for the PCAOB Updates service to receive a notification via describing significant new postings - Page 27 QUESTIONS & ANSWERS Page 28 14

15 RESOURCES Page 29 ADDITIONAL WEBINARS BDO Knowledge Upcoming Webinars: Quarterly Technical Update, Q January 8, 9, & 12 What s On the Minds of Boards January 14, 2015 Register at: BDO Knowledge Webinar Archives: Revenue Recognition Revenue Transition Group Topics Revenue Recognition: Overview of New ASU Quarterly Technical Update: Q Data Breach Essentials COSO 2013 Framework - Preparing for Implementation Page 30 15

16 BDO BOARD REFLECTIONS BDO Board Reflections Resource Center: Recent BDO Publications: FASB Flash Reports 2013 COSO Internal Control Integrated Framework Update on Implementation Considerations BDO Guide to Going Public BDO Board Reflections: Perspectives on Executive Succession Planning Cybersecurity Its Impact on the External Audit & Other Recent Developments Cybersecurity A Board Primer Private Company Council (PCC) Flash Reports Significant Accounting and Reporting Matters Guide For a complete listing of publications, refer to: Page 31 16