Update for Audit Committee Members

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UPDATE FOR AUDIT COMMITTEE MEMBERS Jay D. Hanson, PCAOB Board Member Webcast for Financial Executives International August 8, 2013 4

Disclaimer The views I express are mine and do not necessarily reflect the views of the PCAOB, other Board members, or members of the Board s staff. 5

PCAOB Overview The PCAOB has four basic functions under the Act: Registration and reporting of accounting firms Inspections of firms and their audit engagements Annual and triennial inspections issuers Interim program brokers and dealers Investigation and disciplinary proceedings Establishing auditing, quality control, ethics, independence, and other standards 6

Information for Audit Committees About the PCAOB Inspection Process* PCAOB cannot share non-public portions of reports with audit committees or others; cannot force auditors to share information Beyond the public portion of the report, voluntary disclosure by the auditor is an audit committee s only means of obtaining information Release explains PCAOB process and Board view on certain frequent firm responses; proposes questions audit committees may want to pose to auditors Preparers also may be affected: Auditor may need to do more audit work to respond to deficiency (AU sec. 390); Questions may be raised about the fairness of the financial statements or the adequacy of the disclosures; or PCAOB communicates issuer specific information to SEC 7 *Board release issued Aug. 1, 2012

AS 16 -- Communications with Audit Committees 8 The Board adopted Auditing Standard No. 16, Communications with Audit Committees, on August 15, 2012. The new standard was effective for public company audits of fiscal years beginning on or after Dec. 15, 2012. New requirements anchored to an existing requirement for a communication or an audit procedure AS 16 title is Communications with Audit Committees -- goal is effective two-way communication between auditor and audit committee Certain new required communications, but standard does not preclude the auditor from providing additional information to the audit committee

AS 16 -- Communications with Audit Committees cont d The objectives of the auditor are to: Communicate to the AC the responsibilities of the auditor in relation to the audit and establish an understanding of the terms of the engagement with the AC; Obtain information from the AC relevant to the audit; Communicate to the AC an overview of the overall audit strategy and timing of the audit; and Provide the AC with timely observations arising from the audit that are significant to the financial reporting process. Understanding re. audit services must be with audit committee (consistent with SOX); written engagement letter required 9 Timing communications before issuance of audit report

10 AS 16 -- Communications with Audit Committees cont d Communications required regarding: Company s accounting policies, practices, and estimates; Auditor s evaluation of the quality of the company s financial reporting; Significant unusual transactions Significant accounting or auditing matters where management consulted with other accountants Additional inquiries of audit committee re. matters relevant to the audit, including violations or possible violations of laws or regulations New communication requirements regarding significant aspects of audit, including e.g. audit strategy, specialized skills, consultations, going concern, etc.

Inspection Observations - Impact Review compliance with laws, standards and rules in engagements; review firm quality control systems To help firms improve audit performance and quality control Inform PCAOB risk analysis for future inspections issuer, industry, audit area, firm, office, partner Inform PCAOB staff audit practice alerts Inform PCAOB standard setting 11

Inspection Observations - ICFR* Testing controls re. risk of material misstatement Testing design and operating effectiveness of management review controls Testing controls from an interim date to the company s year-end (the roll-forward period) Testing controls that depend upon systemgenerated data and reports Procedures regarding the use of the work of others *Observations from 2010 Inspections of Domestic Annually Inspected Firms Regarding Deficiencies in Audits of Internal Control over Financial Reporting, Dec. 10, 2012 12

Inspection Observations Triennial Firms* Revenue Internal control testing Estimates: Fair value Reserves and asset impairments Allowance for loan losses Substantive analytical procedures Equity transactions Use of specialists *Report on 2007-2010 Inspections of Domestic Firms that Audit 100 or Fewer Public Companies, Feb. 25, 2013 13

Standard Setting Agenda* Recent Actions: Framework for Reorganization of PCAOB Standards analyzing comments. Related Parties re-proposed; comment period ended July 8, 2013 July to December 2013 Auditor s Reporting Model proposal expected soon Auditors' Responsibilities with Respect to Other Accounting Firms, Individual Accountants, and Specialists proposal expected Audit Transparency: Identification of the Engagement Partner and Other Public Accounting Firms or Persons that are Not Employed by the Auditor but Participate in the Audit adoption or re-proposal expected Possible July to December 2013 Audits of Brokers and Dealers (timing dependent on SEC) adoption or re-proposal expected Going Concern proposal expected 14 *As of June 30, 2013

Standard Setting Agenda, cont d Other Active Projects Quality Control Standards, Including Assignment and Documentation of Firm Supervisory Responsibilities -- concept release expected Auditing Accounting Estimates, Including Fair Value Measurements and Related Disclosures proposal expected Auditor Independence, Objectivity, and Professional Skepticism next steps under consideration Confirmation re-proposal expected 15

Auditor Independence and Audit Firm Rotation On August 16, 2011, Board issued a concept release to solicit public comment on ways that auditor independence, objectivity, and professional skepticism could be enhanced, including through mandatory rotation of audit firms. The concept release invited commenters to respond to specific questions, including, for example, whether the Board should consider a rotation requirement only for audit tenures of more than 10 years or only for the largest issuer audits. The concept release also seeks comment on whether there are other measures that could meaningfully enhance auditor independence, objectivity, and professional skepticism. Board has held three round tables (DC, San Francisco, Houston); will evaluate comments and consider need for and scope of potential measures to enhance independence, objectivity, professional skepticism 16

Auditor s Reporting Model On June 21, 2011, Board issued a concept release on possible changes to the auditor s reporting model. Followed extensive outreach by staff of the Office of the Chief Auditor from October 2010 through March 2011 with investors, auditors, preparers, audit committee members, and others. The concept release discusses four alternatives for changing the auditor s reporting model: Auditor s discussion and analysis Required and expanded use of emphasis paragraphs Auditor assurance on other information outside the financial statements, and Clarification of language in the standard auditor s report) Board hosted a roundtable on September 15, 2011 to discuss the alternatives in the concept release. Comment period ended September 30, 2011; over 150 comment letters received. Board is evaluating comments, monitoring IAASB developments, and developing proposed standard (proposal expected soon) 17

Other Activities Board Near Term Priorities Inspection reports Remediation Audit quality indicators Audit Committee outreach Economic Analysis 18

Questions?

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