PCAOB proposes new requirements for use of specialists and accounting estimates

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The Public Company Accounting Oversight Board has issued a pair of new proposals: to strengthen its requirements for an auditor’s use of the work of specialists, and for auditing accounting estimates such as fair value measurements.

The first proposal aims to give investors more protections by toughening the rules for evaluating the work of a specialist employed or engaged by a company. It would require applying a risk-based approach to supervising and evaluating the work of a specialist who has been hired or engaged by the auditor.

Many companies employ or engage various types of specialists, such as engineers, to give them some information they need while preparing financial statements. The work of company specialists may be used as audit evidence. Auditors can also hire or engage their own specialists to help them find and analyze audit evidence.

The PCAOB is proposing to amend two of its existing standards, Audit Evidence (AS 1105) and Supervision of the Audit Engagement (AS 1201). It also wants to replace and retitle another PCAOB standard, Using the Work of a Specialist (AS 1210). The proposed changes aim to improve the auditor's ability to detect material misstatements in the financial statements and promote a single improved approach to supervising an auditor's specialists.

“Accounting estimates often represent the areas of greatest risk in an audit,” said PCAOB Chief Auditor and Director of Professional Standards Martin F. Baumann in a statement. "The proposal focuses auditors on estimates with greater risk of material misstatement, with particular attention to addressing potential management bias.”

The proposal is open for public comment through Aug. 30, 2017. A fact sheet is available here.

For the other proposal that came out Thursday, the PCAOB is asking for public comments on enhancing the requirements that apply when auditing accounting estimates, including fair value measurements. The PCAOB wants auditors to apply more professional skepticism and devote more attention to potential management bias when auditing accounting estimates. Accounting estimates have become more common and important as financial reporting frameworks change and necessitate more use of estimates, such as fair value measurements. However, auditing certain accounting estimates has proven to be a challenge for many auditors. PCAOB inspectors are continuing to find deficiencies at audit firms, both large and small, when auditing accounting estimates, raising concerns about auditors' level of professional skepticism and awareness of potential management bias.

“Accounting estimates are integral to financial statements, but often subjective and susceptible to management bias,” said PCAOB Chairman James R. Doty in a statement. “Enhancing the standards for auditing estimates will benefit investors by directing greater attention to this important area of the audit.”

The PCAOB is asking for public comment on its proposal by Aug. 30, 2017.

On Thursday, the PCAOB also approved a new standard containing some long-debated changes to the auditor’s reporting model (see PCAOB makes major changes to auditor’s report). Auditors will be required to include a discussion of “critical audit matters” and will need to disclose how many consecutive years they have audited a company, among other changes.

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