The Public Company Accounting Oversight Board is closing in on a proposed new audit standard governing engagement quality reviews by accounting firms.That standard, which appears on track to be advanced during 2006, is part of an ambitious agenda of audit standard-setting activities for the coming year that was outlined by PCAOB staffers during a recent meeting of the board's Standing Advisory Group.
In asking the advisory panel for guidance on implementing the board's ambitious agenda, PCAOB chief auditor Douglas R. Carmichael said that projects on the priority list for 2006 might lead to new rules governing how auditors deal with financial fraud, interact with corporate audit committees and implement independence quality controls.
At the top of Carmichael's list, however, was the PCAOB's effort to design new standards governing the conduct of engagement quality reviews of audits.
These procedures, also known as "concurring" or "second-partner" reviews of audits, have been on the board's standards-setting priority list for much of 2005, and PCAOB rule-makers have already made "substantial progress on a proposed new standard" in this area, Carmichael said.
Engagement quality reviews are designed to improve the quality of individual audits, and during the past year the PCAOB inspections of audit firms have given the board fresh insight into how these reviews are being conducted now by large CPA firms.
In requesting its SAG's assistance in drafting the standard, Carmichael said that the board would be particularly interested in information from the group on how engagement quality reviews are handled by smaller accounting firms.
Financial fraud continues to be a priority for the PCAOB, and Carmichael said that the board would be moving to strengthen existing audit standards addressing this problem.
"We believe we can enhance auditor performance in fraud detection by making changes to the existing interim standards, which include direction to the auditor on various specific areas such as revenue recognition and significant unusual accruals," he told SAG members.
Rather than establishing an entirely new standard for fraud detection by auditors, the board plans to amend existing rules in key areas such as auditing related-party transactions and the appropriate use of the confirmation process, he explained.
"We will also consider whether the existing standard adequately describes the auditor's responsibilities under the federal securities laws," and will examine how an auditor's consideration of the risks of fraud relate to the concept of "reasonable assurance," Carmichael said.
Additionally, the PCAOB plans to do some tweaking of the current standards on communications between auditors and audit committees. These changes are needed to bring the existing ground rules into compliance with new requirements for audit committee communications imposed by the Sarbanes-Oxley Act, board officials explained.
The oversight body is seeking input from audit committee chairmen about how auditors and committees communicate today. The Standing Advisory Committee - a panel of experts from industry, government, the investment community and the accounting profession that was created to assist the board in creating new standards for auditors - will be asked for recommendations on how these current practices should be reflected in the existing auditing standard.
Still another PCAOB agenda item resulting from Sarbanes-Oxley compliance involves strengthening the existing requirements governing audit quality control. In addition to focusing on the supervision of audit work, professional development and advancement of audit personnel, and the monitoring of professional ethics, this project may also result in the development of separate standards on independence quality controls.
"A major source of information for us in the area of quality control comes from our inspections process, and we are incorporating information gained from inspections to assist us in this area," Carmichael said.
Significantly, Carmichael conceded that not every item on the board's ambitious agenda is likely to be addressed with final standards by the end of next year, and he urged the advisory panel "to assist the PCAOB in prioritizing standards-setting activities."
