PCAOB Inspections This Year to Focus in Particular on Pandemic-Related Matters

By:
Chris Gaetano
Published Date:
Apr 7, 2021
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The Public Company Accounting Oversight Board (PCAOB) accounced that its inspections this year will focus in particular on financial reporting and audit risks posed by the COVID-19 pandemic, in light of the "substantial impact on preparers, auditors, audit committees, and others involved in the financial reporting process."

This focus will come into play in terms of both what firms the PCAOB chooses to inspect and what it will be looking at when it does. Audits selected for review will more likely be in industries that experienced significant disruptions due to the pandemic, such as transportation, entertainment, hospitality, manufacturing, certain parts of the retail sector and commercial real estate (including real estate investment trusts). Inspectors will concentrate on financial statement items and other reporting matters that have been particularly affected by the pandemic, such as impairments, going concern assessments, allowance for loan losses, and the increased risk of fraud.

The PCAOB will evaluate how auditors completed and documented procedures in compliance with its standards while dealing with factors such as remote work, time constraints, limited information availability and access to public companies' management. It will also focus on auditors’ compliance with the new requirements relating to auditing accounting estimates, and if applicable, the use of specialists

The PCAOB added that its inspections will include a higher number of custodial broker-dealers than in prior years, given the economic havoc that the virus has played.

The board also said that it will be slightly changing its inspection procedures to prevent them from becoming too predictable, which it said has become a problem over the years. With this goal in mind, while the board plans to perform the same number of inspections that it has in the past, it will select a greater number at random, especially for the largest firms. To the same end, the board will also change what it inspects in the first place, as when audits become too predictable, "firms are able to better anticipate areas to be inspected and place more audit emphasis on those areas, potentially at the risk of reducing attention to other important audit areas." Therefore, the board plans to increasingly select certain nontraditional financial statement areas for review, although it did not specify what those would be.

Beyond that, the PCAOB said it plans, generally, to look at how firms address audit areas with continued deficiencies (e.g. revenue, independence, internal control over financial reporting (ICFR)); firms’ quality-control systems; auditor independence; fraud procedures; critical audit matters; firms’ implementation of new auditing standards; and other areas, such as supervision of audits involving other auditors, responding to cyberthreats and auditing digital assets.

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