PCAOB Releases Staff Guidance on External Audit Evidence

Chris Gaetano
Published Date:
Oct 7, 2021
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The Public Company Accounting Oversight Board (PCAOB) released new guidance on evaluating the relevance and reliability of audit evidence from external sources. The PCAOB said that, over the years, auditors have increasingly come to rely on information from external sources, especially nontraditional ones such as data aggregators and social media. 

In some situations, said the guidance, it is clear when external information is relevant and reliable, such as a year-end price of an actively traded equity security obtained from a stock exchange and used to compare to the company’s recorded price, which would ordinarily provide relevant audit evidence for testing the valuation assertion of financial asset holdings because the exchange price would represent the fair value of the instrument. 

In other situations, though, it is not so clear when external information is relevant, such as when  a company uses customer reviews of its products from a social media website to monitor customer satisfaction and identify any emerging quality issues. On the one hand, it could help an auditor’s understanding of how the company collects information about potential quality problems and identifies a need for changes to warranty reserves. On the other, it might not be relevant at all to the situation. In order to determine this, the auditor would need to further understand how closely the negative customer reviews are correlated with product returns or warranty claims, taking into consideration the company’s business, the industry and the nature of the company’s products.

The PCAOB said auditors need to consider: 

* The expertise or reputation of the external source; 
* The extent of regulatory oversight of the source; 
* The relationship of the external source to the company; 
* Whether the information has been originated, aggregated or adjusted by the external source; 
* Whether the information has been subject to review or verification; 
* Whether the auditor directly obtained the information; and 
* Whether the information was obtained through a complex process.

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