Introduction to Audit Oversight

Division of Registration & Inspections

Ronald Lahr, Associate Director

Juliann Ravas, Associate Director

December 6, 2017

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Disclaimer

The views expressed are those of the

speakers alone and do not necessarily

reflect the views of the Board, its members,

or staff.

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Topics

Division of Registration and Inspections

Overview

Registration Process

Inspection Process

Preplanning Activities

Planning Activities

Performing Inspection

Concluding Inspection

Reporting

Remediation

International Inspections

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Registration Overview

Registration is voluntary, but only firms that are registered with the PCAOB may conduct audits, or play a substantial role in audits, of:

Public companies that trade in U.S. markets

Public or nonpublic broker-dealers

Registration subjects firms to PCAOB oversight

This applies to domestic and foreign public accounting firms.

PCAOB has authority to inspect, investigate and discipline registered public accounting firms

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Registration Process

Registration application submitted electronically on Form 1

Registration Fee (generally $500)

Provisions for Non-U.S. Firms

Assertions of Legal Conflict Preventing Disclosure are Permitted

Certain Reduced Disclosure Obligations

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Registration Process

Board Review

Board Must Act on Each Application Within 45 Days After

Submission

Possible Outcomes of Board Review

Board Approves Application

Board Requests Additional Information on Application

Board Release 2010-007: Consideration of Registration

Applications from Public Accounting Firms in Non-U.S.

Jurisdictions Where There are Unresolved Obstacles to

PCAOB Inspections

Board Issues Notice of Hearing on Application

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Registration Process

Withdrawal from Registration

Electronic Submission of Form 1-WD

Content Highlights

Description of Ongoing Regulatory or Law Enforcement

Proceedings

Statement of Non-Participation in Audits

Possible Outcomes of Withdrawal Request

Withdrawal Becomes Effective Within 60 Days

Withdrawal is Delayed for up to 18 Months

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Registration Process

Support:

Email: Registration-Help@pcaobus.org

Telephone: (202) 207-9329

Statistics (as of 11/7/17):

1,936 Firms are Currently Registered

44 Registration Applications Have Been Disapproved *

1,565 Firms Registered and Subsequently Withdrew From

Registration

* Numerous other applicants have withdrawn applications in response to requests for additional information or after the Board had commenced a proceeding on possible disapproval.

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Annual and Special Reporting

Each registered firm must:

Pay an annual fee (generally $500) by July 31 of each year

File an annual report on Form 2 by June 30 of each year

Content Highlights:

Information about the firm’s practice as it relates to the registration requirement

Percentage of the firm’s total fees billed that is attributable to its issuer audit practice

Number of firm personnel

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Annual and Special Reporting (cont’d)

File a special report on Form 3 within 30 days after specific events occur Content Highlights:

Firm has withdrawn an audit report and the issuer has not reported that event to the U.S. Securities and Exchange Commission as required

Firm has become a defendant in a criminal proceeding prosecuted by a governmental criminal agency

Firm is the subject of a proceeding filed in bankruptcy court

Name or location of the firm’s primary contact to the PCAOB has changed

Registration scheme also allows a firm, under specific circumstances, to file a Form 4 to succeed to the registration status of a registered firm

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Availability of Information Concerning

Registration and Reporting

Registration, annual and special reports are available

on the PCAOB website

pcaobus.org Registration & Reporting

Form 1-WD is not publicly available

Annual and special reports are available to the public

soon after being filed

Confidential treatment may be requested for certain

information contained in forms

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Inspection Program Overview

Inspection Programs

Global Network

Firms

Non-Affiliate Firms

Broker-Dealer Firms

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Division of Registration and Inspections

(Overview)

Purpose of an inspection

Assess the compliance of the firm, and its associated persons,

with the Sarbanes-Oxley Act of 2002 (the “Act”), the rules of the

Board and the Securities and Exchange Commission (“SEC”),

and U.S. professional standards

Primary focus in inspections of issuer auditors

Firm’s system of quality control, and

Issuer audit engagements performed by the firm (including

referred work engagements)

Inspection methodology and approach are scaled

appropriately to size and complexity of firms/issuers

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Inspection Process

Topics

Preplanning Activities

Planning Activities

Performing Inspection

Concluding Inspection

Reporting

Remediation

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Inspection Process (Preplanning Activities)

Selection of firms for inspection

Considerations/firm attributes

Annually inspected firms (> 100 issuers)

Triennially inspected firms (100 or fewer issuers)

Whether the firm is an affiliate of a Global Network

Number of issuer audit engagements, including number of issuers

assigned to each partner

Nature of the firm’s issuer audit engagements (e.g., industry, size

and complexity)

Amount of referred work engagements, including substantial role

Number of years since the prior PCAOB inspection

Special inspections may be authorized by the Board or

requested by the SEC at any time

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Inspection Process (Preplanning Activities)

Coordination with foreign regulators, if applicable

Determine whether inspection will be conducted jointly with

foreign regulator or as a PCAOB-only inspection

If joint inspection

Schedule planning call with foreign regulator inspection staff

Request most recent inspection report of foreign regulator related

to firm to be inspected

Determine level of reliance, as determined by the Board, that

may be placed on a non-U.S. inspection under PCAOB Rule

4012

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Inspection Process (Planning Activities)

Selection of audit engagements to inspect

Gain understanding of the firm’s issuers, substantial-role, and referred work engagements subject to inspection by reviewing

Issuer Information Form prepared by the firm An Excel spreadsheet that includes all issuers, substantial-role and referred

work engagements (PCAOB Exhibit C)

Results of research conducted by Economic Risk and Analysis (“ERA”)

Publicly available information such as Form 20-Fs, Form 10-Ks, and other SEC filings, issuer website, and press release information

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Inspection Process

(Planning Activities)

Selection of audit engagements to inspect

Focus on higher risk audits

Inspection teams identify higher risk audits by considering, among others

Issuer size (market capitalization, revenues, assets)

Financial condition

Complex transactions

Restatement activity

Previous inspection results

Select combination of issuers and referred work engagements, including substantial role

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Inspection Process

(Planning Activities)

Selection of engagement focus areas

Focus on higher risk audit areas by considering, among others

Risk indicators identified by ERA

The level of complexity, judgment, and materiality of the areas

Unusual transactions or activities

Material weaknesses reported by the firms

Previous inspection results

Areas covered by relatively new accounting or auditing

pronouncements

Areas most likely to have audit quality issues

Areas involving the use of specialists or other auditors

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Inspection Process

(Performing Inspection)

Coordination with foreign regulator (joint inspections) Consistent with Statement of Protocol

Inspection team sizes vary but generally consist of five to 10 inspectors

Inspection fieldwork generally varies between two to six weeks

Each inspection focuses on a review of a firm’s quality control system and issuer audit engagements

Quality control system procedures Addressed through interviews and selected evaluation and

testing procedures

Affiliate of a Global Network

Non-affiliate firm

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Inspection Process

(Performing Inspection)

Eight quality control areas examined Tone at the top

Practices for partner evaluation, compensation, admission, promotion, assignment of responsibilities and disciplinary actions

Independence

Client acceptance and continuance

Internal inspections program (Monitoring Program)

Practices for establishment and communication of audit policies, procedures, and methodologies, including training

The supervision by firms’ audit engagement teams of the work performed by other auditors (including affiliates and non-affiliates of the firm)

Consultations

Note: Depending on specific facts and circumstances, additional areas may be considered

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Inspection Process

(Performing Inspection)

Inspecting engagements

Objectives

Assess the auditor’s compliance with applicable laws, rules, and standards in its audit work in the inspected focus areas

Quality of the work performed and the related documentation in specific areas

Understand and assess the knowledge, ability, and skills of the firm’s engagement teams

Whether the work performed was appropriately supervised and reviewed

Determine whether the results of the reviews indicate deficiencies in the design or operation of the firm’s system of quality control over audits

Review selected focus areas in considerable depth

Interview those who performed and reviewed the work, including staff level professionals and specialists, such as tax, IT, valuation (i.e., not partners and managers only)

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Inspection Process (Performing Inspection)

Inspecting engagements

Certain additional engagement specific procedures

Review other aspects of the engagement, including but not limited to

Audit committee communications (issuer audit engagements only)

Assess whether engagement team is making the required communications

regarding the conduct of the audit to those who have responsibility for

oversight of the financial reporting process

Risk of fraud

Assess whether engagement team reviewed nonstandard journal entries

and performed other procedures to detect any incorrect, unauthorized or

inappropriate entries that may materially misstate the financial statements

and to detect evidence of possible material misstatement due to fraud

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Inspection Process (Performing Inspection)

Inspecting engagements

Certain additional engagement specific procedures

Review other aspects of the engagement, including but not limited to

Audit Findings

Assess whether engagement team, in concurring with the client’s decision not

to record potential audit adjustments, gave appropriate consideration to both

quantitative and qualitative aspects of materiality

Assess whether engagement team communicated all potential and recorded

audit adjustments to the principal auditor (referred work engagements only,

including substantial-role)

Substantial-role and referred work engagement audit documentation and communication (referred work engagements only, including substantial-role)

Assess whether engagement team received, reviewed, and appropriately

responded to communications from the principal auditor

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Inspection Process

(Concluding Inspection)

Prepare and issue comment forms

Written document to formally communicate inspection

observations to the firm

Content of comment forms (three primary sections – facts,

issue, and firm response)

Facts surrounding the identified matter

Procedures performed by firm and documented in work papers, as

appropriate

Description of nature and significance of identified deficiency with a

focus on specific accounting principle or auditing standard involved

Firm’s response and remedial actions, if any

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Inspection Process

(Concluding Inspection)

Review foreign regulator report

Analyze findings in foreign regulator report and determine need

for additional inspection procedures, such as

Including findings in PCAOB inspection report, as appropriate, if not

previously known or evaluated

Re-evaluating overall inspection conclusions to determine whether

systematic audit performance or quality control issues exist that

were not otherwise identified through the PCAOB inspection

procedures

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Inspection Process

(Concluding Inspection)

Assemble inspection documentation

Finalize documentation and assemble inspection working

papers/files

Planning

Quality control system procedures

Engagement specific procedures

Administrative procedures and supervision

Notes of interviews with firm leadership

Notes of interviews and meetings with audit engagement team

Copies of selected work papers related to identified issues

Inspection documentation should provide

Nature and timing of inspection procedures performed

Who performed the work and when

Who reviewed the work

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Inspection Process

(Concluding Inspection)

Evaluate firm responses to comment forms

Upon receipt of responses

Evaluate responses

Complete a “comment disposition form”

Summarize impact, if any, on identified deficiency

Conclude as to whether comments should be

Included in report as a specific issuer comment

Included in report as a quality control comment

Excluded from report

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Inspection Process (Concluding Inspection)

Prepare draft inspection report

Inspection team prepares draft inspection report

Several layers of review within PCAOB

Factual accuracy of report scrutinized

Firm's response to comment forms reviewed again

Inspection report may not include all comment forms

Inspection observations reworded

New observations

Quality control deficiencies

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Inspection Process (Reporting)

Report components

Part I (public) – Contains description of inspection procedures and certain observations

Part II (non public) – Contains detailed discussion of inspection results, including

Concerns related to the firm’s system of quality control, if any were identified

Other audit performance issues

Part III (non public) – Contains post inspection procedures

Part IV (can include public and nonpublic content) – Contains response of the firm to draft inspection report

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Inspection Process

(Reporting)

Issue draft inspection report and evaluate responses

Firm has 30 days to respond to draft report

Firm's responsibility to ensure response received within the 30-day

period

Another opportunity to respond to the inspection observations

Can impact the inspection report

Firm response treated similar to inspection report

Firm’s entire response becomes part of inspection report

Firm can designate portions of response that it requests be public

and portions that it requests be nonpublic

Contact person provided in transmittal letter

No draft responses accepted

Confidentiality requests

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Inspection Process

(Reporting)

Issue final inspection report

Report presented to the Board

After review completed, the report is submitted for the Board’s

consideration

The Board issues the final report

Public part of report, including the public portion of a firm’s

response, is posted on the web site, full report is transmitted to

U.S. SEC

State regulatory authorities in any state where the firm is licensed (if the

firm is licensed domestically)

Board transmits to each firm a copy of the full report of that

firm’s inspection

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Inspection Process (Remediation)

Remediation of quality control defects

PCAOB Release No. 104-2006-077, The Process for Board Determinations Regarding Firm’s Efforts to Address Quality Control Criticisms in Inspection Reports (March 21, 2006)

Staff Guidance Concerning the Remediation Process (Nov. 18, 2013)

PCAOB Rule 4009

Firm may submit evidence or otherwise demonstrate that it has

improved its quality control systems, and remedied such defects no

later than 12 months after the issuance of the Board's final

inspection report

If the firm satisfactorily addresses criticisms or defects in the quality

control system, the Board shall provide notice of that determination

to the SEC and to any appropriate state regulatory authority

The Board shall notify the firm of its final determination

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Inspection Process (Remediation)

Remediation of quality control defects

The portions of the Board's inspection report that deal with

criticisms of or potential defects in quality control systems that

the firm has not addressed to the satisfaction of the Board shall

be made public by the Board

Upon the expiration of the 12-month period if the firm fails to make

any submission

Upon the expiration of the period in which the firm may seek SEC

review of any board determination, if the firm does not seek SEC

review of the Board determination

In the event the firm does seek SEC review, upon any decision by

the SEC sustaining the Board’s determination

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Inspection Process (Remediation)

Common remedial actions taken by firms

Modifications to audit methodology

Revisions to audit program guides, work paper templates, and the

development of other tools and practice aids

Additional training provided to partners and staff

Modifications to firm-wide policies and procedures

Increased monitoring

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International Inspections (Non-U.S. Inspections of Registered Firms)

The PCAOB has conducted inspections of one or more registered firms located in the following non-U.S. jurisdictions:

1 Argentina 18 Hungary 35 Panama

2 Australia 19 India 36 Papua New Guinea

3 Bahamas 20 Indonesia 37 Peru

4 Belize 21 Ireland 38 Philippines

5 Bermuda 22 Israel 39 Russian Federation

6 Bolivia 23 Italy 40 Singapore

7 Brazil 24 Jamaica 41 South Africa

8 Canada 25 Japan 42 Spain

9 Cayman Islands 26 Kazakhstan 43 Sweden

10 Chile 27 Republic of Korea 44 Switzerland

11 Colombia 28 Luxembourg 45 Chinese Taipei (Taiwan)

12 Denmark 29 Malaysia 46 Thailand

13 Finland 30 Mexico 47 Turkey

14 France 31 Netherlands 48 Ukraine

15 Germany 32 New Zealand 49 United Arab Emirates

16 Greece 33 Nicaragua 50 United Kingdom

17 Hong Kong 34 Norway

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International Inspections

PCAOB only – performed solely by PCAOB inspection teams

Joint inspection – executed jointly with home country

regulator’s independent inspectors (may not be practicing auditors)

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International Inspections (Joint Inspection with Home Country Regulator)

Rule 4012 allows the PCAOB to rely upon the inspections work of a home-country regulator

Degree of Reliance depends upon

Independence and rigor of home-country system of oversight; and

Discussions between the PCAOB and home-country regulator on

inspection programs

Not a “check-the-box” approach

Will look at the structure and operation of the system as a whole

Criteria listed in Rule 4012 are illustrative, not exhaustive

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International Inspections (Rule 4012 - Independence and Rigor)

Five principles

Adequacy and integrity of the system

Independence of the system from the accounting profession

Independence of the funding of the system

Transparency of the system

Enforcement record, if not premature

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International Inspections (SOX Amendment – Confidential Information Sharing)

Strict confidentiality requirements in original Sarbanes-Oxley Act previously did not permit PCAOB to share confidential information with non-U.S. audit regulators

PCAOB formally requested Congress to amend SOX; amendment included in Dodd-Frank Wall Street Reform and Consumer Protection Act passed in July 2010

Amendment permits PCAOB to share confidential information (e.g. inspection findings) with non-U.S. regulators subject to:

Non-U.S. regulator must have jurisdiction over firm at issue

PCAOB must determine sharing of information is necessary to accomplish purposes of SOX or to protect investors

Non-U.S. regulator must provide:

Assurances of maintaining confidentiality of shared information

Description of its laws relating to information access

Description of applicable information systems / controls

Board must determine that it is appropriate to share information

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Questions

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Stay Connected

Stay Connected with the PCAOB:

Website: www.pcaobus.org

Twitter: @PCAOB_News

LinkedIn: PCAOB

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