Fact Sheet: PCAOB Proposal for Audits Involving Other Auditors
The Public Company Accounting Oversight Board is proposing amendments to certain existing standards to strengthen the current requirements and impose a more uniform approach to the lead auditor's supervision of other auditors, and a new auditing standard for situations in which the lead auditor divides responsibility for the audit with another firm.
The Board's proposal will be open for public comment through July 29, 2016.
Background and Reasons to Improve Existing Requirements for Audits Involving Other Auditors
Many companies have significant operations around the world. When auditing a multinational company, a lead auditor often needs participation of other firms or individual accountants to complete the audit.
The use of other auditors is especially prevalent among audits of larger companies performed by larger accounting firms. PCAOB data indicate that other auditors are used in about 55 percent of audits performed by U.S. global network firms (GNFs) and about 30 percent of audits performed by non-U.S. global network affiliate firms.
Additionally, about 80 percent of Fortune 500 audits performed by U.S. global network firms involved other auditors, according to a PCAOB analysis of data from Audit Analytics and Standard & Poor's.
Work performed by other auditors can account for a significant share of the audit.
In audits involving other auditors selected by the PCAOB for inspection, other auditors on average audited between one-third and one-half of the total assets and total revenues of the audited company.
Without adequate supervision by a lead auditor, deficiencies in the work of other auditors can result in deficient audits.
While many auditors properly supervise the use of other auditors, PCAOB inspectors have found that other firms need to strengthen their practices. Inspectors have identified audit deficiencies in the work of other auditors that the lead auditors did not identify or address.
What is Being Proposed?
In brief, the Board's proposal would make the following changes to existing PCAOB auditing standards:
- Amend AS 1201, Supervision of the Audit Engagement to provide additional direction to a lead auditor on how to apply AS 1201's principles-based supervision provisions to supervision of other auditors. The proposed amendments would prescribe certain procedures to be performed by the lead auditor in supervising other auditors' work.
- Amend AS 2101, Audit Planning to incorporate and update requirements of current standard, AS 1205, Part of the Audit Performed by Other Independent Auditors, to specify that they be performed by a lead auditor in an audit that involves other auditors. For example, the proposal would incorporate and revise requirements for determining a firm's eligibility to serve as lead auditor in an audit that involves other auditors.
- Amend AS 1215, Audit Documentation to require that a lead auditor properly document which specific work papers of other auditors the lead auditor has reviewed, but not retained.
- Amend AS 1220, Engagement Quality Review to require explicitly that the engagement quality reviewer evaluate the engagement partner's determination of a firm's eligibility to serve as lead auditor.
The Board is also proposing a new standard – AS 1206, Dividing Responsibility for the Audit with Another Accounting Firm.
- The proposed new standard would retain, with modifications, many of the requirements of AS 1205, including the requirement that a lead auditor disclose in its audit report which portion of the financial statements was audited by each other auditor.
- Proposed AS 1206 includes new requirements that a lead auditor:
- Obtain a representation from each other auditor that the other auditor is duly licensed to practice under the applicable laws of the relevant country or jurisdiction.
- Determine whether each other auditor that would play a substantial role in the preparation or furnishing of the lead auditor's report is, or is required to be, registered with the PCAOB.
- Disclose the name of the other auditor in the lead auditor's report.
AS 1205, Part of the Audit Performed by Other Independent Auditors, would be superseded by the proposed amendments and proposed standard.
 GNFs are the accounting firms around the world that are members of the six largest networks of accounting firms.