At its public meeting on June 12, the Public Company Accounting Oversight Board adopted a previously proposed rule change affecting auditor liability and changes to its auditing standards regarding the use of technology in audits. The Board also proposed to replace the current auditing standard on substantive analytical procedures.
Contributory Liability. The Board adopted amendments to PCAOB Rule 3502, Responsibility Not to Contribute to Violations. Rule 3502 governs the liability in PCAOB enforcement actions of an associated person of a registered public accounting firm who directly and substantially contributes to the firm’s violations of the laws, rules, and standards that the PCAOB enforces. Previously, such a person would have to have acted at least recklessly to be charged. The Board lowered the liability threshold to negligence.
Designing and Performing Audit Procedures that Involve Technology-Assisted Analysis of Information in Electronic Form. The Board adopted amendments to AS 1105, Audit Evidence, and to AS 2301, The Auditor’s Responses to the Risks of Material Misstatement, and conforming amendments to other auditing standards. These amendments address the use of technology in audits, including designing and performing audit procedures that involve analyzing information in electronic form with technology-based tools. For example, according to the PCAOB’s press release, these amendments clarify that technology-assisted analysis can be used for such purposes as analyzing “a population of transactions as part of identifying risks of material misstatement or to perform, after identifying such risks, substantive procedures on all items within a population” and identifying “transactions and balances that meet certain criteria and warrant further investigation.”
Substantive Analytical Procedures. The Board issued for public comment a proposal to replace AS 2305, Substantive Analytical Procedures, with a new standard. Substantive analytical procedures involve comparing an amount recorded by the company to an expectation of that amount developed by the auditor to determine whether there is a misstatement. According to the PCAOB’s press release, the proposal is intended to “strengthen and clarify the auditor’s responsibilities when designing and performing substantive analytical procedures” and increase “the likelihood that the auditor will obtain relevant and reliable audit evidence.” Among other things, the proposal would enhance the requirements for determining “whether the relationships to be used in the substantive analytical procedure are sufficiently plausible and predictable,” preclude auditors from “develop[ing] their expectation using the company’s amount or information that is based on the company’s amount (so-called circular auditing),” and “strengthen and clarify existing requirements for determining when the difference between the auditor’s expectation and the company’s amount requires further evaluation.” The comment deadline on this proposal is August 12.
Audit committees may want to ask their engagement partner whether the technology-related auditing standard changes or the substantive analytical procedures proposal will have any impact on the company’s audit.
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