PCAOB Preparing New Rule for Audits of Accounting Estimates

http://ww2.cfo.com/auditing/2015/04/pcaob-preparing-new-rule-audits-accounting-estimates/

https://tax.thomsonreuters.com/media-resources/news-media-resources/checkpoint-news/daily-newsstand/proposal-may-issued-address-auditors-responsibility-accounting-estimates/

PCAOB Preparing New Rule for Audits of Accounting Estimates; The PCAOB staff plans to discuss auditors’ responsibilities for accounting estimates with the Standing Advisory Group in June.

Matthew Heller

April 9, 2015 | CFO.com | US

The Public Company Accounting Oversight Board is moving closer to proposing a comprehensive new standard for audits of accounting estimates in financial statements. Thomson Reuters reports that according to the standard-setting agenda the board updated on March 31, PCAOB staff is planning to discuss auditors’ responsibilities for accounting estimates with the Standing Advisory Group in June.

That discussion may help staffers as they work on a proposal the board plans to publish in the fourth quarter of 2015, Thomson Reuters said.

Accounting estimates in historical financial statements measure the effects of past business transactions or events, or the present status of an asset or liability. The auditor is responsible for evaluating the reasonableness of accounting estimates made by management in the context of the financials taken as a whole.

“While some accounting estimates may be easily determinable, others are inherently subjective or complex,” AccountingWebreported last year.

In August, the PCAOB issued for public comment a staff consultation paper on a new standard for auditing accounting estimates and fair value measurements. In their comments on the paper, Thomson Reuters said, the Big Four accounting firms “generally supported the development of a single standard on accounting estimates but said it may be difficult to develop a comprehensive solution for all firms and suggested providing application guidance” in part because different accounting estimates have different levels of complexity and risk.

According to Thomson Reuters, the board is also working on a related initiative to tighten auditors’ supervision of third-party specialists, such as appraisers, actuaries, and lawyers who provide information that is used in reviewing financial statements.

PCAOB officials and board inspectors are increasingly finding that audit firms mishandle their dealings with specialists and plans to issue a staff consultation paper in the second quarter to seek comments on the use of specialists and consider potential audit requirements, Thomson Reuters said.

Proposal May Be Issued to Address Auditors’ Responsibility for Accounting Estimates

April 7, 2015

PCAOB staffers are working on a proposed standard for audits of accounting estimates they hope to submit to the board in the fourth quarter of 2015.The proposal is likely to reflect the comments submitted in response to an August 2014 consultation paper and an upcoming June meeting of the Standing Advisory Group. The project is linked to the use of specialists and the risk assessment standards published in 2010.

The PCAOB staff is planning to discuss auditors’ responsibilities for accounting estimates with the Standing Advisory Group (SAG) on June 17-18, 2015, according to the standard-setting agenda the board updated on March 31.

The discussion may help staffers work on a proposal the board plans to publish in the fourth quarter of 2015.

PCAOB officials are considering a plan to write a comprehensive standard to replace AU Section 342, “Auditing Accounting Estimates,” (AU-C Section 540), and AU Section 328, “Auditing Fair Value Measurements and Disclosures” (AU-C Section 540) and replace some or all of the requirements in AU Section 332, “Auditing Derivative Instruments, Hedging Activities, and Investments in Securities,” (AU-C Section 500).

According to the agenda, the staff is analyzing comments submitted in response toStaff Consultation Paper: Auditing Accounting Estimates and Fair Value Measurements. The August 2014 document outlined numerous problems uncovered in audit firm inspections and laid out some potential changes.

Comment letters from the Big Four audit firms generally supported the development of a single standard on accounting estimates but said it may be difficult to develop a comprehensive solution for all firms and suggested providing application guidance.

The firms said different accounting estimates have different levels of complexity and risk.They advised the PCAOB to come up with a principles-based standard based on the risk assessment standards published in 2010 in Release No.2010-004 ,Auditing Standards Related to the Auditor’s Assessment of and Response to Risk and Related Amendments to PCAOB Standards.The release established a series of eight standards that range from Auditing Standard (AS 8) No. 8 ,Audit Risk, to AS 15 ,Audit Evidence.The board considers the standards particularly important when auditors are using specialized skills or knowledge.

Work on the estimates project is also being lined up with the initiative to tighten auditors’ supervision of third-party specialists, such as appraisers, actuaries, and lawyers that provide information that’s used in reviewing financial statements.

Auditors have increased their use of specialists to test the valuations in client financial statements in recent years.At the same time, PCAOB officials and board inspectors are increasingly finding audit firms that mishandle their dealings with specialists.

The board plans to issue a staff consultation paper in the second quarter to seek comments on the use of specialists and consider potential audit requirements.

If the project moves forward, the standard is also likely to be aligned it with the risk assessment standards

PCAOB inspectors have for years found recurring problems in auditing complex estimates, including fair value.The issue is enough of a concern that SEC commissioners, including Chair Mary Jo White, said the relevant standards should be updated so that auditors can do a better job assessing one of the most complex areas of financial reporting.

Specific guidance for the use of a specialist is found in AU Section 336, “Using the Work of a Specialist,” (AU-C Section 620).

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