Earlier this year, I blogged about new auditor standards approved by the Public Company Accounting Oversight Board (PCAOB) – General Responsibilities of the Auditor in Conducting an Audit and A Firm’s System of Quality Control. These new standards only apply to audits conducted under PCAOB standards – financial statement audits conducted for SEC compliance purposes. Over at TheCorporateCounsel.net, Dave Lynn writes that
“…on September 9, the Commission will consider whether to approve a new quality control standard, QC 1000, A Firm’s System of Quality Control, and related amendments, as adopted by the PCAOB… The new standard will require all PCAOB registered firms to identify their specific risks and design a quality control system that includes policies and procedures to address those risks. The PCAOB’s announcement noted the following key provisions of the audit quality standard:
– The new standard strikes a balance between a risk-based approach to QC (which should drive firms to proactively identify and manage the specific risks associated with their practice) and a set of mandates (which should assure that the QC system is designed, implemented, and operated with an appropriate level of rigor).
– All PCAOB-registered firms would be required to design a QC system that complies with the new standard. Firms that perform audits of public companies or SEC-registered brokers and dealers would be required to implement and operate the QC system they design, monitor the system, and take remedial actions where policies and procedures are not operating effectively – creating a continuous feedback loop for improvement.
– Those firms would be required to annually evaluate their QC system and report the results of their evaluation to the PCAOB on new Form QC, which would be certified by key firm personnel to reinforce individual accountability.
– Firms that audit more than 100 issuers annually would be required to establish an external oversight function for the QC system, referred to as an External QC Function (EQCF), composed of one or more persons who can exercise independent judgment related to the firm’s QC system. In response to comments, the new standard clarifies that the EQCF’s responsibilities should include, at a minimum, evaluating the significant judgments made and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of its QC system.”
If approved, these new standards would only apply to financial statement audits, but offer a much needed improvement opportunity for other audit types, including sustainability/ESG audits and assurance engagements. Even if the QC improvements aren’t mandated, buyers of non-financial audit services would do well to ask their audit firms (and industry association audit mechanisms) how firm practices and procedures address QC risks and concerns the standard is intended to address.
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