PCAOB staff spotlight on audit firms using the work of specialists

The Public Company Accounting Oversight Board (PCAOB) staff recently issued a spotlight outlining considerations for audit firms using the work of specialists. Auditors are encouraged to review these insights and incorporate them into their ongoing PCAOB engagements. The spotlight reviews relevant standard requirements and topics that include:

• Highlighting specific requirements from relevant standards
• Common deficiencies noted by the PCAOB related to using the work of specialists
• Reminders and good practices, and
• Relevant questions for audit committees

Reminder on relevant standards for using the work of specialists

The relevant standards applicable to using the work of a specialist are different based on the role of the specialist and depend on whether it is a company specialist, auditor-employed specialist or auditor-engaged specialist.

Highlighting specific requirements from relevant standards

For the three types of specialists, the spotlight highlights factors that affect the necessary evidence from the auditor’s evaluation of the specialist’s work. These include:

• The significance of the specialist’s work to the auditor’s conclusion and the risk of material misstatement in regards the relevant assertion(s), and
• The specialist’s knowledge, skill and ability (KSA)

For a company specialist, an additional factor to consider includes the company’s (i.e., the client) ability to significantly affect the specialist’s judgments about the work performed or conclusions reached. The spotlight also emphasizes that the focus of the auditor’s evaluation of the work of the company specialist does not require reperforming the work of the company specialist or evaluating whether the work complies with all technical aspects in the specialist’s field.

For auditor-employed and auditor-engaged specialists, the auditor needs to clearly inform the specialist regarding the work to be performed and their responsibilities. The intent of this requirement in the relevant standards is to enhance coordination between the auditor and the specialist.

Common deficiencies noted by the PCAOB related to using the work of specialists

The spotlight outlined common deficiencies noted by the PCAOB related to using the work of a specialist. Below are illustrative examples of deficiencies observed by the PCAOB staff:

• The auditor’s risk assessment did not consider information in the annual filings or other available information that is inconsistent with the auditor’s risk assessment and (or) company specialist(s) report;
• The auditor identified a risk of material misstatement associated with account balances, such as balances reported under fair value, that are estimated using a company specialist but did not perform appropriate controls testing and (or) substantive procedures to address the identified risk, including designing and implementing an audit response that addresses the risk;
• The auditor did not perform procedures to evaluate the work of the company specialist beyond inclusion of the company specialist report in the audit file;
• The auditor did not involve a specialist to assist in an area that the auditor does not have the knowledge, skill and ability (KSA) to perform appropriate procedures; and
• The auditor did not consider significant nonfinancial data produced by the company provided to the specialist (e.g., employee census data related to an actuarial calculation), and the related significant assumptions and methods used by the specialist to develop a financial estimate. In performing their audit procedures, the auditor did not test the completeness and accuracy of significant nonfinancial data produced by the company and used by the specialist.

Reminders and good practices

The spotlight also outlined good practices when using the work of a specialist. These good practices included, but were not limited to:

• Risk assessment: Assessing risk is a continual and iterative process that continues throughout the audit. Many auditors involve the audit firm’s specialists in this risk assessment process. In some cases, a firm may inventory all assumptions and methods and then document their risk assessment for each to ensure they have designed an appropriate response for those that are classified as significant;

• Coordination and supervision: Involving an auditor’s specialist early in the process facilitates clear coordination and adequate supervision. Effective coordination helps establish a clear division of responsibilities. The extent of supervision depends on:

  • The significance of the specialist’s work to the auditor’s conclusion and the risk of material misstatement in regards the relevant assertion(s), and
  • The specialist’s KSA

• Consistency: Some auditors check that risks identified or not identified by the auditor—or that that the auditor might be less knowledgeable about—are consistent with other available information such as annual filings, industry information, and the specialist’s report by creating a matrix document linking these items; and

• Contrary evidence: Auditors can create a matrix document that compares the significant assumptions, findings and conclusions of the company specialist to other comparable relevant assertions and information in the financial statements, including accompanying details. This comparison helps identify areas where the auditor may need to perform additional procedures to address differences.