Accounting standard setters have recently taken further action to improve communication between auditing firms and the audit committees of client companies. The Public Company Accounting Oversight Board (PCAOB) has previously noted its concern over how auditors report to audit committees. The unease is a consequence of PCAOB determinations that many audits have lacked the diligent application of procedures outlined in CPA study.
External audit firms have not been required to discuss with audit committees any deficiencies uncovered in the audit by the PCAOB. But, a newly approved audit standard by the PCAOB clarifies the interaction between auditors and audit committees. The aim of this measure is for audit committees to pressure auditors into compliance with effective auditing techniques plainly described in CPA exam courses. Until now, communication between audit committees was referred to as incidental for an audit.
The new PCAOB initiative makes communication essential for audits. Among the directives for auditing firms are establishing that audit committees – instead of company management – understand the terms of an audit engagement. Auditors are also instructed by the new standards to deliver audit committees with an overview of audit strategy, explanation of the people involved in the audit, plus information about audit analysis of the company’s accounting practices, risks, and unusual transactions.
The scope of this communication gives audit committee members the knowledge about audit purpose discovered by accountants from study for CPA licensing. Audit committees thus obtain a superior understanding of auditor conclusions about financial reporting and other factors relating to the company’s status.
The US Securities and Exchange Commission must approve the new PCAOB standard for it to become effective with company audits of fiscal periods beginning after December 15, 2012. The PCAOB strongly believes the new policy provides audit committees with a clear picture of audit execution that accountants have learned in CPA preparation courses.
Open discussions with auditors bring audit committees out of the dark about exactly what the auditing process entails. This renders leverage for audit committee members to thoroughly question the audit scope as well as results.
By focusing on communication as a significant matter, auditors must raise their ability beyond the technical audit skills contained in CPA exam study courses. Auditors are becoming obliged to effectively describe audit strategy and the risks associated with the audit process. This allows audit committees to fulfill their responsibilities on behalf of investors in public companies. Most important to the PCAOB mission is the expectation that improved exchange between auditing firms and audit committees will result in more effective audits.
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