PCAOB Proposes Tighter Requirements for Audit Firms Verifying Outside Information About Clients
Dec. 20, 2022
The U.S. auditing watchdog’s proposal would mark the biggest change to the current rule since the PCAOB adopted it in 2003
The Public Company Accounting Oversight Board proposed tightening the requirements around how audit firms obtain and verify outside evidence about their clients, such as from customers and lenders, a process aimed at preventing fraud.
Under the current rule, audit firms must send out requests, typically electronically, asking a third party to confirm the accuracy of certain information, such as the amount of accounts receivable. Audit firms are allowed to assume that the lack of a response is a corroboration of accuracy. The process, known as confirmation, is part of nearly every audit.
The PCAOB now wants audit firms to go a step further by confirming the amounts of cash and cash equivalents held by third parties—typically lenders. Current rules don’t require this. Audit firms would no longer be able to rely solely on negative-confirmation requests, which involves seeking a response from third parties only if the stated amount is wrong, as that doesn’t provide sufficient audit evidence, the U.S. auditing watchdog said Tuesday.
Auditors would also be allowed to use certain alternatives to confirmation requests if the alternatives yield as much audit evidence as confirmation requests—for example, software that matches up a company’s records with cash receipts. The proposed rule would also prevent audit firms from using a company’s internal auditors to help select items for confirmation, send out the request or handle the responses. The goal is to make sure that internal auditors don’t manipulate the confirmation requests before they go out or the responses after they come back, PCAOB officials said.
The Public Company Accounting Oversight Board proposed tightening the requirements around how audit firms obtain and verify outside evidence about their clients, such as from customers and lenders, a process aimed at preventing fraud.
Under the current rule, audit firms must send out requests, typically electronically, asking a third party to confirm the accuracy of certain information, such as the amount of accounts receivable. Audit firms are allowed to assume that the lack of a response is a corroboration of accuracy. The process, known as confirmation, is part of nearly every audit.
The PCAOB now wants audit firms to go a step further by confirming the amounts of cash and cash equivalents held by third parties—typically lenders. Current rules don’t require this. Audit firms would no longer be able to rely solely on negative-confirmation requests, which involves seeking a response from third parties only if the stated amount is wrong, as that doesn’t provide sufficient audit evidence, the U.S. auditing watchdog said Tuesday.
Auditors would also be allowed to use certain alternatives to confirmation requests if the alternatives yield as much audit evidence as confirmation requests—for example, software that matches up a company’s records with cash receipts. The proposed rule would also prevent audit firms from using a company’s internal auditors to help select items for confirmation, send out the request or handle the responses. The goal is to make sure that internal auditors don’t manipulate the confirmation requests before they go out or the responses after they come back, PCAOB officials said.
[The Wall Street Journal]
