PCAOB Release No. 2018-006 Specialists - pcaobus.org

1 1666 K Street, NW. Washington, DC 20006. Telephone: (202) 207-9100. Facsimile: (202) 862-8430. ). AMENDMENTS TO auditing standards ) PCAOB Release No. 2018-006 . FOR AUDITOR'S USE OF THE WORK OF ) December 20, 2018. Specialists ). ) PCAOB Rulemaking ) Docket Matter No. 044. ). ). Summary: The Public Company Accounting Oversight Board (" PCAOB " or "Board") is adopting amendments to its auditing standards that strengthen the requirements that apply when auditors use the work of Specialists in an audit. The amendments are designed to increase audit attention in areas where a specialist is used and to align the applicable requirements with the PCAOB 's risk assessment standards .

2 Board Contacts: Barbara Vanich, Acting Chief Auditor (202/207-9363, ); Keith Wilson, Deputy Chief Auditor (202/207-9134, Lisa Calandriello, Associate Chief Auditor (202/207-9337, David Hardison, Associate Counsel (202/591-4168, Mamed Salmanov, Assistant Chief Auditor (202/207-9203, and Joon-Suk Lee, Senior Financial Economist (202/591-4460, ). PCAOB Release No. 2018-006 . December 20, 2018. Page ii Amendments: The Board is adopting amendments to its standards and auditing interpretations that: (1) Revise: AS 1105, Audit Evidence.))))

3 AS 1201, Supervision of the Audit Engagement;. AS 2101, Audit Planning;. AS 2110, Identifying and Assessing Risks of Material Misstatement; and AS 2505, Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments;. (2) Replace AS 1210, Using the Work of a Specialist, and retitle the standard as Using the Work of an Auditor-Engaged Specialist; and (3) Make additional conforming amendments. PCAOB Release No. 2018-006 . December 20, 2018. Page iii TABLE OF CONTENTS. I. Executive Summary .. 1 II. 5 A. Rulemaking History.

4 6 B. Overview of Existing Requirements .. 7 C. Existing Practice .. 10 D. Reasons to Improve auditing 18 III. Overview of Final Rules .. 23 IV. Economic Considerations .. 28 A. Baseline .. 29 B. Need for the Rulemaking .. 40 C. Economic 46 D. Alternatives Considered, Including Key Policy Choices .. 59 V. Special Considerations for Audits of Emerging Growth Companies .. 64 VI. Applicability to Audits of Brokers and 69 VII. Effective Date .. 70 APPENDIX 1: Amendments Relating to the Auditor's Use of the Work of Specialists APPENDIX 2: Other Related Amendments to PCAOB auditing standards APPENDIX 3: Additional Discussion of Amendments PCAOB Release No.

5 2018-006 . December 20, 2018. Page 1. I. Executive Summary The Board is adopting amendments to its standards for using the work of Specialists ( , a person or firm possessing special skill or knowledge in a particular field other than accounting or auditing ), including amendments to two existing auditing standards and the retitling and replacement of a third standard with an updated standard. The amendments are intended to enhance investor protection by strengthening the requirements for evaluating the work of a company's specialist, whether employed or engaged by the company, and applying a supervisory approach to both auditor-employed and auditor-engaged Specialists .

6 The amendments are also designed to be risk-based and scalable, so that the auditor's work effort to evaluate the specialist's work is commensurate with the risk of material misstatement associated with the financial statement assertion to which the specialist's work relates and the significance of the specialist's work to that assertion. These amendments should lead to more uniformly rigorous practices among audit firms of all sizes and enhance audit quality and the credibility of information provided in financial statements.

7 Companies across many industries use Specialists to assist in developing accounting estimates in their financial statements. Companies may also use Specialists to interpret laws, regulations, and contracts or to evaluate the characteristics of certain physical assets. Those companies may use a variety of Specialists , including actuaries, appraisers, other valuation Specialists , legal Specialists , environmental engineers, and petroleum engineers. Auditors often use the work of these companies' Specialists as audit evidence.

8 Additionally, auditors frequently use the work of auditors' Specialists to assist in their evaluation of significant accounts and disclosures, including accounting estimates in those accounts and disclosures. As financial reporting frameworks continue to evolve and require greater use of estimates, including those based on fair value measurements, accounting estimates have become both more prevalent and significant. As a result, the use of the work of Specialists also continues to increase in both frequency and significance.

9 If a specialist's work is not properly overseen or evaluated by the auditor, there may be a heightened risk that the auditor's work will not be sufficient to detect a material misstatement in accounting estimates. To address this challenge, the Board is amending its auditing standards that primarily relate to auditors' use of the work of Specialists . First, AS 1105, Audit Evidence, is being amended to add a new Appendix A that addresses using the work of a company's specialist as audit evidence, based on the risk-based approach of the risk assessment standards .

10 PCAOB Release No. 2018-006 . December 20, 2018. Page 2. New Appendix A of AS 1105: Supplements the requirements in AS 1105 for circumstances when the auditor uses the work of the company's specialist as audit evidence, including requirements related to: o Obtaining an understanding of the work and report(s), or equivalent communication, of the company's specialist(s) and related company processes and controls;. o Obtaining an understanding of, and assessing, the knowledge, skill, and ability of a company's specialist and the entity that employs the specialist (if other than the company) and the relationship to the company of the specialist and the entity that employs the specialist (if other than the company).