The PCAOB oversees every audit of the broker-dealers, such as compliance reports established to pursue the federal securities law to enhance the protection of investors. The PCAOB set auditing standards in different ways, such as setting standards that relate to the profession (Johnson, 2015). The vital information captured in this context includes independence, ethics, quality control, auditing, and other measures. Currently, the PCAOB has developed 17 new auditings with some independence rules and individual ethics.
The other aspect is that PCAOB registers public accounting organizations that prepare an audit for broker-dealers, public companies, and every firm listed by the United States exchanges. In 2014, about 2300 accounting organizations registered with PCAOB, which included at least 900 non-US organizations from 86 countries.
The PCAOB set auditing standards by conducting audits' inspections by registered companies. PCAOB did about 220 reviews in 2013, which entailed inspecting audits by organizations in other 22 foreign countries (Johnson, 2015). The other alternative is by imposing sanctions on audit firms and audits as well as conducting disciplinary proceedings.
Registering Public Accounting Organization
PCAOB encourages every firm to disclose to issue or prepare audit reports for another issuer, public company, or broker to play specific auditing. The PCAOB offers audit services to help the firms see deeper and further their operations and businesses.
Conducting Inspection by Registered Organization
More than 1800 public accounting organizations are registered with PCAOB, such as non-US and US organizations. The PCAOB performs periodic and regular inspections of about a hundred organizations. The Sarbanes-Oxley Act gives the PCAOB the right to inspect any registered firms for monitoring compliance with specific professional standards, rules, and law as that deals with the audit work of the firms for issuer's clients as stated in the act (AICPA, 2020). Also, it includes the audit work of the firm for customers who are securities dealers or brokers. Registered firms under PCAOB do not necessarily operate such functions as they are not covered under PCAOB's statutory scope.
Firms that do not conduct audit works for dealers, brokers, and dealers have numerous reasons for registering with PCAOB. In other instances, regulators enact laws that make an individual subject to the jurisdiction. However, the laws provide the PCAOB-registered organization with an opportunity to perform for specified services that are not related to dealers, brokers, and audits (Johnson, 2015). Currently, the organization that does not conduct audit work for dealers, brokers, or issuers registers with PCAOB to advance to a better competitive edge for future businesses that need registration.
Regularly, the PCAOB inspects an organization that provides audit reports opening on the issuer's statements. However, the actual number inspected by the PCAOB regularly does fluctuate with time. The concepts are because some registered organization fails to provide audit opinions, whereas some organization will provide an audit report for the first time. PCAOB inspects the firm's triennially or annually (Johnson, 2015). However, it depends on whether the organization issue audit reports for at least 100 issuers annually or less than 100 issuers triennially. At some time, the PCAOB may inspect other registered firms that have a huge impact on issuer auditing. Other practices are performed by PCAOB for inspecting other organizations every year. In 2011, the PCAOB, for the first time, performed an inspection of registered organizations' audits for dealers and brokers.
PCAOB inspection is vital for security to be traded in the United States. The inspection leads to deficiency identification in more audit firms' audits of public organizations in their quality control procedure. In 2003, the PCAOB adopted specific preexisting standards. The AICPA's Code of Professional Conduct Rule 102 describes in detail the Interim Ethics Standards, including its rulings and interpretation thereunder.
The PCAOB Inspection Process
Every year, all public accounting for larger firms is inspected, whereas smaller firms may be inspected for about three years. The inspection of the firm is one of the core elements of supervising the organization. The inspection division is the largest single group of workers. In 2005, the PCAOB performed an inspection for about 2811 registered organization
The PCAOB and Sarbanes-Oxley promulgate to administer the provision even before discussing the specific provision. However, it is more effective to consider the general approach pursued by the PCAOB in its inspection process. Public accounting firm inspection begins when the organization assessment is "tone at the top." In this context, a tone at the top means management behaviors and attitudes dealing with regulatory ethics and compliance (AICPA, 2020). Hardly, a person cannot overestimate the PCAOB inspectors' importance that is placed on a positive "tone at the top." Such that, when the inspection realizes that the tone at the top is positive, there will be a reduction to perform a broader inspection of particular audits. Thus, it helps in establishing a healthy financial reporting environment.
Section 104 of the Sarbanes-Oxley Act authorizes PCAOB to describe the inspection procedures of the Board and conduct an inspection. In this context, the regulatory agencies take and translate the general language of the statute into specific regulations and rules that can be administered. The PCAOB rules and the Sarbanes-Oxley Act provisions are also provided on the PCAOB's website to be applied by online users.
The PCAOB rules 4000-4004 and SOA sections of 104 (a) and 104 (b) expounds on the special inspections and regular inspections. In this context, regular inspection refers to routine inspections needed by every registered accounting organization to be inspected once every three years. The draft inspection reports were reviewed by the Board, where they respond to it by modifying them (Johnson, 2015).
Also, the Board sends inspectors to collect information, which is then provided as a final inspection report. The Board then shares the final report with the accounting organization where comments and letters are attached to the final report. However, if the Board deems it appropriate, it may attach comments or letters by inspectors. The final inspection report has attached comments and letters and transmits them to the SEC.
The PCAOB Rule 4009 states that if an accounting organization receives a negative inspection report or falls short, the organization shall show good faith to tackle its shortcomings, no public criticism or sanction will follow. PCAOB is always mindful of the urge to maintain the existing public accounting firm's viability (Johnson, 2015). For instance, the Big 5 public accounting organization shrank to Big after the death of Arthur Anderson. Thus, it implies that if the firms were to succumb, today, the public accounting firms could be down to Big 3. For that reason, it would be hard for large organizations to satisfy their accounting requirement. For example, a large multinational organization like General Electric has the most accounting needs that can be satisfied with Big 4.
The proposed Standard and Rule
In 2019, the Securities and Exchange Commission and PCAOB file an act in pursuant of section 19 (b) of the Securities Exchange Act of 1934 and section 107 (b) of SOA. The proposal was to adopt Auditing Standard 2501, which entails auditing accounting estimates such as PCAOB auditing standards such as Fair Value Measurements. In the same year, April, the rules were established in the Federal Register for comments (Johnson, 2015). When the notice was issued, the commission had to extend it to July 3, 2019, when the commission deemed it fit to take action on the proposed rules.
Description of the proposed rules
In December 2018, the PCAOB adopted AS 2505 that relates to PCAOB auditing standards amendments. The proposed rule strives to improve and strengthen the needs for auditing accounting estimates covering fair value measurements. The goal will be realized by replacing the three existing standards with one particular standard that utilizes a risk-based approach.
Changes to PCAOB Standards
The proposed PCAOB standards capture single standards rules which replace every derivative standard, fair value standards, and accounting estimates standards. The rule also covers special topics appendix addressing particular matters that relate to auditing the fair value of financial instruments (AICPA, 2020). The rules contain an amendment to other PCAOB auditing standards to relate them with new auditing accounting estimates' standards. The proposed rules intend to amend the existing requirement.
One of the changes was to give direction to prompt auditors to focus on addressing management bias that relates to accounting estimates as a means of applying professional skepticism. The first emphasis was to amend AS 2110, which needed a discussion among the key engagement members concerning the manipulation of the financial statement via management bias in accounting estimates in significant disclosures and accounts (Johnson, 2015). The other aspect was the need for auditors to focus on their obligations when exercising professional skepticism and evaluating audit outcomes, especially if management bias exists.
The proposed rules aimed at reminding auditors to make sure that the audit evidence covers information that corroborates and supports the assertion of the company, especially about the financial information and statements contradicting the assertions (Johnson, 2015). The proposed rules ensure that auditors identify significant assumptions reached by the firm describe every matter that must be considered by the auditor when identifying the assumption. There is a need to provide significant assumptions examples like assumptions which are susceptible to manipulation.
The proposed rules focus on the need for the auditor to evaluate if a firm has a reasonable bias for the used significant assumptions when applied for its selection of assumptions from others. The proposed rule explicitly demands that an auditor have to be reasonable based on the methods and assumptions when establishing an independent expectation of an accounting estimate. An auditor needs to have an in-depth understanding of the management analysis of some accounting estimates (AICPA, 2020). Thus, the auditor must be careful in understanding the account while evaluating the reasonableness of potential management bias and significant assumptions.
The proposed rule intends to recast specific existing needs using various terms that aim at maintaining skeptical mindsets like "compare" and "evaluate" rather than "corroborate." The aim is also to strengthen the need for evaluating if the data was used appropriately by the firm to establish a fair value standard and include a new provision for evaluating if the source of data of the firm changes or not. The proposed rules strive at amending As 2401 to clarify the responsibilities of auditors when performing a retrospective review and align them with what is required in the new standards.
The new proposed laws cover key requirements in the fair standard of the value to other estimates of accounting in significant disclosures and accounts to reflect a uniform method to substantive testing. The estimates which are not subject to fair value standards, the proposed rules aim at describing the responsibilities of the auditor by testing the individual elements of the process of the company used to c...
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