Each year, the PCAOB informs audit firms, investors, and public businesses about which areas of audit inspectors will be focusing on during the upcoming inspection cycle to enhance audit quality. While the majority of its focus areas are unlikely to be of much concern to anyone outside of accounting firms, a few of them will have indirect consequences for public businesses themselves – fraud and other risks, IPOs and M&A activity, and independence.
Audit plans for 2022 were to focus mainly on future financial reporting and audit risks generated primarily by the current economic situation, including:
Currently, the economic environment alters the overall landscape of risk, potentially increasing or creating new financial reporting and audit risks. Due to the accounting complexities, strategic assessments, and modifications involved in audits of financial statements and internal controls, a focus will be made on audit processes addressing the risks of material misstatement, including the risk of fraud at organizations.
Additionally, audits of issuers in the banking, energy, and information technology industries will be prioritized since they offer a greater audit risk due to the complexity and judgmental character of the financial statement accounts and related internal controls, according to the PCAOB.
Furthermore, while preparing and carrying out the audit, inspectors will examine the auditor's assessment of fraud risk, including:
The PCAOB observed in its inspection summary the rising levels of financing activity through IPOs — in both traditional and Special Purpose Acquisition Company (SPAC) formats — since 2020. A SPAC is a company that does not have any commercial activities and is initiated to raise capital through an IPO or to acquire or merge with another existing company.
According to Audit Analytics, 612 of the 1,046 companies that went public last year did so through SPAC, 427 via traditional IPO, and seven via a direct listing. Moreover, there were 84 IPOs in the first quarter of this year, with 54 of those firms going public through a SPAC.
PCAOB investigators will focus on areas that impact the auditor's work in SPAC and de-SPAC transactions including:
Recently, audit firms are facing challenges in hiring and maintaining experienced staff. However, if new hires do not get the proper instruction and guidance, it will adversely influence audit quality, the PCAOB emphasized. Keeping this in view, investigators will evaluate the strategies and practices the audit firms have executed to allocate experts with appropriate criteria to audit engagements.
In addition, investigators will assess whether audit firms are sufficiently revising the type and scope of their supervision and review procedures. Also, prefer engagements in which the lead engagement partner is new to the engagement, including those appearing from partner turnover and/or unexpected partner replacements.
As new technologies are implemented, one of the possible challenges is ensuring that auditors have the required knowledge and skills to effectively and, perhaps more significantly, effectively integrate these new technologies into the audit.
Furthermore, considering the rapid rate of technical progress in financial reporting and auditing, PCAOB inspectors will focus on the following technological areas:
The usage of digital assets creates distinct audit risks for businesses, demanding a risk assessment and audit response by audit firms. Therefore, inspectors will continue to focus on identifying companies with large digital asset holdings and digital asset activities.
Cyber-attacks continue to pose distinct challenges to businesses. As a result, the inspectors will conduct inspections to assess the auditor's reaction to documented cybersecurity breaches and known security vulnerabilities.
During assessments, companies will investigate changes in the use of technology in auditing and financial reporting to gain a better understanding of how auditors utilize technology to identify and respond to relevant misinformation concerns.