Pcaob Inspection

PCAOB Inspection

Introduction

The Public Company Accounting Oversight Board (PCAOB) was founded in 2002 under the SOX Act, which was written as a result of the Enron Event. PCAOB was set up to supervise public companies’ auditing reports. It focuses on protecting investors’ interests and improving the public’s interests. On the other hand, PCAOB ensures the fairness and independence of auditing reports. PCAOB inspects hundreds of firms in the United States annually (PCAOB, Inspected Firms, 2017).

Inspection Process and Reporting Process

The selection standards of PCAOB to select an audit firm’s client are based on risk. There are two different bases. Firstly, they look for the riskiest clients among the audit firms. Then, they focus on the higher risk offices and partners of the riskiest clients in the specific working area. They also may review the firms’ previous work which did not meet the PCAOB’s requirements (PCAOB, Remarks on PCAOB Inspections, Audit Risks, and Standard-Setting Priorities, 2017). The audits are not selected by random. The random selection cannot detect as all kinds of problems as possible. The clients with higher risk may contain more problems, PCAOB will find the potential problems to assure the quality of audit. As time goes by, the selection method is evolving. PCAOB not only focuses on the risks they are already aware of or the assessment of audit risk, but they also consider the size and complexity of the firm. PCAOB chooses the firms which have potential material misstatements and deficiencies, it means the audit firm does not have sufficient evidences to support the opinion on the audit report. Also, PCAOB focuses on the most challenge problems in the firms, which is related to quality control instead of the riskiest problems. This means they pay more attention to the level of the audit firm (PCAOB, Remarks on PCAOB Inspections, Audit Risks, and Standard-Setting Priorities, 2017). The evolved selection method is more reasonable than the method used before.

After the inspection, PCAOB will publish an inspection report. However, before they can do this, PCAOB will prepare a draft. After finishing the draft report, the firm will have 30 days or longer, which is decided by the Board who review the draft. Then the firm has to write a response to PCAOB. The response is confidential and not released to the public at that time. When PCAOB receives the response, they can modify the inspection report if the response from the auditing firm is reasonable before publishing the final report. There are two parts to the report. In Part I, PCAOB lists and describes deficiencies in each engagement they observe. In Part II, PCAOB analyzes the deficiencies of Part I and the entire quality control of the audit firm. The information in Part II is not entirely public. PCAOB can publish Part II later. When PCAOB figures out the audit firm has deficiencies in quality control, PCAOB will give the audit firm 12 months to improve their quality control. After 12 months, if PCAOB still thinks the audit firm has some deficiencies, they will publish Part II.