Are you a member of an audit committee that's been phoning it in? Or are you a newbie that's feeling upstaged by your fellow audit committee buds that are the so-called financial experts? Maybe you're skeptical of the words coming out of your audit firm's piehole(s) but you're not sure how to respond? Fear not! The PCAOB is here to help.
Let's say you've read your firm's most recent inspection report and you can't quite make heads or tails of it (other than there seems to be a lot of deficiencies). If the first thing that pops into your grey matter, "Holy jumping Jehoshaphat! Was our audit selected?" why not ask someone?! If they say yes, then you might ask the audit partner(s) to explain the deficiencies and which ones applied to your audit. Of course there's the possibility that you'll get some vague responses like "It was just a documentation problem" or "There was a difference in professional judgment" or "Honestly, you don't wanna know." The Board has translated the auditor-speak for you:
The PCAOB is aware of certain audit firm responses that should be viewed with skepticism, such as:A. "It was just a documentation problem." The PCAOB bases deficiency findings on an absence of available evidence in the audit files or elsewhere to support that adequate work was done to support an audit opinion, not just a failure to document work that was in fact done. Audit firms are provided an opportunity to describe the details of work that was done but not documented.B. "There was a difference in professional judgment." The PCAOB bases deficiency findings only on failures to obtain sufficient audit evidence, not on disagreements when reasonable judgments appear to have been made about such matters.C. "The firm has addressed the criticisms in accordance with PCAOB standards." Professional standards require that when a required auditing procedure was omitted, certain remedial steps must be taken. Ask whether the firm performed more work in response to the finding or in subsequent audits, or whether the firm concluded that no additional steps were required – in other words, that the firm disagrees with PCAOB inspection conclusions.
There's also the super-secret Part II of the Board's inspection that rarely sees the light of day. Why not ask about that? Sure, your audit partner may not be at liberty to give you all the gory details, but if you feel so inclined, you can dance around the issue:
Firms may be reluctant to share the details of Part II findings in an inspection report for a number of reasons, but even in that case, audit committees may want to ask for certain generic information about the findings such as:A. what changes the firm is making to address any quality control deficiencies;B. what is the progress of the quality control remediation process, including a discussion of any submissions the audit firm made to the PCAOB as part of that process;C. the inspected years about which the PCAOB has made a final determination about the firm's remediation efforts and the nature of that determination; andD. whether the PCAOB has provided initial indications that the audit firm may not have sufficiently remediated any items.
So whether or not you're considered the "smart one" on the audit committee, this handy-dandy guide should help you ask the questions that will annoy your audit firm's partner in ways that a diligent A/C member was meant to. Enjoy!