Responsibilities of Lead Auditors to Conduct High-Quality Audits When Involving Other Auditors

An SEC Statement, released by Paul Munter, Chief Accountant, March 17, 2023, says that, “In this statement, we (1) discuss the auditor’s responsibilities with respect to audits involving other auditors, including members of their own network firms; (2) highlight how the auditor’s responsibilities are incorporated currently in the PCAOB standards, including the PCAOB’s quality control standards; and (3) provide reminders on good practices for audit committees and issuers.”

Munter said that “we continue to observe shortcomings related to the lead auditor’s performance of its responsibilities in planning, supervising, and evaluating the work performed by other auditors, including in engagements involving the use of network-member other auditors. Recent PCAOB enforcement actions against audit firms and their personnel, and related Commission staff observations, highlight troubling instances where the lead auditor used audit work performed by another, affiliated audit firm that played a “substantial role” in the audit, yet was not registered with the PCAOB. An unregistered accounting firm causes a violation of PCAOB Rule 2100 whenever it plays a substantial role in the audit of an issuer –  irrespective of the audit engagement structure used by the lead auditor. Any lead auditor should be aware of this requirement and safeguard against such violations in its use of other auditors during an audit engagement.”

He added that “Commission staff have observed technical, but critical issues in engagements involving the use of other auditors. Such issues include violations of PCAOB AS 1301, Communications with Audit Committees, when lead auditors are not attentive to the accurate legal entity name of other auditors that perform audit procedures and therefore fail to communicate correctly such auditors’ names, locations, or planned responsibilities, as well as deficiencies related to Form AP, Auditor Reporting of Certain Audit Participants, which include instances where the lead auditor’s Form AP contains inaccurate or omitted information, such as failing to report the audit participation of the correct legal entity or inaccurately disclosing audit hours incurred by other accounting firms. Audit committee communications and Form AP filings with the PCAOB are key mechanisms for transparency into the participation in the audit. Those communications and filing requirements underscore how critically important it is for lead auditors to prevent unregistered audit firms from playing a substantial role in the audits of issuers, and to correctly identify the role of certain other auditors.”

Furthermore, Munter said, “because many accounting firms operate within a network of separate accounting firms, instances of faulty or incomplete communication with the audit committee risks confusing or misleading the committee into thinking that the engagement involves a single registered public accounting firm rather than a lead audit firm and other auditors within the same network. Because audit quality may not be the same in all accounting firms within a network, clear, accurate communication with the audit committee about which firms performed the work and the steps the lead auditor took to drive greater consistency in audit quality throughout the performance of the engagement is critical to the audit committee’s ability to oversee and evaluate the performance of the independent audit firm.”

He reminded all auditors, regardless of their role as either lead or other auditor, “of the importance of the proper design and application of quality control policies and procedures to sufficiently reduce the risks to audit quality that are inherent in audits involving other auditors. For lead auditors, an appropriately designed quality control system should include critical incremental quality control policies and procedures such that the lead auditor consistently meets its supervision and review requirements over the other auditors.”

For much more on this important topic, read | Responsibilities of Lead Auditors to Conduct High-Quality Audits When Involving Other Auditors.