PCAOB Adopts Audit and Quality Control Standards

The PCAOB adopted (i) a new auditing standard that sets forth the "general responsibilities of the auditor in conducting an audit," and (ii) new quality control standards.

The new standard, AS 1000 ("General Responsibilities of the Auditor in Conducting an Audit"), consolidates, rescinds or revises previous standards, and creates a risk-based approach that mandates quality objectives and key processes for all firms' Quality Control ("QC") systems. 

The new standard:

• includes introductory language that reaffirms the auditor's fundamental obligation to protect investors through the preparation and issuance of informative, accurate, and independent auditor's reports;
• includes objectives for the auditor to conduct and communicate the results of both an audit of a company's financial statements and an audit of a company's ICFR as well as satisfy and fulfill other general principles and responsibilities described in this standard;
• retains and clarifies the general principles and responsibilities that are important for an audit, including reasonable assurance, due professional care, professional skepticism, and professional judgment;
• aligns the engagement partner's supervisory responsibilities with due professional care;
• retains the requirement for the auditor to be independent, but expresses the obligation more directly by referring to the PCAOB's independence criteria in its rules and standards, and the independence criteria set out in the rules and regulations of the SEC;
• describes the auditor's obligations to (i) comply with ethics requirements, (ii) obtain and maintain competence, and (iii) prepare audit documentation;
• expresses the auditor's responsibilities by using the terms by reference to PCAOB Rules that describe the degree of responsibility that PCAOB standards impose on auditors; and
• removes language that is outdated, inconsistent, and not relevant to audits conducted under the standards of the PCAOB.

In a separate rulemaking, the PCAOB adopted new quality control standards that (i) supersede existing standards and integrate a risk-based standard that would apply to all registered public accounting firms; (ii) create reporting requirements on quality control matters, (iii) expand requirements on monitoring for deficiencies on completed engagements, (iv) supersede existing standards on "integrity and objectivity," and (v) make additional changes to PCAOB standards, rules, and forms.

New QC 1000 ("A Firm's System of Quality Control") includes the following key provisions:

• all PCAOB-registered firms are required to design a QC system that meets these standards;
• all PCAOB-registered firms will be required to implement and operate a QC system when they lead an engagement under PCAOB standards, play a substantial role in the preparation or furnishing of an audit report or have current responsibilities under applicable professional and legal requirements regarding any such engagement;
• firms that audit more than 100 issuers annually are required to establish an external oversight function for the QC system, composed of one or more persons who can exercise independent judgment related to the firm's QC system; and
• firms that audit more than 100 issuers annually are required to annually evaluate their QC system and report the results of their evaluation to the PCAOB on a new form (Form QC).