PCAOB Tightens Rules on Conduct and Amends Auditing Standards on Tech Use

The Public Company Accounting Oversight Board ("PCAOB") (i) amended the "culpability" standard for finding that an individual contributed to the negligence of an audit firm; (ii) amended an auditing standard for regulating the use of technology in audits; and (iii) proposed a new auditing standard that would regulate "substantive analytical procedures."

As amended, Rule 3502 ("Responsibility Not to Knowingly or Recklessly Contribute to Violations") changes "from recklessness to negligence ... the liability standard for associated persons' contributory conduct." Rule 3502 provides that an individual may be liable if the individual negatively contributed to the violation of the audit firm. A person acts negligently if they "knew or should have known [that their conduct] would contribute to such [a] violation." 

As amended, Auditing Standard AS 1105 ("The Auditor's Responses to the Risks of Material Misstatements") addresses how auditors may use technology-based tools in performing and ultimately issuing an auditor report. Provisions from the amended standard include:

• distinguishing between the definition of "test of details" and "analytical procedures;"
• clarifying criteria that auditors should consider when performing a test of details investigation;
• the necessity of information technology controls;
• creating guidelines for assessing whether external information for audit evidence is reliable; and
• revising AS 1105 "to reflect the greater availability of information in electronic form..."

The PCAOB proposed "to replace and retitle its auditing standard related to an auditor's use of substantive analytical procedures." Amendments to Auditing Standard AS 2305 ("Designing and Performing Substantive Analytical Procedures") would:

• outline clear rules for "determining whether the relationship(s) to be used in the substantive analytical procedure is sufficiently plausible and predictable;"
• clarify that circular auditing is not a permissible avenue for auditors to develop their expectations;
• reorganize rules so that there is greater uniformity with other PCAOB rules;
• emphasize factors that auditors should consider when assessing the "persuasiveness of audit evidence obtained from a substantive analytical procedure;" and
• provide guidelines for auditors in assessing whether further evaluation is needed when the auditor's expectation is different from the company's amount.