In brief: PCAOB reproposes related parties auditing standard and related amendments (No. 2013-25)

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In brief 05/09/2013 by Assurance services
In brief: PCAOB reproposes related parties auditing standard and related amendments (No. 2013-25)

At a glance

The PCAOB reproposed a related parties auditing standard and amendments on significant unusual transactions and financial relationships with executive officers. This In brief article provides an overview of the key aspects of the reproposal.

What's new?

On May 7, the Public Company Accounting Oversight Board ("PCAOB" or the “Board”) reproposed for public comment a new auditing standard, Related Parties (the "reproposed standard"), that would strengthen existing auditing procedures associated with identifying, assessing, and responding to the risks of material misstatement associated with a company's relationships and transactions with its related parties. The PCAOB also reproposed amendments (the "reproposed amendments") to certain PCAOB auditing standards that address a company’s (1) significant unusual transactions and (2) financial relationships and transactions with its executive officers.

The proposed standard and amendments were originally issued on February 28, 2012. The Board is issuing the reproposed standard and amendments to provide an opportunity for commenters to provide input on the changes reflected in the reproposal.

What are the key provisions?

In the Board's view, this project is particularly appropriate due to the number and magnitude of financial reporting frauds, and resulting investor losses, associated with these critical areas. As a result, the reproposed standard and amendments would update and strengthen auditor performance requirements in these areas that could pose significant risks of material misstatement to company financial statements.

Although the overall approach and many of the performance requirements remain the same in the reproposed standard and amendments, the Board is proposing certain changes to align more closely with the risk assessment standards and to respond to some commenters' suggestions, including clarifying that the procedures regarding a company's financial relationships and transactions with its executive officers would be performed as part of the auditor's risk assessment process and would not require the auditor to make any determination regarding the appropriateness and reasonableness of a company's compensation arrangements with its executive officers or recommendations regarding such compensation arrangements.

Relationships and transactions with related parties

The reproposed standard would strengthen existing audit performance requirements by enhancing and setting forth new, specific audit procedures that would include:

  • Performing specific procedures to obtain an understanding of the company's relationships and transactions with its related parties, including obtaining an understanding of the terms and business purposes;
  • Performing specific procedures for related party transactions that require disclosure in the financial statements or that are determined to be a significant risk, including reading the underlying documentation and evaluating whether the terms and other information about the transaction are consistent with explanations from inquiries and other audit evidence about the business purpose (or the lack thereof) of the transaction;
  • Evaluating whether the company has properly identified its related parties and relationships and transactions with related parties; and
  • Communicating with the audit committee, including inquiry of the audit committee or its chair about the audit committee’s understanding of the company's relationships and transactions with related parties that are significant to the company, and whether any member of the audit committee has concerns regarding relationships or transactions with related parties and, if so, the substance of their concerns.

Significant unusual transactions

The reproposed amendments regarding significant unusual transactions are designed to focus the auditor's identification and evaluation of a company's significant unusual transactions, and, among other things, enhance the auditor's evaluation of:

  • Whether such transactions have been appropriately accounted for and adequately disclosed in company financial statements; and
  • Whether the lack of a business purpose indicates that they may have been entered into to engage in fraudulent financial reporting or conceal misappropriation of assets.

Financial relationships and transactions with executive officers

Other reproposed amendments would modify Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement, to require the auditor to perform specific procedures to obtain an understanding of the potential risks of material misstatement posed by incentives and pressures arising from a company's financial relationships and transactions with its executive officers.

Who's affected?

The reproposed standard and amendments are applicable to all audits conducted in accordance with PCAOB standards. The Board is specifically requesting comments on considerations raised by the JOBS Act, including the application of the reproposed standard and amendments to audits of emerging growth companies. The Board is also requesting comments regarding the application of the reproposed standard and amendments to audits of brokers and dealers.

What's the proposed effective date?

The reproposed standard and amendments would be effective, subject to approval by the SEC, for audits of financial statements for fiscal years beginning on or after December 15, 2013.

What's next?

Comments on the reproposal are due on July 8, 2013.

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the National Professional Services Group (1-973-236-7800).

Authored by: 

Marc Panucci
Partner
Phone: 1-973-236-4885
Email: marc.a.panucci@us.pwc.com

Julie Anne Dilley
Director
Phone: 1-646-471-3205
Email: julie.anne.dilley@us.pwc.com