PCAOB offers advice on auditing accounting estimates

The Public Company Accounting Oversight Board released a publication Wednesday to assist smaller firms with the vagaries of auditing accounting estimates as the board comes under threat of being eliminated.

The publication, “Audit Focus: Auditing Accounting Estimates,” gives auditors a set of reminders and good practices about accounting estimates, which can be a challenging part of financial statements.

Accounting estimates — including impairments of long-lived assets or allowances for credit losses — are commonplace in financial statements and can substantially impact a company’s financial position and results of operations. They typically involve subjective assumptions and measurement uncertainty, leaving them susceptible to management bias. Some estimates involve complex processes and methods. That means accounting estimates are often some of the areas of greatest risk in an audit.

The release of the publication comes as the PCAOB is finding itself at risk of being absorbed into the Securities and Exchange Commission after the House Financial Services Committee passed legislation at the end of April that would transfer the PCAOB’s responsibilities to the SEC. The bill is expected to be part of the massive tax reconciliation bill now making its way through the House. PCAOB chair Erica Williams has spoken out against the bill, pointing to the inspection agreements that the PCAOB has with other countries’ audit regulators, including China’s. SEC chair Paul Atkins said at a conference this week the SEC could handle the PCAOB’s work, although it would need to have the funding and be able to bring over people from the PCAOB, according to Thomson Reuters. Earlier this month, six former PCAOB officials wrote a letter to lawmakers expressing concerns about the proposal.

The PCAOB’s inspection staff is continuing to find deficiencies related to auditors’ testing of accounting estimates. The deficiencies include not identifying the significant assumptions employed by a company to determine an accounting estimate.

The latest Audit Focus publication includes: reminders for auditors from the PCAOB standards related to auditing accounting estimates; the PCAOB staff’s perspectives on common deficiencies in auditors’ work; and good practices that audit firms that audit smaller companies have implemented in the area of accounting estimates.