PCAOB Issues Concept Release on Audit Confirmations

The PCAOB on April 14 voted to issue a concept release to help determine whether to amend the existing standard on audit confirmations. Board members Bill Gradison and Daniel Goelzer referred to the approach as experimental and said it responds to criticisms about the transparency and timeliness of the Board's actions. Chair Mark Olson noted that significant advances in technology have occurred since the existing standards were written over 15 years ago, so they may be due for an update.

As part of the confirmation process, auditors evaluate communications from knowledgeable third parties with respect to the client's financial statements. Goelzer noted that one example is to ask customers to confirm the accuracy of their account balances. The evidence obtained from external and independent sources are considered a high level of audit evidence.

The PCAOB's concept release addresses nine topics, including the definition of audit confirmations, the requirement to confirm certain information, the reliability of the information and how to address exceptions, non-responses and management requests not to confirm. Another concern is the opportunity for skilled individuals to intercept and revise communications, so the reliability of the confirming information must be evaluated for its security and control.

Board member Steven Harris noted that the current standard only requires auditors to confirm accounts receivable, but instructs them to consider the need to confirm complex agreements and transactions. Members of the Standing Advisory Group raised a number of issues at their April 2 meeting which have been incorporated into the concept release.

Gradison voted to issue the concept release but said he was a little hesitant since it adds another layer to the standard setting process. The Standing Advisory Group has addressed the issue twice, once in 2004 and again on April 2. The concept release may lead to a proposal and finally to an adoption, but it is a very slow process, he said. Gradison added that not all of the Board's standard setting processes should begin with a concept release.

Board member Charles Niemeier noted that the concept release does not contemplate wholesale changes, but addresses developments in technology and the potential risks. Goelzer agreed that the current standard, AU 330, is not broken but has room for improvement. Goelzer views the concept release approach as a step in the review and modernization of the Board's interim standards with the goal of revising and adopting permanent standards.

The International Auditing and Assurance Standards Board recently adopted a confirmation standard. The Auditing Standards Board is considering how to conform private company auditing standards to those of the IAASB, according to Goelzer. The Board has stated that it will consider relevant international standards on auditing when drafting its own standards, but Goelzer said there are some fundamental differences in their approaches to confirmations.

One difference is that confirmations are a tool available to the auditor in other parts of the world, but not a requirement. The Board is not considering making accounts receivable confirmations optional, Goelzer said, and this difference is unlikely to change. As for starting with a concept release, Goelzer said it will give investors, preparers and auditors a means of letting the Board know their views during an early stage so they can be considered during the standard drafting process.

Goelzer asked if the concept release reflects some of the findings from the staff inspections. Associate Chief Auditor Dee Mirando-Gould said that it did. The inspections have identified instances where auditors have failed to confirm receivables, failed to follow up on exceptions and relied on responses that included disclaimer and restrictive language. All of those issues are raised in the concept release.