PCAOB: A Firm’s System of Quality Control

In this comment letter, the CAQ provides views to the PCAOB related to its request for comment on A Firm’s System of Quality Control and Other Proposed Amendments to PCAOB Standards, Rules, and Forms.

The CAQ is supportive of the Board issuing this proposed standard as a way to strengthen auditing practices and continuously improve audit quality. The CAQ and our member firms are committed to promoting audit quality and appreciate the thoughtful proposal set forth by the Board.

While we support the objectives of the proposal as set forth by the Board, we express some overarching concerns that we encourage the Board to address in the final standard. These include:

• Prescriptiveness Without Commensurate Benefit to Audit Quality
  • The volume of prescriptive requirements, such as specified quality responses, make the standard inherently less scalable.
  • We recommend that the standard include more specified quality objectives. Including specified quality objectives will achieve the PCAOB’s objective of ensuring that firms identify risks and develop appropriate responses, while providing firms more flexibility to tailor the response, as necessary based on their size, complexity, risk, and nature of their engagements.
• Foundational Differences Between QC 1000 and ISQM 1
  • Definitions are critical to the foundation of the QC standard.
  • As currently proposed, the definitions of QC Finding and QC Deficiency in QC 1000 differ from those in ISQM 1, such that the standards differ at a foundational level.
  • Differences in the definitions may manifest as differences in the operation of the QC system and the conclusion on the overall effectiveness of the QC system. The ramification of such differences could be significant; most notably, we believe that these foundational differences could lead to different conclusions on the effectiveness of the QC system under different standards, which could be confusing to stakeholders.
• Parallels Between QC 1000 For Audit Firms and Sarbanes-Oxley for Issuers
  • We anticipate the impact of QC 1000 on auditors will be similar to the impact SOX had on issuers.
  • We encourage the PCAOB to consider those lessons, particularly around scalability, emphasis on risks, and costs to implement and operate SOX relative to the benefits achieved.
  • We believe our suggestions herein will enable the profession to use professional judgment to implement QC 1000 using an AS 5-like approach.
• Other Key Issues
  • In our view, the evaluation date should not be prescribed by the PCAOB. The evaluation date should be decided by each individual firm based on their cadence for activities related to evaluating their system of quality control, business cycle, and other relevant factors (as is allowed under ISQM 1).
  • We encourage the PCAOB to allow a period of at least 90 days between the evaluation date and reporting date.
  • We believe that the major QC deficiency level is the appropriate level to communicate to the audit committee as major QC deficiencies are deficiencies that are severe and pervasive to the overall system of quality control.
  • We recommend that the threshold of “reasonable possibility of occurring” apply to all risks, including risks of intentional misconduct by firm personnel and other participants.

Read the full comment letter here.