PCAOB Amends Standards for the Use of Specialists

This article was co-written by Jonathan Grim.

In response to more estimates used in financial reporting and the increased use of specialists who determine these estimates, the PCAOB published Release No. 2018-006, Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists on December 20, 2018. These amendments are intended to enhance investor protection by strengthening the requirements of the auditor when evaluating the work of a specialist, whether that specialist is employed by the company, employed by the auditor, or engaged by the auditor. If the specialist’s work is not properly evaluated by the auditor, the risk that the auditor will not be able to detect a material misstatement may increase.

The amendment revises the standards AS 1105, Audit Evidence (for use of the company’s specialist) and AS 1201, Supervision of the Audit Engagement (for use of auditor-employed specialist). The Amendment also replaces AS 1210, Using the Work of a Specialist, and retitles the standard as Using the Work of an Auditor-Engaged Specialist (for use of auditor-engaged specialist). As AS 1210 currently exists, it does not differentiate the auditor requirements between the roles of the company’s specialist and an auditor-engaged specialist, even though both have different roles in the reporting process.

The amendments to the auditing standards are as follows:

AS 1105 Auditor Requirements for Using the Work of a Company’s Specialist:

• Obtain an understanding of: [1] the work and reports of the specialist and related company processes and controls; [2] the knowledge, skill, and ability of a company specialist; and [3] the relationship between the company of the specialist and the outside entity that employs the specialist (if applicable).
• Perform procedures to evaluate the data, significant assumptions, and methods, including models, used by the specialist, and the reliability of the work in regards to the relevant assertion.

AS 1201 Auditor Supervisory Requirements over Auditor-Employed Specialists:

• Verify that the specialist is aware of the work needed to be performed and coordinate their work with that of the other engagement team members.
• Evaluate the appropriateness of the audit evidence gathered from the specialist and its consistency with other relevant information.

AS 1210 Auditor Requirements for Using Auditor-Engaged Specialists

• Supervisory requirements parallel those of the revised AS 1201.
• Reviewing the specialist’s work is dependent on the risk of material misstatement, significance of the work, and their knowledge, skill and ability.
• In the event that the auditor employs a specialist with impaired objectivity, additional procedures should be performed to evaluate the data, significant assumptions and methods used by the specialist. In some cases, it may become necessary to employ additional specialists.

While the new standards may seem to increase the work and cost of the auditor, the revisions clarify that the auditor’s evaluation does not require reperforming the specialist’s work. Instead, the responsibility is to evaluate whether the specialist’s work provides sufficient evidence to support the conclusion regarding conformity to the applicable financial reporting framework. Upon approval of the SEC, the standards would become effective for audits of financial statements for fiscal years ending on or after December 15, 2020.