New auditing rule requiring accounting firms to file Form AP testable April 1

On December 15, 2015, the Public Company Accounting Oversight Board (PCAOB) issued PCAOB No. 2015-008, a new auditing rule designed to improve transparency regarding both the engagement partner and “other accounting firms” that may have taken part in the audit of issuers. PCAOB No. 2015-008 will be testable on the CPA exam starting April 1, 2017. The rule requires firms to file Form AP, Auditor Reporting of Certain Audit Participants, which is available to the public on the PCAOB’s website.

Filing of Form AP with the PCAOB is required no more than 35 days after the audit firm files the audit report with the SEC. For initial public offerings, Form AP is required to be filed no later than 10 days after the auditor’s report is first included in a document filed with the SEC.

Form AP requires the following information:

• Name of the engagement partner. The PCAOB notes that the engagement partner plays “a unique and critical role in the audit.” Given that shareholders ratify the issuer’s choice of independent auditor, the PCAOB believes it is important that those same shareholders be informed of the leader of the engagement team who conducted the most recently completed audit.
• Disclosures regarding other accounting firms. The PCAOB states that “the quality of the audit is dependent, to some degree, on the competence and integrity of the participating accounting firms” for those audits where the signing partner’s firm used another accounting firm in a non-U.S. jurisdiction to audit the financial statements of a subsidiary in that country. Accordingly, Form AP requires certain disclosures with respect to the other accounting firms that participated in the audit.
• Partner ID number. To prevent confusion when engagement partners have the same names or change their names, firms will assign engagement partners unique identification numbers for disclosure on Form AP. When partners change firms, they will be assigned a new partner ID, but their previous ID number also will be reported on any new Form AP associated with that partner.
• Other accounting firms.
  • If the firm’s participation constituted at least 5% of the total audit hours, the firm completing the Form AP must provide each accounting firm’s:
    • legal name,
    • unique five-digit identifier for any firm that has a publicly available PCAOB-assigned number,
    • headquarters office location, and
    • extent of participation in the audit, expressed as a percentage (either as a single number or within a range) of total audit hours.
• If the firm’s participation constituted less than 5% of the total audit hours, the auditor filing the Form AP must provide:
  • the number of such other accounting firms and
  • the “aggregate extent of participation of such other accounting firms, expressed as a percentage of total audit hours.”
• Disclosures regarding referred-to auditors. If there is a reference to another accounting firm in the auditor’s report, the firm must disclose on its Form AP the name and office location of the referred-to accounting firm, as well as “the magnitude of the portion of the financial statements audited by the referred-to auditor.”
• Optional disclosures. The PCAOB permits, but does not require, auditors to provide in the auditor’s report the information disclosed in Form AP regarding the engagement partner, other accounting firms, or both. If disclosure is made in the auditor’s report about other accounting firms:
  • “the disclosure must include information about all of the other accounting firms required on Form AP, so that auditors cannot choose to include some other accounting firms and exclude others.”
  • the auditor’s report must explicitly state that the principal auditor has responsibility for the work of the other accounting firms, and “that it has supervised or performed procedures to assume responsibility for their work in accordance with PCAOB standards, to avoid potential confusion about the respective responsibilities of the principal auditor and the other accounting firms.”

PCAOB Release No 2015-008 extracts:

“Information provided on Form AP is intended to help investors . . . research publicly available information about the firms identified in the form, such as whether a participating firm is registered with the PCAOB, whether it has been inspected and, if so, what the results were and whether it has any publicly available disciplinary history.”

“Investors will also have a better sense of how much of the audit was performed by firms in other jurisdictions, including jurisdictions in which the PCAOB cannot currently conduct inspections.”

“The PCAOB believes the transparency created by public disclosure should promote increased accountability in the audit process . . . Although auditors already have incentives to maintain a good reputation, such as internal performance reviews, regulatory oversight, and litigation risk, public disclosure will create an additional reputation risk, which should provide an incremental incentive for auditors to maintain a good reputation, or at least avoid a bad one.”

“The Board [also] believes additional transparency should increase accountability at the firm level. The Board has observed that some auditors allowed other accounting firms that did not possess the requisite expertise or qualifications to play significant roles in audits. Firms similarly have not always given the critical task of engagement partner assignment the care it deserves. Making firms publicly accountable in a way they have not been previously for their selections of engagement partners and other accounting firms participating in the audit should provide additional discipline on the process and discourage such lapses.”

If you’re sitting for AUD on or after April 1, 2017, this material will be testable. For more alerts and notices about new or upcoming testable exam material, subscribe to the Surgent CPA Review blog: Passing Insights.

Susan J. Cox, M.Acc., CPA is a Senior Technical Editor for Surgent CPA Review. Susan received her graduate and undergraduate degrees from Florida State University. Prior to joining Surgent, Susan worked as a technical editor for Thomson Reuters, an accounting instructor for the University of South Florida, a senior internal auditor for GTE, and an experienced senior auditor for Arthur Andersen & Co.