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PCAOB Adopts New Related Party Auditing Standard and Related Amendments
Practical Law Legal Update 9-570-9785 (Approx. 4 pages)
PCAOB Adopts New Related Party Auditing Standard and Related Amendments
by Practical Law Corporate & Securities
| Published on 11 Jun 2014 • USA (National/Federal) |
The Public Company Accounting Oversight Board (PCAOB) adopted a new auditing standard on related party transactions and relationships. It also adopted amendments to related existing auditing standards.
On June 10, 2014, the Public Company Accounting Oversight Board (PCAOB) adopted new Auditing Standard No. 18, Related Parties, that seeks to improve the way auditors evaluate public company disclosure about relationships and transactions with related parties. The PCAOB also adopted amendments to existing auditing standards to enhance auditor:
- Identification and evaluation of companies' significant unusual transactions.
- Understanding of companies' financial relationships and transactions with their executive officers.
New Auditing Standard
The purpose of the new auditing standard is to strengthen auditor performance requirements for identifying, assessing and responding to the risks of material misstatement associated with a company's relationships and transactions with related parties. Among other things, the new auditing standard requires an auditor to:
- Perform specific procedures to obtain an understanding of the company's relationships and transactions with related parties. The new procedures will be performed in conjunction with the auditor's risk assessment procedures under Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement.
- Evaluate whether the company properly identified its related parties and its relationships and transactions with related parties.
- Perform specific procedures if the auditor determines the existence of a related party, relationship or transaction that was not previously disclosed to it.
- Perform specific procedures for each related party transaction that is either required to be disclosed in the company's financial statements or determined to be a significant risk.
- Communicate to the audit committee the auditor's evaluation of the company's identification of, accounting for and disclosure of its relationships and transactions with related parties, and other related significant matters arising from the audit.
The new auditing standard supersedes PCAOB interim auditing standard AU sec. 334, Related Parties.
Amendments to Existing Auditing Standards
Significant Unusual Transactions
The PCAOB adopted amendments to AU sec. 316, Consideration of Fraud in a Financial Statement Audit, and other related auditing standards. The purpose of the amendments is to strengthen the auditor's performance requirements for the identification and evaluation of significant unusual transactions.
The amendments, among other things, require the auditor to:
- Perform specific procedures to identify significant unusual transactions.
- Perform specific procedures to obtain an understanding of, and evaluate, the business purpose of identified significant unusual transactions.
- Consider additional factors in evaluating whether significant unusual transactions may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets.
Financial Relationships and Transactions with Executive Officers
The PCAOB also adopted amendments to Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement. The purpose of the amendments is to increase the auditor's focus on incentives or pressures for the company to achieve a particular financial position or operating result.
The amendments require the auditor, as part of the audit risk assessment process, to perform procedures to obtain an understanding of the company's financial relationships and transactions with its executive officers. They do not require the auditor to determine the reasonableness of compensation arrangements or make recommendations on compensation arrangements.
Anticipated Effective Date
The new standard and amendments will take effect, subject to SEC approval, for fiscal years beginning on or after December 15, 2014, including reviews of interim financial information within these fiscal years. If approved, the SEC will also determine whether the new requirements will apply to audits of emerging growth companies.