Question

(CO A) Review some of the Panel on Audit Effectiveness recommendations.

Answer 1

Solution:-

Almost two years ago, at the request of the chairman of the Securities and Exchange Commission (SEC), the Public Oversight Board (POB) appointed a Panel of eight, members charging it to thoroughly examine the current audit model. The Panel and its   staff have completed a comprehensive review and evaluation of the way independent audits are performed and assessed the effects of recent trends in auditing on the public interest.

I would like to emphasize that, while many specific recommendations are made for improvements in the conduct of audits and the governance of the profession, our report demonstrates that both the profession and the quality of its audits are fundamentally sound.

The Panel believes the recommendations in this report will result in more effective audits that improve the reliability of financial statements, enhance their credibility, contribute to
investors’ confidence in the profession and improve the efficiency of the capital markets. Implementation will require the efforts, support and cooperation of the profession,
various standard-setting and oversight bodies, and the SEC. The very existence of the Panel has helped to stimulate desirable changes, and the Panel is gratified to note that
various bodies and firms have already adopted, or are currently in the process of adopting, a number of its recommendations.

The Panel’s recommendations are addressed to many constituencies: standard setters, audit firms, the SEC Practice Section (SECPS), audit committees, the SEC and others.

Among the Panel’s major recommendations are:
• Auditors should perform some “forensic-type” procedures on every audit to enhance the prospects of detecting material financial statement fraud.

• The Auditing Standards Board should make auditing and quality control standards more specific and definitive; in certain specified areas, audit firms should review and,
where appropriate, enhance their audit methodologies, guidance and training materials; and peer reviewers should “close the loop” by reviewing those materials and their implementation on audit engagements and then reporting their findings.
• Audit firms should put more emphasis on the performance of high-quality audits in communications from top management, performance evaluations, training, and compensation and promotion decisions.
• The POB, AICPA, SECPS and SEC should agree on a unified system of governance for the profession under a strengthened, independent POB that would oversee
standard setting (for auditing, independence and quality control), monitoring, discipline and special reviews.
• A majority of the members of the Independence Standards Board (ISB) should be from outside the profession, and the SEC should encourage and support the ISB in
carrying out its mission.
• The SECPS should strengthen the peer review process, including requiring annual reviews for the largest firms, and the POB should increase its oversight of those reviews.
• The SECPS should strengthen its disciplinary process.
• Audit committees should pre-approve non-audit services that exceed a threshold amount and should consider certain specified factors when doing so. The ISB should identify the factors.
• The International Federation of Accountants should establish an international self- regulatory system for the international auditing profession.

The Panel believes that its recommendations are supported by its findings and are necessary to enhance the effectiveness of audits of financial statements. To elevate the entire profession to the high levels of quality some have already achieved, the Panel included in its recommendations certain excellent practices it observed. Finally, the
Panel believes that its recommendations will provide a solid foundation for standard setters and firms to react to investors’ demands for timely assurances from auditors on otherfinancial and non-financial data in the “new economy.”

The results of the Panel’s review of specific audits were generally good, and the Panel is satisfied that the audit risk model is appropriate, although it needs to be enhanced,
updated, and implemented more consistently.

The Panel members were unable to agree whether to support or reject an exclusionary rule that would prohibit an audit firm, except in very limited circumstances, from providing non-audit and non-tax services to its public audit clients. Chapter 5 contains statements of the opposing views. The SEC’s rule-making initiatives should provide an opportunity for public discussion and resolution of this issue.

The Panel members believe that the POB must play a key role in the implementation of the recommendations in this report. The POB should support, encourage and monitor their timely implementation by those to whom the recommendations are addressed and should discuss the progress made in its Annual Report.

All who have had the privilege to be involved in this important effort are grateful to the POB for the opportunity to serve and for its support and encouragement throughout the process. The Panel thanks everyone who provided information and assistance in its endeavor. We look forward with confidence to an increasingly important future role for the auditing profession both in the United States and throughout the world.

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