Case Study: PCAOB Standards, Auditing Accounting Estimates

This case study examines the impact of PCAOB standards on accounting practices. It analyzes the draft guidelines issued by IFAC, which help companies establish and implement codes of conduct, leading to reduced compliance costs. The study focuses on the main principles of PCAOB, particularly those related to internal control standards, which are crucial for identifying material weaknesses before they affect a company's finances. The case study also explores the benefits of the AS2 revision proposed by PCAOB, requiring external auditors to seek approval for internal control services from audit committees. Furthermore, it reviews the draft standard released by PCAOB regarding the evaluation of internal control audits and the use of others' work. The study highlights the influence of new standards on accounting estimates, fair value measurements, and derivative instruments, emphasizing the application of professional doubt and addressing specific matters related to fair value of financial instruments. The case concludes by acknowledging the challenges auditors face in auditing accounting estimates and the role of PCAOB standards in identifying deficiencies within both large and small firms.

ACCOUNTING
qwertyuiopasdfghjklzxcvbnmqwerty
uiopasdfghjklzxcvbnmqwertyuiopasd
fghjklzxcvbnmqwertyuiopasdfghjklzx
cvbnmqwertyuiopasdfghjklzxcvbnmq
wertyuiopasdfghjklzxcvbnmqwertyui
opasdfghjklzxcvbnmqwertyuiopasdfg
hjklzxcvbnmqwertyuiopasdfghjklzxc
vbnmqwertyuiopasdfghjklzxcvbnmq
wertyuiopasdfghjklzxcvbnmqwertyui
opasdfghjklzxcvbnmqwertyuiopasdfg
hjklzxcvbnmqwertyuiopasdfghjklzxc
vbnmqwertyuiopasdfghjklzxcvbnmq
wertyuiopasdfghjklzxcvbnmqwertyui
opasdfghjklzxcvbnmqwertyuiopasdfg
hjklzxcvbnmrtyuiopasdfghjklzxcvbn
mqwertyuiopasdfghjklzxcvbnmqwert
yuiopasdfghjklzxcvbnmqwertyuiopas

Case study
The draft guidelines were issued by IFAC that helps the companies to establish, as well as
implement the code of conduct. Such a code is highly useful as it defines the conduct and
helps in the reflection of the updates done by the professional accountants and suggestions
that were received by the listed companies thereby leading to the reduction in compliance
cost. The main principles of PCAOB reflect standards of internal control on the matters that
are vital that enhances the possibility that the companies will trace the material weakness
before it can have a financial implication on the company (PCAOB, 2017). Concerning the
overall status it can be noted that more standards are created and hence, it will have a direct
bearing on different companies. Moreover, it even eliminates the requirements of an audit
that are not essential to attain the benefits that are intended and provides direction in terms of
scaling the audit for a company that is smaller and less complex in nature.
Having few standards will help the smaller and big companies. The major benefit that can be
seen in the scenario is the AS2 revision that was proposed by PCAOB. This will be done so
that the external auditors seek approval before in terms of any service relating to internal
control from the audit committee. Further PCAOB released draft standard so that the audit
internal control can be evaluated in a better fashion. The draft standard issued by PCAOB
reflects the extent to which an independent worker might use others work like that of auditors
and management. Further, it is witnessed that the section has provided small public
companies and new issuers to have more time in terms of compliance with Sarbanes-Oxley
requirements (Wood, 2011). Further, it is noted that the new standards will have dominance
on the old standard and will have an influence on the estimates of the accounting standards,
fair value measurements, and instruments of derivatives. The updates were brought so that
estimates of accounting standards are addressed in a specific manner that leads to a complete
focus on estimates with higher risk in terms of material misstatement and stress upon the
application of professional doubt. The introduction of the new standard will even include
topics that are specific that addresses various matters that are in tune with the fair value of
financial instruments that includes the use of information in term of pricing from third parties
like pricing services (Niemi & Sundgren, 2012).
It has been noted that audit of accounting estimates are challenging to the auditors. PCAOB
standards are brought so that deficiencies can be identified for both bigger and smaller firms
in estimates of auditing accounting, raising concerns regarding the application of professional
doubt and considering the bias of potential management (PCAOB, 2017).
2

Case study
Hence, it can be commented that the accounting estimates of PCAOB were informed with the
help of major outreach and other important inputs from public companies, investors, etc. It is
well known that accounting estimates and fair value measurements are highly prevalent in the
current scenario. Therefore, the estimates play a leading role in subjective assumptions, as
well as measurement of uncertainty. Hence, the updates and proposals can be highly effective
but more standards will make the system complex in nature.
3

Case study
References
Niemi, L., and Sundgren, S. (2012). Are modified audit opinions related to the availability of
credit? Evidence from Finnish SMEs. European Accounting Review, 21(4), 767-796.
doi: 10.1080/09638180.2012.671465
PCAOB. (2017). Statement on Proposed Auditing Standard on Auditing Accounting
Estimates, Including Fair Value Measurements, and Proposed Amendments to
Auditing Standards For Auditor’s Use of the Work of Specialists. Retrieved from:
https://pcaobus.org/News/Speech/Pages/Harris-statement-auditing-accounting-
estimates-specialists-6-1-17.aspx
Wood, D.A. (2011). The Effect of Using the Internal Audit Function as a Management
Training Ground on the External Auditor's Reliance Decision. The Accounting
Review: 86(6), 39-56. Doi: 10.2308/accr-10136
4