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1 Enhancing Audit Quality 2017 highlights and progress i

2 DISCLAIMER: The contents of this publication do not necessarily reflect the position or opinion of the American Institute of CPAs, its divisions and its committees. This publication is designed to provide accurate and authoritative information on the subject covered. It is distributed with the understanding that the authors are not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For more information about the procedure for requesting permission to make copies of any part of this work, please email [email protected] with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707–8110. ii Enhancing Audit Quality: 2017 highlights and progress

3 Contents 2 Introduction Enhancing Audit Quality areas of focus 4 5 Peer Review 10 Documentation 12 Single audits 14 Employee benefit plan audits 15 Quality control 16 Driving audit quality in the future 17 Changing talent needs 18 Revised audit report Data analytics 18 21 Assurance Research Advisory Group (ARAG) 21 Valuation credentials 22 Assurance services beyond financial statements - Cybersecurity - Sustainability reports (ESG) 24 Conclusion 1

4 Introduction Financial statement audits and assurance on other subject matters play a vital role in society. Assurance services can inform citizens about how a town or school district is managing tax dollars. They can help a small business owner get financing to grow. They can guide investors interested in buying a business. They can provide a community with information on how a local business is replenishing natural resources. And they can let clients, customers and investors know that systems are in place to protect sensitive information from cyberattacks. As business and regulatory environments evolve and become increasingly complex, the CPA profession’s commitment to performing quality audits becomes even more essential. With this in mind, the American Institute of CPAs (AICPA) launched the Enhancing Audit Quality (EAQ) initiative in 2014. The initiative aligns all AICPA audit- and assurance-related activities with the goal of supporting firms’ quality improvement. 2 Enhancing Audit Quality: 2017 highlights and progress

5 The AICPA’s 6-Point Plan to e Pre-licensur t Standard Improve Audits is a roadmap for and ethics integrating quality improvement s throughout the audit process, Enhancing Enforcemen from pre-licensure through Audi t monitoring Practice rt Quality the futur enforcement. A learning aicpa.org/EAQ of e CP and suppo Peer review A data-driven approach to audit quality enhancement EAQ uses a data-driven approach to obtain insights into quality trends in the profession and to support the development of resources for auditors and auditees. Detect audit Take action Analyze data quality trends Peer Review Program • Consider standards • implications - Enhanced oversights of peer reviewers • Raise awareness about findings Results of reviews - • Provide education and • Ethics investigations resources to support Other sources • quality enhancement • Reinforce through peer review 3

6 Enhancing Audit Quality areas of focus Through EAQ’s data-driven approach to quality enhancement, the AICPA identified several key areas of focus in 2017. 4 Enhancing Audit Quality: 2017 highlights and progress 4 Enhancing Audit Quality: 2017 highlights and progress

7 Peer Review Reinforcement of compliance with auditing, The Peer Review Enhanced Oversight Program independence and quality control standards through To gather data on the factors driving audit quality peer review is at the heart of EAQ. Through their and evaluate the performance of peer reviewers personal connections with firms, peer reviewers are and the firms they review, the Peer Review uniquely positioned to carry the quality message Program conducts enhanced oversights. In the and help firms address issues of concern. However, Enhanced Oversight Program (see figure 1), without peer reviewers effectively detecting where subject-matter experts review a sample of firms’ audits do not fully comply with professional audit engagements after they’ve been subject to standards, reviewers may leave firms with the peer review, but before they have been evaluated by impression that prevalent quality challenges do the Peer Review Committee. not pertain to them. As a result, firms may not recognize opportunities where they can improve their performance. A “non-conforming engagement” is an engagement that was not performed and/or reported on in conformity with applicable professional standards in all material respects. Figure 1: AICPA Peer Review Enhanced Oversight Program Objectives Identify material Focus on Evaluate the Provide education must-select departures from and feedback to performance of professional engagements * peer reviewers peer reviewers and firms standards *Refers to high-risk practice areas in which one or more of the engagements a firm performs must be selected in the firm’s peer review. 5

8 Enhancing Audit Quality areas of focus Figure 2 90 190 engagements subject to Enhanced Oversights from 2015 (pilot year) to 2016 55% of engagements found to be materially non-conforming in 2016 200 Approximate number of oversights to be performed in 2017 Most common causes of non-conformity: • Inadequate or nonexistent audit documentation No testing of internal controls over • compliance in single audits • No testing of one or more applicable compliance requirements in single audits No evidence of SOC 1 report evaluation • in employee benefit plan audits 6 Enhancing Audit Quality: 2017 highlights and progress 6 Enhancing Audit Quality: 2017 highlights and progress

9 Peer Review Program improvements Figure 3: Results of Peer Review Program changes Throughout 2017, the Peer Review Board (PRB) continued to implement a variety of reforms that require reviewers to meet additional, more The rate of non-conformity with stringent qualifications. The PRB reforms will professional standards peer also expedite the process for remediating and reviewers detected on must-select removing poor performers. This has led to better 3x engagements has more than reviewer performance, improved detection of tripled since 2015. non-conformity with professional standards and firms obtaining appropriate remediation, which the AICPA believes will ultimately result in improved Poor-performing peer reviewers audit quality. are getting the remediation 4x they need to improve their While these reforms were necessary, the PRB performance. The number of recognizes that balance is key. To support reviewers subject to remediation peer reviewers throughout these changes and has quadrupled since 2014. encourage feedback, in ongoing efforts to “get it right,” the AICPA conducted a member “listening tour” in 23 states in 2017, ran a peer review staff training on leading change in the program, conducted a “Peer Reviewer Q&A” webcast, held a focus group at the Peer Review Conference and undertook personal outreach to the highest-volume peer reviewers. Despite changes to the program, the ratio of firms to peer reviewers has not suffered. In fact, as a result of PRB actions to strengthen the peer reviewer pool, the number of firms per reviewer nationwide has shrunk from 18.12 in 2010 to 14.65 in 2017. However, certain states continue to experience challenges with the size of their peer reviewer pools and acquiring reviewers with specialized industry experience. The AICPA is committed to supporting these states in addressing these challenges. 7

10 Enhancing Audit Quality areas of focus Since reviewers are improving the identification of Figure 5: Firms in the United States Department of firms’ audit quality issues, more firms are receiving Labor EFAST2 database not properly enrolled in Peer the remedial action they need. Review or failed to report to their peer reviewer that they performed an employee benefit plan audit (evaluation performed in 2012–13 for year-ends in 2011). Figure 4: Firms required to undergo pre- or post-issuance review as corrective action 2013 697 18 % 2015 816 500 0 1,000 Firms that fail to remediate are terminated from Figure 6: Firms in the Federal Audit Clearinghouse the Peer Review Program. The number of firms (FAC) database not properly enrolled in Peer Review terminated for failing to remediate nearly doubled or failed to report to their peer reviewer that they from 2015 to 2016. performed a single audit (evaluation performed in 2015–16 for year-ends in 2013). Importantly, the Peer Review Program can only help firms detect their quality issues if they are properly enrolled in the program and provide a complete population of engagements. To identify firms that were not in compliance with Peer Review requirements, the AICPA reviewed public databases and found that not all firms were properly enrolled (see figures 5 and 6). 3% The AICPA has taken action with all of those firms, including recalling peer review report acceptance, referring individuals to the AICPA Ethics Division and implementing other remediation as appropriate. 8 Enhancing Audit Quality: 2017 highlights and progress

11 Peer Review Integrated Management Referrals to state boards of accountancy Application (PRIMA) State boards of accountancy have important roles in facilitating audit quality. To promote One innovation that will elevate EAQ’s data-driven high professional standards of practice, the approach to quality improvement is the Peer Review Peer Review Program attempts to remediate Integrated Management Application (PRIMA), a firms when deficiencies are identified. In cases web-based tool that launched in May 2017, replacing of non-cooperation or when remediation is the AICPA’s previous peer review information inadequate, enrollment in the program may be system. This new platform allows the Peer Review terminated, in which case the applicable state Program to adapt faster to the needs of practice board of accountancy is notified. monitoring and users. Independent of Peer Review, the Professional PRIMA will take virtually all the information Ethics Division and participating state CPA collected during a peer review, much of which was societies attempt to remediate members when historically entered on paper forms, and store it deficiencies are identified. When violations are in an online system. This system will allow the egregious, the AICPA takes additional action, AICPA to analyze trends in quality across all 30,000 such as admonishment, suspension or expulsion, enrolled firms, and the results of that analysis in which case the applicable state board of will inform standard-setting, education, the Peer accountancy is notified. Review Program and more. The AICPA relies on state boards to take The platform also will allow the AICPA to identify appropriate action with respect to firm and firms that take on their first engagement in a new individual licenses. Actions state boards take are industry or area and provide them with targeted essential to resolving these egregious issues and resources, most of which would be free. This is a continuing to support audit quality. result of a new reporting requirement in which firms will submit additional information on an annual basis, as opposed to the previous requirement of Figure 7: AICPA referrals to state boards of every three years. accountancy (Jan. 1, 2014-May 31, 2017) 300 346 individual referrals firm referrals 48 state boards to which referrals were made 9

12 Enhancing Audit Quality areas of focus Documentation What the AICPA found What the AICPA is doing AICPA Auditing Standards Board (ASB) representatives The most common quality issue encountered in Enhanced Oversights was inadequate or no audit evaluated whether the Audit Documentation documentation, indicating auditing procedures standard was clear, and concluded that while the standard’s requirements were clear, a few common were either not performed, or, where performed, not documented in accordance with standards. misconceptions were inhibiting compliance. In response, the AICPA developed an awareness campaign that includes a free documentation toolkit More than 50% of all non-conformity aicpa.org/documentation . The toolkit found at detected was due to inadequate or no contains resources for auditors such as: documentation. • Sample working papers To obtain sufficient appropriate audit evidence • A tool for SOC 1™ consideration necessary to support the audit opinion, auditors Audit must comply with AU-C section 230, A dual-purpose testing practice aid • Documentation . This standard indicates that written documentation should be sufficiently detailed An internal inspection aid • to give an experienced auditor not previously A PowerPoint presentation firms can present to • involved in the audit a clear understanding of the their staff work performed, the evidence obtained and the conclusions reached. The standard states that an • A nano-learning segment auditor is required to document: The nature, timing and extent of procedures • The results of those procedures and evidence • obtained • Any significant findings, issues or professional judgments If sufficient appropriate audit evidence necessary to support the audit opinion was not appropriately documented, then the audit was not conducted in accordance with Generally Accepted Auditing Standards (GAAS) and the auditor would not have a basis to render an opinion. Put simply: If an auditor’s not done , the auditor is not documented work is obtaining evidence to support his or her opinion. 10 Enhancing Audit Quality: 2017 highlights and progress

13 Journal of Accountancy A June 1 article titled “Audit The AICPA also developed targeted communications documentation: Tips for getting it right” got more and education to raise awareness, including blog than 5,000 page views in three weeks. In a show of Journal of Accountancy articles, email posts, the campaign’s reach, a United States Department newsletters, communications to state CPA societies of Labor (DOL) representative recommended the and state boards of accountancy and a social media documentation toolkit to attendees at the Florida meme campaign. The response to this campaign has Institute of CPAs 2017 Mega CPE Conference. been significant, with more than 10,000 page views to the toolkit and more than 4,500 downloads of the documentation resources in the first six months. Figure 8: Documentation social media meme campaign The AICPA will continue to promote the importance of adequate audit documentation and available documentation resources in 2018. 11

14 Enhancing Audit Quality areas of focus Single audits What the AICPA is doing Single audits are a highly specialized type of compliance audit performed on state and local Through the Enhanced Oversight Program, the governments and not-for-profit organizations that AICPA identified inconsistencies in regulations expend $750,000 or more of federal assistance and guidance that created challenges for auditors. in a fiscal year. Both federal agencies that provide Those inconsistencies will be communicated to the federal assistance and the public rely on single appropriate federal regulatory bodies along with audits to confirm that these organizations are recommended revisions that would support the managing federal funds appropriately. broader effort to enhance quality. To spread awareness of the factors driving single What the AICPA found audit quality, the AICPA: Data from Enhanced Oversights showed single Developed an infographic highlighting the results • audits with year-ends on or before Nov. 30, 2015, of the 2016 study had concerning levels of non-conformity with the Uniform Guidance, the regulation that dictates single Reached out to auditors, auditees and other • audit requirements. stakeholders about these factors Figure 9: Common causes of non-conformity in Created webcasts, alerts and other resources for • single audits firms The first step in the AICPA’s research into single audit quality was to identify what factors drive audit why those quality; the next step is to determine 23% factors made a difference. The AICPA plans to drill down further into the data to learn more about these of all single audits subject to enhanced oversight factors. were materially non-conforming with professional failure to properly test controls standards due to The AICPA also developed auditee resources . over compliance to help available at aicpa.org/auditeeresources them prepare for their single audits. The resources include web events, explanations of key sections of the Uniform Guidance and auditee practice aids. Additionally, the Governmental Audit Quality 16% Center (GAQC) developed a webcast and other of single audits subject to enhanced oversight were communications to spread awareness of the most materially non-conforming due to failure to properly common single audit issue: auditors not testing test direct and material compliance requirements . . internal controls over compliance In 2016, the AICPA studied a random sample of 87 single audits and identified three key factors that strongly correlated to quality performance in that sample (shown in figure 10). 12 Enhancing Audit Quality: 2017 highlights and progress

15 Figure 10: The three key factors driving single audit quality 1. Practice makes perfect The more single audits a firm performed every year (regardless of firm size), the more likely a given single audit was to conform to professional standards. Number of single audits performed annually 2 to 10 11 or more 1 51% 85% 38% conformity conformity conformity Firms should only accept engagements that they are competent to perform Recommendation: and, when needed, engage knowledgeable third parties to serve on engagement teams. 10 0% 2. Commitment to quality conformity Governmental Audit Quality Center (GAQC) firm members had GAQC members who 2X greater conformity performed 11 or more than non-members. single audits annually aicpa.org/GAQC . Recommendation: Learn more about GAQC membership at engagement partners 3. Qualified Number of single audits the engagement partner performed annually 2 to 10 11 or more 1 75% 56% 32% conformity conformity conformity Qualifications of the engagement partner mattered. Non-conformity spiked when the engagement partner: Recommendations: • Had less than six years of experience performing single audits Provide appropriate resources for consultation • Had non-conforming engagements previously Consider the need for engagement quality control review (EQCR) Establish firm policies requiring engagement partners to take • Took less than nine hours of single audit-specific CPE within the past three years robust single audit-specific CPE 13

16 Enhancing Audit Quality areas of focus Employee benefit plan audits Employee benefit plan (EBP) audits are essential What the AICPA is doing to protecting savings and benefits earned by The AICPA Employee Benefit Plan Expert Panel workers throughout their careers. These include and Employee Benefit Plan Audit Quality Center audits of pensions, health and welfare and 401(k) (EBPAQC) Executive Committee brought to plans subject to the Employee Retirement Income the Financial Accounting Standards Board’s Security Act of 1974 (ERISA) under the regulatory (FASB) attention the need for employee benefit authority of the DOL. plan reporting simplification. As a result of these advocacy efforts, the FASB issued a new accounting standard, ASU 2015-12, to simplify What the AICPA found EBP audit reporting. The EBPAQC also has Enhanced Oversights found concerning levels of developed webcasts and tools on ASU 2015-12 non-conformity with the standards as well as two implementation, audit planning, EBP audit best primary areas challenging EBP audit practitioners: practices and more to help member firms perform high-quality audits. Figure 11: The two primary areas challenging EBP audit practitioners In April 2017, the ASB released a proposal to create a new standard for auditor reporting on EBP audits subject to ERISA. The purpose of the proposal is to help auditors better understand their responsibilities with respect to EBP audits and to provide financial 20% statement users with more information about auditors’ responsibilities. The ASB received a of engagements had material non-conformity robust response to the proposal and will continue related to improper utilization of SOC reports to consider comments as they determine the future and certifications. direction of the proposal. The AICPA also plans to: Develop free tools, aids and education related to • the common quality issues listed in figure 11 >50% • Raise awareness about these aids through of engagements had material non-conformity targeted outreach related to inadequate or no documentation. Continue to reinforce detection of these issues • through Peer Review 14 Enhancing Audit Quality: 2017 highlights and progress

17 Quality control What the AICPA is doing What the AICPA found For the past several years, the AICPA has Having a strong quality control structure in place helps firms avoid quality issues and promote a collaborated with the International Auditing and Assurance Standards Board (IAASB) on its quality commitment to quality in their practices. Through Enhanced Oversights, the AICPA uncovered control project, which may ultimately lead to common quality control issues having an impact on revisions to the AICPA standard QC Section 10, audit quality, including the following: A Firm’s System of Quality Control. The AICPA is bringing its audit quality findings to the IAASB for • Many firms copy quality control documents word consideration during its project. for word from templates obtained from third-party providers and fail to tailor them to their firms’ Additionally, the AICPA created a free Invigorate the Focus on Quality Toolkit found at aicpa.org/pcps/quality unique risks, leading to those risks not being to help firms with their quality control systems. The addressed. toolkit includes resources such as: Many firms were not performing key required • • An audit and accounting practice aid firms can use to quality control functions, such as consultations or engagement quality control reviews. develop the policies and procedures for their system of quality control (available at aicpa.org/qc4me ) • Quality control checklists • A practice aid on establishing and maintaining a system of quality control • An article on how firms can create and promote a culture of quality The AICPA will continue to reinforce detection of quality control issues in Peer Review as well as promote these free quality control resources so that firms can benefit from them. 15

18 Driving audit quality in the future The audit is changing. New, emerging technologies are transforming how we work and live, and the market is seeking assurance on information not contained in traditional financial statements. The profession needs to prepare for these changes to meet clients’ needs, create value and continue to provide quality services. Through its Auditing in the Future initiative, the AICPA is getting auditors ready for the needs of tomorrow’s marketplace. 16 Enhancing Audit Quality: 2017 highlights and progress 16 Enhancing Audit Quality: 2017 highlights and progress

19 Changing talent needs Enhancing audit quality starts not when an auditor Accounting Doctoral Scholars Program 2.0 The AICPA believes that professionals with recent accepts an engagement, but at the beginning of the auditor’s career — with relevant, public accounting experience can add significant value to the college-classroom experiences of forward-looking education and a Uniform CPA the next generation of CPAs. In 2008, the AICPA Examination that evaluates candidates based on the Foundation, state CPA societies and major skills and competencies auditors truly need. As the accounting firms created the Accounting Doctoral audit continues to evolve, the AICPA is committed to Scholars Program (ADS) to advocate for an preparing the next generation of the profession for increased number of accounting professors with the services auditors will perform in the future. real-world experience in audit and tax by funding Updated Uniform CPA Examination eligible doctoral candidates. That program resulted Core content knowledge remains fundamental to in 100 new Ph.D.s with practical accounting the CPA profession, but with changing market forces experience placed in classrooms at 47 universities and technological advances, newly licensed CPAs across the country. are performing more value-added services than As a result of its success, in the latest iteration ever before. These services require certain essential skills to be used in tandem with core knowledge of the program, “Accounting Doctoral Scholars 2.0” (launched in August 2016), 45 to 50 doctoral to be an effective CPA. The updated Examination, released April 1, 2017, is significantly different from candidates with at least three or more years of recent public accounting experience will be selected previous versions due to its greater focus on the higher-order skills seen in figure 12. for funding. Twelve of those individuals started their Ph.D. programs in 2017. More information is To maintain the Examination’s alignment with adsphd.org available at . professional practice, the AICPA continually engages with firms, educators, state boards and other stakeholders who are a critical resource when evaluating potential changes or enhancements. Figure 12: Higher-order skills evaluated on the Uniform CPA Examination Critical Problem- Effective Analytical Professional communication thinking solving ability skepticism 17

20 Driving audit quality in the future Revised audit report Data analytics Guide to Audit Data Analytics Users of financial statements and the auditor’s report have requested more information about Understanding how new and emerging technologies significant aspects of the audit, resulting in a call for can be used throughout the audit process is an changes to the auditor reporting model in the United important step in advancing the profession and States and other jurisdictions around the world. In enhancing audit quality. This fall, the AICPA is developing proposed changes to U.S. GAAS relating releasing the Guide to Audit Data Analytics, which to auditor reporting, the ASB considered input will discuss the issue at a foundational level from investors, regulators, corporate governance while also describing how these techniques can organizations, auditors and others in response be integrated into the audit process to improve to numerous proposals and requests for public effectiveness and bring additional insights. The comment. Consistent with its strategic policy, the AICPA will launch learning resources associated ASB has considered the revisions to the auditor’s with the guide and plans to release advanced report resulting from IAASB and Public Company guidance in 2018. Accounting Oversight Board (PCAOB) auditor reporting projects in developing its proposal. The Rutgers AICPA Data Analytics Research ASB’s goal is to make the report more informative (RADAR) initiative and further clarify auditors’ responsibilities, thereby The goal of the RADAR initiative is to demonstrate increasing the public’s confidence in audits and through research how further integration of data related financial information. Changes include: analytics into the audit process can effectively A mandated opinion section in the first paragraph • lead to advancements in the public accounting profession. The RADAR research teams bring The option to include key audit matters • together experts from the profession and academia, currently working on three projects, displayed on Expanded descriptions of auditor and • figure 13 on the following page. management responsibility, including those related to going concern The ASB expects to issue an exposure draft by November 2017, with a 90-day comment period. The proposed Statements on Auditing Standards (SASs) and related proposed amendments are estimated to be adopted for audits with year-ends as early as June 15, 2019. 18 Enhancing Audit Quality: 2017 highlights and progress

21 Figure 13: Current RADAR projects Multidimensional Audit Data Selection (MADS) Seeks to articulate a process for filtering large populations of data, identifying items that may be more likely to contain or result in material misstatement(s). Process mining Leverages process mining techniques to analyze business processes and help form a view of the effectiveness of internal controls. Visualization Explores the potential use of visualization to enhance the ability to gain insights from audit data analytics. of supporting a continued focus on audit quality The research findings will help to inform the through enhanced audit insights. More information development of standards and guidance to facilitate . aicpa.org/RADAR can be found at the use of data analytics in the audit, with a goal 19

22 20 Enhancing Audit Quality: 2017 highlights and progress 20 20 Enhancing Audit Quality: 2017 highlights and progress

23 Assurance Research Valuation credentials Advisory Group (ARAG) The Assurance Research Advisory Group, consisting Certified in Entity and Intangible Valuations™ of representatives from academia and public (CEIV™) credential practice, funds research projects addressing private Fair value measurement deficiencies present company topics of interest to practitioners and challenges not only for valuation professionals, but standard setters. Accounting educators who submit also for their clients, investors and regulators, as an approved research proposal are eligible for up to well as others placing trust in a company’s financial $15,000 in funding and, where applicable, access to statements and auditors reviewing these valuations. firm personnel or anonymized firm data the AICPA To address the need for increased competence and Peer Review Program provides with firm consent. improved quality, consistency and transparency The AICPA funds research proposals that provide in the performance of fair value measurements, in the profession with valuable insight into the factors early 2017 the AICPA launched the new Certified in that affect the quality of assurance services. Entity and Intangible Valuations (CEIV) credential and Mandatory Performance Framework for Accounting educators who submit an CPAs and finance professionals. CEIV credential holders will follow the new framework, which approved research proposal are eligible defines how much work is necessary to provide for up to $15,000 in funding. supportable and auditable fair value measurements for financial reporting. CEIV credential holders In December 2016, ARAG approved its first two will also participate in an ongoing, proactive proposals: Quality Monitoring Program designed to provide confidence to markets and regulators that CEIV “Identifying Significant Components and • credential holders are performing high-quality Determining Component Materiality in Group valuations in compliance with the Mandatory Audits: Does a Focus on Size Miss the Mark?” Performance Framework. With more consistency • “Lost in Translation? A Comparative Analysis of and transparency in the valuation process, auditors Auditors’ Perceptions of the Firms’ Tone at the Top” reviewing valuations performed by CEIV credential holders can more effectively assess the work done These projects are expected to inform the ASB’s to determine fair value measurements. efforts as they consider changes to the Group Audit and Quality Control standards. Additionally, the ARAG Certified in the Valuation of Financial program is being expanded for 2017 and beyond. Instruments (CVFI™) credential Similar to the CEIV credential, Certified in the Valuation of Financial Instruments (CVFI) will also have a disclosure framework that credential holders will be expected to follow. The CVFI credential, expected to launch in 2018, will provide everyone in the valuation chain with a more accurate and transparent method for disclosing what goes into complex calculations when valuing financial instruments and securities. 21

24 Driving audit quality in the future Assurance services beyond financial statements In 2017, the AICPA launched a cybersecurity risk As customers, investors, suppliers and the public management reporting framework that uses a increasingly rely on information outside of financial common language — similar to what GAAP is for statements to make decisions, CPAs are in the accounting — to help organizations of all sizes, in best position to provide trusted assurance on more industries worldwide, take a proactive approach information than ever before. against cyberattacks. Cybersecurity Vendor/supply chain The AICPA is also developing guidance for CPAs With data breaches occurring on a near-daily basis, to help manufacturers and distributors better cybersecurity has gained increased attention understand cybersecurity risk in their supply chains. among business directors, regulators, vendors It is expected to be released in 2018. and customers. Organizations are evaluating the effectiveness of their cybersecurity risk management programs and looking at ways to communicate the results to interested stakeholders. Figure 14: Cybersecurity risk management reporting framework SOC for Cybersecurity Trust Services Criteria Description Criteria for Guide for Reporting on an (Control Criteria) for Security, Management’s Description Entity’s Cybersecurity Risk of an Entity’s Cybersecurity Availability, Processing Management Program and Risk Management Program Integrity, Confidentiality Controls and Privacy Attestation engagement Management resources Advisory services Companies can use the framework Companies can work with Companies can engage a qualified as a guide in creating and a CPA skilled in information CPA to perform an examination to evaluating their cybersecurity risk management and technology to provide stakeholders with confidence management programs. assess controls, identify gaps in the organization’s cybersecurity and develop a robust response efforts — letting clients, customers plan to strengthen their existing and investors know that steps and cybersecurity programs. systems are in place to protect sensitive information and to help prevent disruptive events. 22 Enhancing Audit Quality: 2017 highlights and progress

25 Sustainability reports (ESG) In July 2017, the AICPA released an authoritative guide on sustainability assurance engagements. These reports can help users know if a company has met requirements related to greenhouse gas emissions, achieved company goals on water consumption or lived up to promises to manufacture products in an environmentally safe way. As companies look to increase the credibility and reliability of their reported sustainability information, they are engaging CPAs to provide assurance on this data. The AICPA’s authoritative guide equips CPAs for engagement acceptance, planning and performance, as well as reporting. Figure 15 20% 82% 2016 2 011 S&P 500 companies who publish some type of 1 sustainability report, even though it is voluntary 73% of portfolio managers and research analysts take sustainability matters into account when making 2 investment decisions. 69% of portfolio managers and research analysts believe it is important that sustainability information be 2 subject to independent assurance. 1 Source: Governance & Accountability Institute , 2017 2 , 2015 CFA Institute’s Environmental, Social and Governance (ESG) Survey Source: 23 23

26 Conclusion Enhancing Audit Quality is a strategic, comprehensive commitment by the AICPA and the profession to promote quality services. Through this long-term initiative, the AICPA is guiding the profession through continuous, steady quality improvement that will lead to enhanced performance over time. And as EAQ supports auditors in their goal of improved audit quality, those auditors will in turn be able to support small business owners, investors, the public and more with valuable, trusted services. Looking to the future, EAQ will continue to: • Implement reforms to make the Peer Review Program more effective • Promote the value of audit and assurance in the marketplace • Conduct research to uncover more meaningful information about audit quality trends CPAs have long been considered one of the most trusted professions by the public, and a commitment to quality is key to maintaining that trust. As the business environment continues to evolve at an unprecedented pace, the AICPA is dedicated to helping firms improve their audit quality and reinforcing the value of assurance services. 24 Enhancing Audit Quality: 2017 highlights and progress

27 25

28 © 2017 Association of International Certified Professional Accountants. All rights reserved. AICPA and the American Institute of CPAs are trademarks of the American Institute of Certified Public Accountants and are registered in the United States, European Union and other countries. The Globe Design is a trademark owned by the Association of International Certified Professional Accountants and licensed to the AICPA. 22797-312 26 Enhancing Audit Quality: 2017 highlights and progress

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