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At a glance

The PCAOB has issued a new standard, AS 1210, Using the Work of an Auditor-Engaged Specialist (which replaces existing AS 1210, Using the Work of a Specialist) and amended two existing standards, AS 1105, Audit Evidence, and AS 1201, Supervision of the Audit Engagement. The new standard and the amendments cover how auditors use the work of company specialists, auditor-engaged specialists, and auditor-employed specialists in their audits. Companies should work with their auditors to understand current practices as well as the specific procedures and incremental effort the new standards will require for each audit.
Changes will be effective for audits of companies for periods ending on or after December 15, 2020 (2020 for calendar year audits).

The new and amended PCAOB standards establish separate requirements for different types of specialists. Changes to the existing guidance include the following:
  • The requirements for assessing the knowledge, skill, and ability of the company's specialists and the auditor-engaged specialists, and their relationship with the company, have been enhanced.
  • An assessment similar to that of the specialist is now required for the entity that employs the specialist (if applicable).
  • The requirements for evaluating the work of a company's specialist have been strengthened.
  • The requirements for an auditor to review and evaluate the work of an auditor-engaged specialist have been enhanced.
Understanding the impact of the new and amended standards begins with understanding their scope; that is, what is a specialist?
Under the PCAOB standards, a specialist is a person (or firm) possessing special skill or knowledge in a particular field other than accounting or auditing. A person (or firm) with specialized skill or knowledge in information technology or income taxes is not a specialist, as information technology and income taxes are specialized areas of accounting and auditing.
Specialists include attorneys engaged by the company, such as attorneys engaged to interpret contractual terms or provide a legal opinion. For example, an attorney would be considered a specialist if they provide a legal interpretation of whether transferred financial assets are considered isolated in order for the company to determine the appropriate accounting. The amendments do not, however, apply to information provided by a company's attorney concerning litigation, claims, or assessments that are used by the auditor (i.e., the legal confirmation) pursuant to AS 2505, Inquiry of a Client's Lawyer Concerning Litigation, Claims and Assessments.
Consistent with current guidance, the amendments recognize the following three types of specialists, but strengthens or expands the audit requirements related to their work:
  • Company specialist: a specialist employed or engaged by the company. Requirements for use of company specialists are included in Appendix A of AS 1105.
  • Auditor-engaged specialist: a specialist engaged by the auditor's firm. Requirements for use of Auditor-engaged specialists are included in amended AS 1210.
  • Auditor-employed specialist: a specialist employed by the auditor's firm or by an affiliated entity that adheres to the same quality control and independence requirements. Requirements for use of Auditor-employed specialists are included in Appendix C of AS 1201.
A company's specialist and an auditor's specialist have fundamentally different roles. The company uses the work of a specialist in the preparation of its financial statements, and the auditor evaluates that work as audit evidence. An auditor's specialist performs work to assist the auditor in obtaining and evaluating audit evidence. The Board's amended requirements reflect the different roles of the specialists.
Auditors use of the work of company specialists or auditor-employed specialists will likely increase with upcoming FASB standards, such as ASC 326, Financial Instruments - Credit Losses.
Company specialists
The company uses the work of a specialist in the preparation of the financial statements. The new guidance states that auditors must assess a company specialist's knowledge, skill, and ability as well as the relationship between the company and the specialist (and the entity that employs the specialist, if applicable). The auditor's assessments, combined with the risk of material misstatement, will affect the auditor's determination of the extent of evaluation of the specialist's work required.
The new PCAOB standards extend these requirements to include the entity that employs the specialist, if the specialist is not employed by the company.
In the release accompanying the new guidance, the PCAOB notes that a strong reputation and standing of the specialist's employer in the specialized field can be a signal that the employer maintains qualified staff. On the other hand, an employer with a poor reputation or little expertise in the specialized field can indicate that more scrutiny of the qualifications of the individual specialist is warranted.
The extension of the requirement to the entity that engages the specialist may lead to additional inquiries of both the company specialist and the company to understand the professional qualifications of the entity that employs the specialist and the specialist and/or any relationships that the company has with the entity that employs the specialist that may affect their specialist's objectivity.
Companies should maintain effective controls over the assessment of the professional qualifications of specialists and their employer and their relationship with the company.
Data, assumptions, and methods used by the company specialist
In the release accompanying the new guidance, the PCAOB acknowledged that the amendments to the requirements to evaluate the work of a company's specialist will have the greatest impact on audit costs.
The expanded guidance on evaluating the specialist's data, assumptions, and methods is intended to help auditors think about how to use the work of a company's specialist as audit evidence. The expanded requirements align with the PCAOB's new standard on auditing estimates.
The key changes are as follows:
Current guidance
New guidance
Test the data provided to the specialist, taking into account the auditor's assessment of control risk
Test company-produced data provided to the company's specialist and evaluate the relevance and reliability of data from external sources
Understand the assumptions used
Evaluate significant assumptions
Understand the method used
Evaluate whether the method is appropriate under the circumstances
As part of their system of internal control over financial reporting, companies may need to obtain additional information and documentation from their specialist in order to support their evaluation of the specialist's methods, significant assumptions, and external data sources. Auditors will also need this information to support their audit procedures.
The auditor does not need to reperform the work of the specialist. Instead, the auditor must evaluate whether the specialist's work provides sufficient appropriate evidence to support a conclusion regarding whether the corresponding accounts or disclosures in the financial statements are in conformity with the applicable financial reporting framework. For example, if the specialist used a proprietary model to develop an independent expectation, the auditor would need to obtain information from the specialist to assess whether the specialist's model was in conformity with the applicable financial reporting framework and to evaluate differences between the independent expectation and the company's recorded estimate.
Auditor-employed specialist
The PCAOB's guidance is intended to promote effective coordination between an auditor and a specialist.
The standard also explains that the extent of supervision, review, and evaluation of the auditor-employed specialist's work is meant to be risk-based and depends on (1) the significance of the specialist's work to the auditor's conclusion regarding the relevant assertion; (2) the risk of material misstatement of the relevant assertion; and (3) the knowledge, skill, and ability of the auditor-employed specialist relevant to the work to be performed by the specialist.
The supervisory requirements that apply to auditor-employed specialists are closely aligned to the existing requirements for supervising engagement team members. 
Auditor-engaged specialist
The new guidance expands the requirements related to the auditor's assessment of the knowledge, skill, ability, and objectivity of the auditor-engaged specialist to the entity that employs the specialist. These assessments, combined with the risk of material misstatement, affects the auditor's determination of the extent of the review and evaluation of the specialist's work required.
This amendment is expected to have minimal impact to current practice as most larger audit firms employ specialists and only rarely engage specialists from outside their firm.
To have a deeper discussion, contact:
Dave Sharpe
Mark Lohmann
Stephanie Baccarella

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