Auditing Estimates: An Update for Unprecedented Times
For anyone reading the headlines, it sometimes feels as if we are living in unprecedented times, but the reality is, Shakespeare was right: “the past is prologue.” We’ve been through wars before. We’ve experienced inflation. We’ve survived recessions. What’s perhaps unique however, is the confluence of so many uncertainties which feels like uncharted territory for many of the younger generations.
For instance, in March 2020, while typically a lagging indicator of economic health, we saw unemployment uncharacteristically lead the way for economic deterioration with the onset of the pandemic. While the markets tanked in the short term, by Q3 2020, the stock market had fully recovered and then went on to rally through Q4 2021. Though market performance does not equate to economic strength, certainly the pandemic seemed to de-correlate the two metrics. Fast forward to Q3 2022 and headlines are struggling to know what to call the current economic situation. Is it a recession or just a correction? Despite two quarters of negative economic growth, companies across many industries are still posting profits (albeit perhaps less than anticipated) and almost every company is struggling to hire sufficient resources. Supply chains are still disrupted, given the war in Ukraine and the reverse impact of sanctions, as well as the ongoing nature of the pandemic. And finally, we’re all aware of the red-hot inflation trend, leading the Fed to post several interest rate hikes in a very short time.
While we can all acknowledge the economic uncertainties, how do we incorporate these new realities into our audits? Specifically, how does management compensate for these uncertainties in its estimates and how do auditors test these assumptions given how new or different they are from the past economic cycles?
In our first article on Auditing Estimates, we provided various audit considerations for teams when evaluating subjective management assumptions. We stated (and many of our readers echoed their frustrations) that “auditing a management estimate can feel like trying to make concrete out of Jell-O.” Several years later, in its most recent inspection observations, the PCAOB still finds issues with estimates, stating:
“While we have observed improvements in auditing accounting estimates, deficiencies continue to occur, particularly in auditing the allowance for loan losses (ALL), estimates related to accounting for business combinations, investment securities, and long-lived assets.”
The most common deficiencies stemmed from audits where engagement teams:
- Did not sufficiently evaluate the appropriateness of models used in valuations;
- Did not sufficiently obtain audit evidence for assumptions used in valuations;
- Did not sufficiently evaluate changes, or lack of changes, in recurring assumptions used in valuations (specifically for ALL); and
- Did not sufficiently evaluate contradictory evidence when concluding on the reasonableness of assumptions.
Building on our previous article, below we expand on the common deficiencies and additional considerations to incorporate into audits of estimates, especially given current economic conditions.
Auditing Estimates Considerations
Valuation Models
While I have rarely seen inappropriate models used in valuations, I have often seen teams fail to sufficiently document its evaluation of the valuation models used in estimates. AS 2501.10 and 11 explicitly require the auditor to evaluate whether the method used by management is in accordance with the financial reporting framework and is appropriate for the specific account. In addition, all changes to models need to be considered. Regardless of the type of model used/applied, it must be evaluated. The more complex the model, the more there is a need for a qualified valuation specialist that can specifically evaluate the appropriateness of the model itself, whether at the macro level (i.e. use of an income approach) or at the micro level (i.e. the appropriate factors to incorporate in building a discount rate).
Support for Assumptions
This finding is arguably the most difficult for auditors to fulfil given the judgment involved in what defines “sufficiency” or “reasonableness.” While we can debate the definitions, the reality is that many teams are still failing to obtain solid evidence and support for assumptions embedded into valuations. I often see teams inquire with management to understand how management derived its assumptions while failing to perform further procedures to obtain actual support for the inputs. Below are some considerations for teams to incorporate into their evaluation of assumptions:
- Availability of data / information: In the current economic environment, is there relevant historical or industry data that can support specific assumptions?
- For instance, given supply chain disruptions, do the past two or three years of historical internal data support future projections? How long will supply chain disruptions last? What will be the impact on production and sales? What will be the impact on costs and margins?
- For start-ups with less operating history or smaller companies with less internal information tracking/monitoring, or less controls around internally derived information, management and auditors may be forced to look to external sources of information to support specific assumptions.
- Accuracy and completeness as well as relevance and reliability of information: Engagement teams need to evaluate the accuracy and completeness of any data used by management that is internally derived (i.e. company specific data). In addition, for all externally derived information, auditors need to evaluate the relevance and reliability of that information. Regardless the source of the data, AS 2501.14 specifically requires auditors to evaluate whether “the data is relevant to the measurement objective for the accounting estimate.” The current economic uncertainties will challenge the relevance of information given some of the current conditions have not been seen in 30 or 40 years (i.e. inflation).
- Qualitative inputs: Management often discusses qualitative factors that impact the valuations. Somehow, these qualitative inputs need to translate into quantitative figures used in the valuation model. Management is responsible for creating and supporting the quantitative assumptions, so auditors should not hesitate to challenge management on how it derived a specific assumption. I encourage teams to keep asking: “How? Why? Tell me more.” Be curious.
Changes in Recurring Assumptions
Given the changes in economic conditions, management and auditors need to consider changes (or the lack thereof) in recurring assumptions. Part of this evaluation should be built into retrospective reviews over management estimates (as required under AS 2401.63-65). Retrospective reviews will help audit teams evaluate how accurate previous management estimates were. To the extent management missed the mark in prior years, I would expect that current year assumptions would change to more accurately reflect the most recent information. In addition, to the extent economic conditions change, again, assumptions should also adjust year over year. For instance, although historical inflation assumptions typically ranged from 2-3%, I would expect current year inflation assumptions to reflect the higher trends being reported in the news.
Too often, auditors simply apply a “status quo” blanket expectation for all assumptions, but the challenge will always be:
- If assumptions changed year over year, what supports the change in assumptions?
- If assumptions remained static, should they have remained constant? Or should they have changed to reflect evolving macro-economic or company-specific factors?
These same concepts apply for analytics and fluctuation analyses where teams often just use a blanket “status-quo” expectation and investigate any changes greater than $X and/or X%. Well, why is the status quo the appropriate expectation to start? These are the auditor judgments that need to be documented to evidence the team’s considerations.
Contradictory Evidence
Auditors often review large sums of information. Invariably, there will be data that appears contradictory to management’s assumptions/assertions. It is critical for auditors to challenge this information and resolve any discrepancies that arise from contradictory evidence. Auditors should consider the following:
- Obtain support from management to validate its assumption and ask management to speak to why the contradictory evidence is irrelevant or unreliable and should not be factored or weighted in the valuation.
- Perform a sensitivity analysis to demonstrate how the contradictory evidence does not materially impact the valuation.
- If contradictory evidence could materially impact the valuation, consider different scenarios and obtain additional support that further validates management’s assumption and/or invalidates the contradictory evidence. For instance, look at historical performance with the presence of the same contradictory evidence but that would still support management’s assumption.
The extent of additional procedures needed to resolve the contradictory evidence will depend on various factors, such as the risk assessment linked to the estimate, including the fraud risk assessment, the overall evaluation of management bias, the materiality of the valuation and the correlated contradictory evidence, etc. The key here is that auditors cannot simply ignore contradictory evidence. Teams need to document the evaluation.
Bank-Specific Considerations
While estimates for all companies are difficult to audit, it is perhaps even more complex for banks given the allowance for loan losses (or now the allowance for credit losses) has so much tied to economic conditions. How are banks incorporating new realities such as the interest rate volatility? Or supply chain disruptions that may impact borrowers’ abilities to service loans? What about conflicting economic conditions such as declining unemployment figures coupled with two quarters of negative economic growth? Do banks have sufficient historical data from previous time periods that mimicked the current economic conditions? Depending on the source of that information, is that information accurate and complete or relevant and reliable?
For banks, engagement teams should specifically consider the following:
- Since the allowance is often predicated on historic loss data, how has the engagement team evaluated the accuracy and completeness of that information? Recurring audits will often use recent historical loss data pulling from systems and reports that have been tested in previous audits. However, what if the engagement team decides to look at information from the 2008 recession or from the inflationary decades such as the 1970s and 1980s? What procedures has management and/or the engagement team performed to validate the accuracy and completeness of that information?
- How has the engagement team evaluated the relevance of information? For instance, a two or three-year historical loss lookback would not necessarily reflect the current economic conditions such as inflation, interest rates, unemployment rates, etc. Engagement teams should consider the relevant economic factors that are built into the allowance and evaluate how closely (or not) the historical loss data reflects the current economic conditions. To the extent the data is dissimilar, then management should be adjusting assumptions, such as qualitative factors (Q-factors), to incorporate these differences.
- For banks that may not have relevant historical loss data sets, management may be forced to look for external sources to support their assumptions (i.e. look for other banks and their loss ratios). Engagement teams need to consider the relevance and reliability of this information when evaluating the assumptions. For instance, where were the loss ratios obtained? Which industries/segments were included? How similar are the loan portfolios?
- Are inputs to qualitative factors auditable? What support is there for changes in qualitative factors? Do changes (or lack of changes) in qualitative factors correlate with macro-economic trends (i.e. did the bank adjust for unemployment and did that adjustment mirror current unemployment trends)? How did the bank determine the percentage change given the qualitative consideration? Often teams will need to look in aggregate at the impact of all changes to qualitative factors on the overall reserve.
- In testing controls, are engagement teams considering all relevant controls that might provide comfort over accuracy and completeness of information used to derive assumptions or data used in the valuation? How precise are management review controls around the valuation and how much comfort can engagement teams leverage from the testing of these management review controls? For example, would an entity level credit committee review be sufficiently precise to detect material misstatements in estimation and calculation of allowance, or should the auditors identify and test more precise process level controls?
One tool we often recommend to our clients who perform bank audits is to perform an anchoring exercise, or a look-back analysis performed to locate historical periods with similar economic conditions/outlooks. This requires historical information about losses reported in a time period with similar risk characteristics (e.g. Y1 of recession). Then compare the loss reserves to actual charge-offs (of the loans existed at Y1 YE) that occurred in the periods subsequent to Y1. The difference would be a good indicator of how accurate the historical loss model was and what assumptions / inputs might need to be adjusted in estimation of relevant Q-factors to fully reserve for anticipated losses in the current year.
Key Takeaways
Auditing estimates is never easy. As with all things audit, the nature, timing, and extent of procedures are driven by the risk assessment. Given the confluence of numerous economic uncertainties, many of which are “new” compared to the last couple of decades, the risks surrounding subjective management judgments and assumptions used in valuations will increase the overall risk linked to an estimate, including the potential for fraud risk through management bias. As auditors plan and prepare for audits, consider the following:
- Engagement teams must always evaluate the appropriateness of valuation models used in estimates. Some models may require a qualified valuation specialist to conclude.
- Auditors need to continue to expand on testing the reasonableness of assumptions by obtaining support from management that is complete and accurate and relevant, or from other external sources (such as industry data) that is relevant and reliable. Given so many changes to economic conditions, relevance will be an important consideration for teams to document.
- When the status quo is disrupted and the economy is in a period of significant uncertainty, auditors should consider all changes, or lack of changes, in assumptions and inputs. This is an important part of reviewing estimates for management bias from previous periods and for truly concluding on the reasonableness of current year estimates.
- Contradictory evidence must always be considered and sufficiently documented and resolved to conclude on the overall reasonableness of accounting estimates.
- Q-factors should be supported by reasonable estimates which are based on accurate, and relevant and reliable information, especially in times of significant uncertainties.
While we’ll never make concrete out of Jell-O, no matter the economy, we must continue to perform robust audit procedures and build in additional considerations to account for the economic changes and uncertainty we’re experiencing today. The hope is not to make concrete, but merely a Jell-O that holds it shape (and jiggles) despite a dynamic, changing environment.
Farkhod Ikramov, JGA Director, has over 25 years of public accounting and audit regulation experience. Most recently, Farkhod held a ten-year tenure as a PCAOB inspector. Throughout his experience there, he inspected a variety of industries, focusing the last four years on financial services, insurance and mining. His experience positions him as a passionate and practical advisor to public accounting firms, assisting leadership in the implementation of the right controls, policies and practices throughout the organization.
Joe Lynch, JGA Shareholder, to Provide Insights on Changes to Engagement Quality Review Requirements
JGA is pleased to announce that Joe Lynch , JGA Shareholder, will be a featured guest on the upcoming AICPA & CIMA A&A Focus live webcast on February 4, 2026. Joe has been invited to join the program to provide insights on changes to engagement quality review requirements. This appearance offers a valuable opportunity for viewers to gain practical, real-time guidance on effective EQR practices—an increasingly critical component of audit quality and compliance under the evolving professional standards landscape. Click here for m ore information about the program and registration details. At Johnson Global Advisory, we support firms in selecting, implementing, and optimizing these tools to meet their unique needs. For more insights, visit our blog or contact us to learn how we can help your firm AmplifyQuality®. For more information, please contact your JGA audit quality expert .
Introduction The accounting firm industry experienced a ground-breaking transaction in August of 2021 when TowerBrook acquired EisnerAmper, which marked the first private equity (“PE”) transaction of a large-scale accounting firm. This transaction was structured using an alternative practice structure (“APS”). Historically, licensing and independence rules have barred non-CPAs from owning accounting firms. Through an APS, a PE firm may invest in the non-attest entity with service lines such as tax advisory and consulting. The CPA partners retain control over the attest functions, which preserves regulatory compliance. While the APS model has been in existence since the 1990s, this August 2021 transaction brought new attention to this structure. What has followed is an extraordinary volume of deal activity. Per the CPA Trendlines (“CPAT”) Cornerstone report posted on November 18, 2025, CPAT has tracked over 115 PE-related transactions from 2020 to 2025, with over 80 transactions in 2025. While PE in the accounting firm space is no longer news, the pace and volume of transactions is certainly news-worthy. Impact of PE Investment The impact of PE investment on the accounting firm space is unprecedented. The APS has enabled PE to fuel billions of capital investment. PE-backed firms provide immediate payouts to partners at appealing valuations while providing access to capital to these firms for merger and acquisition growth, technology investments, and other priorities. Well-capitalized firms now have an improved ability to invest in technological capabilities, attract experienced talent to be more competitive for college graduates, and improve their market position. With new technologies, routine tasks are being automated such as data entry, tie-outs and controls testing, resulting in less time needed to perform certain audit procedures. What the regulators are saying At the AICPA December 2025 conference on Current SEC and PCAOB Developments, common topics were the presence of private equity in the accounting firm space and the opportunities and challenges that come with this investment. PCAOB Acting PCAOB Chair George Botic described that both transformative technologies (e.g., artificial intelligence or “AI”) and the continuing expansion of private equity investments in accounting firms are two developments that bring opportunities and challenges. Mr. Botic noted that while AI has enhanced risk assessment, reduced manual processes and made it possible to efficiently analyze entire populations of data (which can reduce the risk of missing irregularities or unusual patterns), that overreliance on AI may ultimately threaten auditors’ exercise of professional skepticism and judgment. As it relates to private equity, Mr. Botic noted that while these investments have the potential to enhance audit quality by increasing firm capacity and modernizing audit tools with advanced technologies, the presence of private equity presents a risk that firms shift incentives to prioritize profitability over audit quality. Mr. Botic stated, “Both AI and private equity investments in accounting firms carry the potential to truly reshape the profession. Yet these opportunities come with clear challenges to ensure that overreliance on AI and the pressures of private equity do not jeopardize audit quality.” SEC SEC Chair Atkins discussed in his remarks that he would like the PCAOB to modify its inspections process to place more reliance on the system of quality management and that inspection of certain engagements would inform the PCAOB if the firm’s system of quality management is effective. He also expressed a view that accountability for audit quality should move upward to firm leadership. How is a firm’s system of quality management (“SQM”) impacted? Today’s transforming environment has far-reaching impacts on a firm’s SQM. This publication will focus on risk assessment, governance and leadership, ethics and independence, resources, engagement performance, and monitoring and remediation.
As we wrap up an incredible year, we’re showcasing the insights that sparked the most conversations and drove the most impact. Here are the Top 10 Actionable Insights from 2025: Use of Other Auditors: Managing Risk and the New PCAOB Standard ISQM 1, SQMS 1: Influencing the Firm on the Benefits Beyond Compliance (Part II) Case Study – Example Successor Auditor Considerations QC 1000 Implementation: Key Themes and Guidance from the PCAOB Workshop Clearing the Roadblocks: Auditing Estimates with Confidence in Small Firms Enhancing Auditor Independence: Key Themes from PCAOB Recent Spotlight The Never-Ending Story: How to Remediate Recurring EQR Findings – Part Deux Cryptic Audits of Crypto Assets: Auditing Digital Assets Innovative Solutions for QC 1000, SQMS 1, & ISQM 1: Quality Management tools in the Marketplace Enhancing Audit Evidence: PCAOB Expectations and What We Are Seeing in Practice
As companies increasingly rely on cloud platforms, external data providers, and integrated third-party systems, the boundary between “internal” and “external” information has blurred. Audit evidence today may originate outside the company, but often arrives through the company, transformed, mapped, merged, or embedded within systems before it reaches the auditor. In response to this evolving landscape, the PCAOB amended AS 1105, Audit Evidence, effective for audits of fiscal years beginning on or after December 15, 2025. Central to these amendments is AS 1105.10A, which introduces a principle-based, risk-scalable framework for evaluating the reliability of electronic information provided by the company. At JGA, we view this development as a natural response to the data ecosystems shaping today’s financial reporting. We also see it rapidly becoming a recurring area of focus by global audit regulators, particularly when the information supports significant risks, revenue, fraud procedures, or management estimates. This article summarizes key themes from the PCAOB’s Board Policy Statement on Evaluating External Electronic Information (issued September 2025) paired with practical observations from JGA’s inspection support and methodology enhancement work with firms across the profession. Why External Electronic Information is a Growing Focus Area Across industries, external platforms now drive core financial and operational processes: payment processors, logistics platforms, third-party fulfillment solutions, subscription systems, industry data services, and more. Although such information originates from outside the company, it is often: Received, stored, or routed through company systems Transformed within spreadsheets or EUCs Merged with internally generated data Exported in formats that allow modification Provided to auditors without a traceable chain to the original source. Our direct experience working with our clients shows that PCAOB inspection teams consistently emphasize that external does not inherently mean reliable. The auditor must understand how the information was obtained, how it was handled, and whether there was a reasonable possibility that it could have been modified before reaching the auditor. Understanding AS 1105.10A The Board Policy Statement highlights two foundational expectations: 1. Auditors should understand the source and flow of the information. Inspection teams frequently question whether the engagement team understood: The true originating source of the data How the company received it (e.g., automated feed vs. manual upload) Whether the information is editable or configurable Whether it passed through multiple systems or spreadsheets How it is used in controls, substantive testing, or significant estimates In JGA’s experience, inspection findings often arise from situations where teams relied on a “system-generated” or “externally sourced” report without fully understanding where it came from or whether it could have been changed. 2. Auditors should address the risk of modification. The standard allows for two broad approaches, testing the information itself or relying on controls, depending on the assessed risk. The standard is intentionally flexible, but this flexibility requires well-supported judgments, especially for information affecting significant accounts or fraud risks. The PCAOB also acknowledged scenarios where separate testing may not be required (e.g., direct-to-auditor feeds or read-only API transfers) but emphasized that this exception applies only when the risk of modification is no more than remote. What We Observe in PCAOB Inspections Through JGA’s transformation activities with firms, we continue to see consistent challenges in the following areas: Reliance on information provided by the company without evaluating whether transformed, filtered, or merged with other data sets. Use of external or industry data in analytics without understanding the methods, assumptions, or relevance to the issuer. External information embedded in significant estimates or complex models without evaluating management’s process for compiling that information. System-generated or external journal entry listings used in fraud procedures without establishing completeness and reliability. In each of these situations, inspection teams focus on whether engagement teams understood how the information was obtained, how it was processed, and whether there was a reasonable possibility of modification before it reached the auditor. Emerging PCAOB Expectations Although the standard is principles-based, several expectations are now appearing consistently in inspections: Reliability cannot be presumed, external information must be evaluated just like any other audit evidence. Understanding the company’s process for receiving and handling external information is foundational. Judgments about whether separate testing is required must be risk-responsive and well-supported. Documentation should clearly articulate the source of the information, the company’s process, and the basis for concluding the information was reliable. These expectations are shaping how firms need to think about IPE testing, data flows, and the role of technology within the audit. Areas Where Firms Often Seek Assistance Across our methodology enhancement and inspection support work, firms consistently ask for help in: Identifying when information is “external electronic information provided by the company”. Determining whether reliance on management’s process is appropriate. Navigating situations where data passes through multiple systems or spreadsheets. Evaluating third-party or industry data used in analytics. Assessing effects on significant risks, especially revenue and fraud. Aligning documentation practices with PCAOB expectations. Many firms have strong processes for testing IPE, but other nuances of the standards require an additional layer of consideration that is still evolving in practice. Looking Ahead As companies build increasingly automated and interconnected systems, auditors must deepen their understanding of those environments to obtain sufficient appropriate evidence. Firms that proactively adapt their methodologies and train engagement teams will be better positioned for both compliance and audit quality. At JGA , we help firms interpret emerging regulatory requirements, strengthen methodologies, and enhance the use of technology and data in the audit. Ultimately, ensure compliance and consistency get to our ultimate goal of helping firms grow and scale responsibly. To learn how we can help your firm navigate these expectations and #AmplifyQuality, visit www.johnson-global.com, or contact a member of your JGA client service team.
WASHINGTON, D.C. Johnson Global Advisory (JGA) is pleased to announce Boyd O’Rourke as a Managing Director, focused on helping audit firms meet their strategic objectives with audit quality in mind. With 30 years of experience in public accounting, Boyd has deep experience in firm management, strategy, risk management, and quality control. Boyd’s skillset complements JGA’s core services by adding new firm strategy and risk management service offerings. “ I have a passion for building high-functioning groups inside accounting firms,” said Boyd. “With private equity firmly in the accounting firm space, service line growth, acquisitions, and consolidation are happening at record speed. JGA’s goal is to help firms manage this growth while limiting exposure to regulatory and business risks. I am excited to advise firms navigating this most-critical period of their journey. ” Most recently, Boyd held multiple senior roles at CBIZ CPAs (formerly Mayer Hoffman McCann P.C.), including Executive Committee Member, National Practice Leader, Chief Risk and Quality Officer, National Director of Quality Control, Mid-west Regional Attest Practice Leader, and National Training Director. “ By most measures, Johnson Global Advisory is a small consulting firm—but over the past eight years, our impact on individual firms and the global profession as a whole has been vastly disproportionate to our size,” said Jackson Johnson, President and Founding Shareholder, JGA. “That is only possible because every professional that joins the JGA team brings deep senior-level experience, technical expertise, and a genuine ability to connect with our clients around the world. I am especially grateful that Boyd O’Rourke has chosen JGA as the platform to share his leadership and expertise to help firms grow and scale. Having known Boyd for several years, I’ve seen firsthand his commitment and executive approach to solving complex problems affecting public accounting firms. His decision to join us is a testament to the unique opportunities JGA offers—and to our shared mission of making a meaningful difference for our clients and the industry .” Boyd is based in the Kansas City area and received his Bachelor of Business Administration in Accounting from the University of Iowa. To learn more about Boyd and the full JGA team, read here . At Johnson Global Advisory , we support firms in selecting, implementing, and optimizing solutions and tools to meet their unique needs. For more insights, visit our blog or contact us to learn how we can help your firm AmplifyQuality®.
In September 2022, we wrote an article discussing the struggle that firms were experiencing at that time in remediating Quality Control (QC) criticisms as it relates to their Engagement Quality Review (EQR) process. This struggle seemingly continues today, as, so far in 2025, the PCAOB has publicly re-released previously issued inspection reports for 32 registered firms, and in 19 of those reports, EQR was a QC criticism that was released to the public as these firms had failed to satisfactorily remediate their EQR QC criticism¹. This means that firms continue to struggle to identify and effectively implement remedial actions to the satisfaction of the PCAOB that demonstrate that they have successfully remediated their non-compliance with AS 1220, Engagement Quality Review . So why are firms still failing to remediate this QC criticism? As we stated previously, having worked with engagement teams and looking at the nuanced and sometimes detailed nature of some of the PCAOB Part I findings, attributing the audit issue to a deficient EQR review can sometimes feel like the regulator is being overly exigent. In fact, in its adopting release to the EQR standard , the Board stated that it “…has been sensitive to commenters' concerns and agrees that the EQR should not become, in effect, a second audit.” This is a difficult concept for EQRs to balance though, as engagement teams often ask us, “As EQR am I required to review every test of design and operating effectiveness for internal controls related to every significant risk? Which substantive workpapers in significant risk audit areas should I review and to what level of detail?” Though not explicitly required in AS 1220, implicitly by the very nature of the EQR attribution, the PCAOB is inherently creating an expectation of a detailed EQR review. After all, AS 1220.09 does require the EQR to “review documentation.” When the PCAOB evaluates a firm’s Rule 4009 remediation response, they pay particular attention to recurring deficiencies. If the same deficiency is long-standing or occurs in subsequent reports, remediation efforts undertaken must be incremental in each remediation submission so as to address the recurring deficiency. Said otherwise, a firm cannot deliver the same training year after year and expect it to drive change; it must change its approach to remediate the recurring deficiencies. We have numerous clients telling us that this is the second or third inspection report that includes an EQR QC criticism. They often ask us, “This time, what can we do that is incremental that we haven’t already done?” Remediation Considerations The new quality control standards (QC 1000, ISQM 1 and SQMS1) require firms to perform root cause analyses for audit deficiencies. In doing so, firms should identify the real root cause behind why EQRs are failing to identify audit deficiencies and then design specific remedial actions to address these root causes. So, remedial action should be in response to the actual root cause of the EQR deficiency – i.e., what is the ultimate root cause of EQR’s not identifying the Part I deficiencies at the time of their review? The following are typical actions that we see firms undertake: a. Training as an Action For many firms, they start out the remedial process by providing training to audit professionals that specifically address the requirements of AS 1220. Some firms attempt this by sourcing online training from the marketplace. If this is the first time your firm has received a Part II EQR criticism, then this action might be effective. However, training designed to remediate quality control deficiencies must be specific to the facts and circumstances of your issue(s). Oftentimes though, when the EQR criticism is long-standing or repetitive, training alone is not sufficient. Key takeaway : Consider developing more robust training that specifically addresses nuances of firm findings and walk through examples of EQR reviews. b. EQR Sign-off Checklist as an Action Another common remedial action is for firms to make enhancements to their methodology, including their EQR sign-off checklist . Most firms subscribe to audit software programs already which have a basic EQR checklist that calls out the requirements under AS 1220. Modification to the EQR checklist and/or creation of addendums that specifically focus on the issues or concerns can be a meaningful improvement and can add rigor to the review process. Key takeaway : Firms should determine whether they need to modify their EQR sign-off checklist and/or create addendums to include specific bullets and questions addressing firm audit deficiencies, specifically calling it out to the EQR’s attention. c. EQR mentoring/coaching program as an Action Many firms have already implemented the previous two actions, and they may continue to see deficiencies in the QC criticism. The PCAOB is expecting firms to do more to ensure quality audits. As we have worked with firms on remediation, we recommend firms consider an EQR mentoring/coaching program . When designed and implemented properly – and timely – we believe this action to be important to a successful remediation of QC deficiencies around the EQR function. Key takeaway : Consider designing and implementing an EQR coaching or mentoring program, paying close attention to key elements important for effective remediation criteria. Other Considerations Given that global audit regulators have raised the bar in expectations on recurring findings – specifically on the EQR process – we cannot stress enough the importance of beginning the remediation process early . Engage the PCAOB in a dialogue immediately once your 12-month remediation period begins, to discuss the planned remedial actions and get feedback on the sufficiency of those actions. Pay particular attention to understanding what is considered timely implementation. Do not underestimate the amount of time it will take to fully implement remedial actions. Key takeaway : Engage the PCAOB early in the remediation process to seek feedback on the sufficiency of the remedial actions (perhaps even before the final report has been issued). EQR as last line of defense Another important point is that EQRs are essentially the last line of defense with regard to audit quality. Said differently, audit quality starts with the audit engagement team and the firm’s entire QC system (training, methodology, tools, etc.) that enables and supports audit engagement teams to perform quality audits. Firms must also consider the remedial actions that also address the PCAOB’s Part I audit deficiency(ies). The EQR QC criticism, while linked to its own standard, is really just the review of the audit work performed under all the other audit standards (e.g., AS 2501, AS 1301, etc.). It is a collective effort, and the EQR as well as the entire engagement team should be considered when remediating all QC criticisms identified in firm inspection reports. It may feel like a never-ending story and perhaps regulators are being overly rigorous, but the reality is this issue is not going away, so firms need to consider what incremental actions they can take to truly ensure EQRs perform quality reviews. At Johnson Global Advisory , we support firms in selecting, implementing, and optimizing these tools to meet their unique needs. For more insights, visit our blog or contact us to learn how we can help your firm AmplifyQuality®. ¹ Part I of a PCAOB inspection report contains audit deficiencies; this part is made public when the report is initially published. Part II contains the firm’s QC criticism(s); and this part is not initially released to the public. The firm has one year from the date the report is published to remediate the QC criticism(s). If the remediation is satisfactory to the Board, then Part II is kept private. However, if the firm fails to satisfactorily remediate the QC criticism, the QC criticism in Part II is then released to the public.
With the effective date for SQMS 1 and QC 1000 fast approaching, firms of all sizes—especially small and sole practitioners—must take action to implement a system of quality management (SQM) that meets the new standards. The good news? You don’t have to start from scratch. Despite QC 1000’s implementation date deferral, the AICPA’s date hasn’t changed, and the international standards are already effective. It’s important to maintain momentum on the efforts toward implementation of all applicable standards for your firm. This article outlines 10 practical steps to help firms build their SQM. Each step includes actionable guidance and considerations for firms with limited resources, and ties into JGA’s broader thought leadership on quality management, risk assessment, and system evaluation. The 10 Steps to Build Your SQM Step 1: Establish a Project Team Form a team with the right mix of quality expertise and operational insight. For small firms, this may mean involving a manager who can grow into a leadership role or setting aside dedicated time as a sole practitioner. Recommended actions to consider: Identify internal champions with interest or experience in quality. Schedule recurring project meetings to maintain momentum. Join a peer group for support and shared learning. Step 2: Understanding and Awareness Document your firm’s business strategy, service offerings, and operational conditions. This step helps identify factors that may impact quality—such as remote work, new industries, or staff turnover. Recommended actions to consider: Conduct a strategy review with firm leadership. List recent changes in firm structure or engagement types. Use these insights to inform your risk assessment. Step 3: Assign Responsibilities Define who is accountable for the SQM. The new standards require clear delineation of ultimate and operational responsibility, including oversight of independence and monitoring. Recommended actions to consider: Assign roles based on existing responsibilities. Clarify delegation boundaries for managing partners. Document responsibilities in your quality manual. Step 4: Establish a Risk Assessment Function Design a process to identify and assess quality risks. This includes understanding conditions or events that could impact quality objectives. Recommended actions to consider: Create a risk assessment policy tailored to your firm. Use relatable examples to demystify risk factors. Leverage AICPA practice aids for structure and templates. Step 5: Perform the Initial Risk Assessment Conduct brainstorming sessions by component and document risks using the AICPA Risk Assessment Template. Include both formal and informal responses. Recommended actions to consider: Use the AICPA risk library to identify common risks. Tailor risks to your firm’s size and services. Include existing responses—even if informal—for evaluation. Step 6: Finalize the Gap Analysis Evaluate where your current responses fall short. This may include undocumented policies or areas where responses don’t fully address the risk. Recommended actions to consider: Identify gaps in governance, ethics, and technology. Determine which informal practices need formalization. Prioritize gaps based on risk severity and regulatory impact. Step 7: Implement Responses to Address the Gaps Develop policies and procedures to close gaps. Responses must be documented and operational. Recommended actions to consider: Draft policies that reflect your firm’s values and risks. Link procedures to specific quality objectives. Use existing documentation as a starting point. Step 8: Update Your Monitoring Process Move beyond peer review prep—monitoring should be continuous and system-wide. Recommended actions to consider: Assign monitoring responsibilities across the team. Incorporate testing of responses into internal inspections. Use dashboards or checklists to track progress. Step 9: Formalize Root Cause and Remediation Procedures Investigate deficiencies and document why they occurred. This step is essential for both system and engagement-level reviews. Recommended actions to consider: Conduct interviews to understand root causes. Use findings to improve policies and training. Apply remediation even if your firm only undergoes engagement reviews. Step 10: Initial Test of Design and Implementation Review documentation and walk through processes to ensure your system is operational and testable. Recommended actions to consider: Validate that each component is supported by evidence. Simulate a peer review to test your system. Confirm that objectives, risks, and responses align. Conclusion Implementing a system of quality management is not just a compliance exercise—it’s an opportunity to strengthen your firm’s foundation for audit quality, risk management, and long-term success. Whether you’re a sole practitioner or a small firm with a few partners, these 10 steps offer a scalable roadmap to meet the new standards. Ready to get started or need help refining your approach? Contact your JGA audit expert today to schedule a consultation and ensure your implementation is tailored to your firm’s needs. At Johnson Global Advisory , we support firms in selecting, implementing, and optimizing these tools to meet their unique needs. For more insights, visit our blog or contact us to learn how we can help your firm AmplifyQuality®.
Introduction Auditing accounting estimates has long been one of the most judgment-intensive and inspection-prone areas of the audit. For smaller firms, the challenge is even greater due to limited resources and evolving regulatory expectations. At JGA , we’ve worked closely with firms navigating these complexities and have identified three critical areas where auditors can strengthen their approach and reduce risk. What’s Recurring and What’s New: Insights from PCAOB’s Latest Audit Focus The PCAOB’s recent Audit Focus¹ underscores persistent deficiencies in how auditors evaluate accounting estimates. Common issues include failure to identify significant assumptions, reliance on inquiry or simple recalculations, and inadequate testing beyond vouching to internal or external data. These recurring gaps continue to surface in inspections of smaller firms. What’s new is a sharper emphasis on critical accounting estimates—those with high uncertainty and material impact. Auditors are now expected to understand how management analyzes the sensitivity of assumptions to other likely outcomes and to incorporate that understanding into their evaluation of bias and reasonableness. Additionally, the PCAOB highlights good practices such as updating internal guidance, enhancing EQR partner reviews, and aligning audit programs with the standards. Key Takeaways and Our Recommended Action Items 1. Evaluate the Reasonableness of Significant Assumptions What the PCAOB said: The PCAOB continues to observe recurring deficiencies in how auditors evaluate significant assumptions used in accounting estimates. Common issues include failing to identify key assumptions, relying solely on inquiry or recalculations, and not assessing whether assumptions are consistent with external factors like market conditions or industry trends. Auditors are expected to evaluate assumptions both individually and in combination, and to consider management’s intent and ability to carry out specific actions when assumptions are forward-looking². JGA’s reaction: In our article “Like Making Concrete out of Jell-O”², we described the inherent difficulty of auditing estimates that are subjective, uncertain, and often based on future projections. We emphasized that auditors must go beyond surface-level validation and challenge management’s assumptions with rigor. In “An Update for Unprecedented Times”³, we noted that economic volatility has made assumption testing even more complex, requiring auditors to evaluate whether recurring assumptions still hold in today’s environment. JGA’s recommendation: Firms should implement structured assumption testing protocols that go beyond vouching. Use external data sources to validate assumptions and ensure that engagement teams document how each assumption was evaluated. Partner and EQR reviews should include a step to confirm that all significant assumptions were tested for reasonableness and consistency. 2. Develop Independent Expectations and Use Reliable Data What the PCAOB said: AS 2501 outlines three approaches to testing estimates, including developing an independent expectation. The PCAOB stresses that auditors must have a reasonable basis for their own assumptions and methods and must evaluate the relevance and reliability of third-party data. This is especially important when using unobservable inputs or when substituting auditor assumptions for those used by management². JGA’s reaction: We’ve consistently advocated independent modeling as a way to reduce bias and improve audit quality. In our earlier articles, we highlighted how auditors can use historical data, peer comparisons, and macroeconomic indicators to build independent expectations. In “An Update for Unprecedented Times”³, we emphasized that auditors must reassess models and assumptions that were previously considered reliable, especially in light of post-pandemic economic shifts. JGA’s recommendation: Firms should train engagement teams to build independent expectations using validated data sources. When using third-party data, document the evaluation of reliability per AS 1105. Consider integrating external audit methodology tools that support independent modeling and provide templates for documenting assumptions and methods. 3. Strengthen Audit Methodology and Engagement Oversight What the PCAOB said: The PCAOB highlights good practices from firms that have updated their internal guidance, audit programs, and review checklists. These updates include scoping exercises for identifying estimates subject to AS 2501, requiring EQR partners to review all significant inputs, and linking risk assessments to audit responses. These practices are especially important for smaller firms that may lack centralized oversight². JGA’s reaction: We’ve seen firsthand how firms that invest in methodology updates experience fewer inspection findings. In “Like Making Concrete out of Jell-O”², we discussed how subjective estimates—like goodwill impairments or startup valuations—require more than just technical compliance. In “An Update for Unprecedented Times”³, we noted that firms must adapt their methodologies to reflect new economic realities and ensure that recurring assumptions are still valid. JGA’s recommendation: Firms should revise their audit programs to include scoping for all types of estimates, not just those flagged as significant risks. Partner and EQR checklists should be updated to ensure comprehensive review of estimate testing. Risk assessment documentation should clearly link identified risks to specific audit responses, with traceable evidence. Conclusion Firms should assess their current audit programs and consider enhancements aligned with AS 2501. JGA offers tailored consultations to help firms implement best practices and prepare for inspections. Contact us today to schedule a review or download our latest audit quality resources. Auditing estimates doesn’t have to feel like “making concrete out of Jell-O.” With a disciplined approach to assumptions, independent analysis, and robust methodology, firms can deliver high-quality audits that stand up to regulatory scrutiny. JGA is here to help you lead with confidence. For more information, reach out to your JGA audit quality expert . Sources ¹PCAOB’s new publication Audit Focus- Auditing Accounting Estimates | PCAOB ²See our full article Auditing Estimates: Like Making Concrete out of Jell-O ³See our full article Auditing Estimates: An Update for Unprecedented Times
The PCAOB’s Technology Innovation Alliance (TIA) Working Group released a report on using AI, data analytics, and digital signatures to improve audit quality and investor protection. It recommends standardizing documentation, adopting responsible AI, and fostering innovation. Joe Lynch , JGA Managing Director, contributed insights as a stakeholder in the TIA roundtables and panels.
Learn how to build your firm’s quality management system on time with actionable insights from Joe Lynch , Managing Director at JGA, as featured in the Journal of Accountancy . This article outlines eight strategic steps to ensure effective and timely implementation of quality management practices for your business.
