PCAOB INSPECTION OBSERVATIONS: A Recap of 2021 Inspections
PCAOB Inspection Observations: A Recap of 2021 Inspections
As part of its initiative to increase visibility as well as to provide meaningful information, over the past couple years, the PCAOB has released an annual inspections observation report. The 2021 inspection observations, which was most recently published in December 2022, contains various sections which address some of the trends related to inspections, the recurring deficiencies both at the engagement and QC level, as well as some of the best practices observed. Let’s take a closer look at each of the four main sections of the report:
Trends in Inspections
This is the first visibility into audit quality during the pandemic. During 2021, the PCAOB inspected a total of 690 audits across 141 audit firms; 12 of those firms are annually inspected and the other 129 are triennial firms. 2021 inspections were predominantly over audits of fiscal years ending on December 31, 2020. Overall, the PCAOB found an increase in inspection findings across all inspections. Approximately 55% of audits will have at least one Part I.A and/or Part I.B deficiency, up from 44% in 2020.
The PCAOB continued to increase unpredictability in its inspections, both in the selection of issuers and in selection of focus areas. That said, the Board still performs its own risk assessment and intentionally inspected larger public companies with a focus on financial statement areas with a greater risk from COVID, such as impairment and current expected credit losses (CECL). In addition, the PCAOB’s Target Team also performed inspections across firms over specific focus areas. In 2021, the Target Team focused on fraud, going concern, SPACs, and cash and cash equivalents; their findings can be found in the PCAOB’s August Spotlight.
Common Deficiencies
The most insightful portion of the PCAOB’s spotlight is the section on recurring deficiencies. We’ve written about many of these before, including the Regulator Who Cried Wolf and Repeat Findings, so it should come as no surprise that many of the current year's findings are repeats from prior years.
The PCAOB explicitly stated: “We expect audit firm leadership to address the recurring nature of these deficiencies and monitor the effects of actions taken. An audit firm’s inadequate response to address recurring deficiencies may warrant additional action such as the Division of Registration and Inspections referring firms to the Division of Enforcement and Investigations for potential investigation or disciplinary action for failing to comply with PCAOB standards.” We have seen through our work with firms that the PCAOB is in fact taking enforcement seriously. The PCAOB has also expressed its expectation that firms begin performing root cause analyses to understand the reason for repeat findings. Root cause and remediation are significant parts of the new quality control standards, so firms need to take this statement to heart.
Let’s take a closer look at each of the sections identified by the Board:
Internal Control over Financial Reporting (ICFR)
- Management review controls (MRCs): MRCs continue to be one of the most cited deficiencies in inspections. Engagement teams need to understand and document precision, review procedures performed by management and how the engagement team validated these procedures, identification of items for follow-up and whether such items were addressed.
- Identifying and selecting controls to test: This goes back to understanding the likely sources of potential misstatement or “what could go wrong” (WCGW). Each WCGW should have a correlated control to address the risk. This includes controls around completeness and accuracy of information used in controls.
- Testing operating effectiveness (aside from MRCs): Engagement teams need to ensure they are sufficiently testing all relevant control objectives. Remember that inquiry alone is not sufficient. Also, the nature of the test and the evidence obtained must correlate to the assessed risk.
- Evaluating deficiencies in ICFR: Engagement teams are quick to document why every deficiency is “just a deficiency” and not a material weakness. We encourage teams to begin with the concept that if a control is in scope, it is designed to address a risk of material misstatement, which means that if it is deficient, it is a potential material weakness. Start with that premise and then consciously pare it back based on the relevant criteria.
ICFR is especially important in integrated audits given the fact that controls often impact the nature, timing and extent of the substantive audit. In other words, if controls are not tested properly, then the substantive audit testing approach may no longer be supported.
Revenue and Related Accounts
- Evaluating accounting: Especially in light of the new ASC 606 guidance, the PCAOB has focused on the auditor’s evaluation of the technical accounting, in accordance with the applicable financial reporting framework. Inspectors consistently took issue with engagement teams’ failures to evaluate the identification and satisfaction of performance obligations and the allocation of transaction price. In addition to accounting, the PCAOB cited concerns around insufficient footnote disclosures.
- Completeness and Accuracy (C&A): This topic seems to recur throughout all the PCAOB’s findings and will only continue to rise in importance as companies move away from more manual processes and implement more information systems, automating significant processes. Data is only as useful as it is complete and accurate (if generated from inside the company) or relevant and reliable (if generated from outside the company).
- Technology-Based Tools: Firms are increasingly using software audit tools in substantive audit procedures; in particular, the PCAOB noted increased use of technology in revenue, but also in testing inventory, journal entry testing, investments, and CECL. Inspectors are identifying concerns around:
- Populations used in data analytics: What is the population being used? Is it complete? Is it relevant? Is the data “pure” or is it mixed with other irrelevant information? For instance, if the engagement team is performing a cash proof for revenue, how does the engagement team know that the cash population is ONLY for revenue payments? Does the cash population include cash payments for other financial statement accounts?
- Resolving exceptions identified: When using data analytics, all exceptions need to be identified AND resolved.
Accounting Estimates
Estimates have always been difficult to audit, but COVID especially challenged the auditing of estimates given subjective assumptions and measurement uncertainty. The most prominent findings included:
- CECL – Engagement teams often did not sufficiently evaluate qualitative factors used in calculating reserves. The PCAOB specifically indicated its concerns around teams’ failures to evaluate changes in qualitative factors AND/OR evaluating the lack of changes year over year.
- Reasonableness of significant assumptions: Specifically, in forecasted cash flows, engagement teams failed to sufficiently evaluate the basis for the assumption as well as the consistency of the assumption within the industry or compared to external factors (i.e. COVID) as well as within company, taking into account management’s intent and ability.
In other words, as part of the evaluation of significant assumptions, it’s not enough to just obtain some support; auditors need to take a step back and fulfill all requirements of the standard, including comparing the assumptions to external factors, to management’s intent or ability, and to past years’ performance (i.e. perform a lookback review) to understand changes AND lack of changes in assumptions. This is especially true given the unprecedented nature of COVID.
Inventory
- Valuation: Engagement teams failed to sufficiently test the cost of material inventory balances. If a balance is material, by its very nature, it poses a risk of material misstatement. We’re not saying you have to audit all 100% of inventory, but the engagement team needs to evaluate (and potentially document) the residual risk of material misstatement for all untested balances.
- C&A: Yet again, completeness and accuracy of information used in valuation testing, such as inventory reserves, needs to be tested and documented.
Equity and Equity Related Transactions
- Evaluating accounting: Again, teams need to evaluate technical accounting to ensure it is in accordance with the applicable financial reporting framework. In particular, the PCAOB found that many auditors concluded incorrectly on the accounting for warrants related to SPACs.
Digital Assets
Audit evidence: The PCAOB challenged the appropriateness of audit evidence used in performing audits of digital assets. Said differently, the PCAOB is challenging the completeness and accuracy and/or relevance and reliability of information used in audit procedures when testing digital assets.
Other Areas
- CAMS: Engagement teams need to keep in mind the completeness of their evaluation of potential CAMs and ensure the completeness and accuracy of the CAMs disclosure in the audit report. The standard is clear that ALL communications to audit committees must be evaluated and documented, even if it’s clear that the communication is not a CAM.
- Audit Report: Despite being several years old, engagement teams are still struggling to appropriately calculate auditor tenure, specifically, the start date. For more information, the PCAOB has provided specific guidance.
- Audit Committee (AC) Communications: Teams need to remember to communicate ALL required AC communications, including discussing use of accounting firms and shared service organizations, critical accounting policies/practices, and providing material written communications, such as the management rep letter.
- Form AP: Like audit tenure, Form AP has been a requirement for several years, but firms are still failing to accurately (specifically regarding use of other accounting firms and accurately calculating % participation based on hours incurred) and timely file Form AP. Again, the PCAOB has specific guidance over Form AP.
- Audit Documentation: The PCAOB was often provided with “persuasive other evidence” during inspections, indicating that firms are failing to archive a complete set of workpapers.
- Fraud Considerations: Recurring findings include failing to evaluate/document the completeness of the JE population, examining underlying support for journal entries selected for testing, and testing all journal entries meeting the “characteristics of potential fraudulent entries.”
Quality Control Considerations
Through the inspection process, the PCAOB also reviews different quality control aspects of a firm. Some of these findings are identified through specific inspection procedures (e.g. independence checks) while other findings are derived from themes emerging from the results of engagement inspections (e.g. supervision and review). With the release of the proposed QC 1000, the PCAOB will continue to focus more on the effectiveness of firms’ systems of quality control.
Independence
- SEC Reg S-X Rule 2-01: The PCAOB continues to find that firms are failing to prevent and/or identify Rule 2-01 violations. Inspection results indicated that firms’ internal independence compliance and monitoring is often deficient.
- Audit Committee pre-approval: Both the SEC and the PCAOB have specific AC pre-approval requirements for audit work, tax services, and non-audit work. In other words, all services performed for a public issuer audit client must be pre-approved in some capacity by the audit committee.
Supervision and Review
The issues below typically stem from audit engagement failures identified in the section above. In other words, if there is a deficiency in auditing estimates (which are typically linked to significant and/or fraud risks), the PCAOB takes the stance that a thorough review by the engagement partner and EQR should/could/would have identified these issues and thus, a prevalence of Part I issues indicates a deficiency in the supervision and review. Specifically:
- Documentation: Audit documentation is often insufficient for managers, partners and EQRs to perform a thorough review.
- Evidence of EQR review: The PCAOB took issue with the lack of evidence of review. Remember, an EQR review is more than just a sign-off.
Internal Monitoring
- Performing reviews: Internal inspections are a requirement under the current PCAOB QC 20. They will become an even more important part under the newly proposed QC 1000. Whether internally, externally, or co-sourced, the point is, firms must perform internal inspections.
- Ineffective reviews: The PCAOB often performs inspections of audits previously inspected by the firm itself. The point is to evaluate the effectiveness of the firms’ review. When the PCAOB identifies issues NOT identified by the firm, it’s an indication that the firms’ reviews are ineffective.
Registration
- State registration: The PCAOB identified multiple audits performed in states where firms are not licensed / registered.
Good Practices
In an attempt to provide more useful information to firms to help remediate deficiencies and ensure quality audits, the PCAOB has begun to release “good practices” it has identified from various interviews with firms. These are important tools and concepts that firms should consider incorporating into their own systems, especially considering the impending overhaul of QC systems.
Templates
Many firms are developing templates (that pull directly from the standards) to help facilitate the execution of audit procedures, such as how to test MRCs or how to audit accounting estimates.
Improving risk assessment
- Given an increased focus on risk assessment, many firms are revising how they approach risk assessment; ultimately, we perform risk-based audits, so let’s be sure to thoroughly evaluate the risks and then link our audit procedures to the assessed risks.
Subject Matter Experts (SMEs)
- The PCAOB noted that many firms are requiring the use (or perhaps consultation) of SMEs in specific audit areas, typically those with higher risk, such as business combinations. In addition, many firms have used personnel outside of the engagement team to help with reviews of certain areas, such as CAMs. SMEs and targeted reviewers help bring expertise and drive consistency in approach and execution across the firm.
Independence
- Technology: Firms are investing in technology to help prevent / detect independence violations. For instance, technology tools tracking time charged vs. financial holdings vs. independence sign-offs. Technology can also be used to expand/change how certain procedures are performed, such as importing brokerage statements as opposed to manual input of financial holdings.
- Confirmations: More frequent independence confirmations (i.e. quarterly or semi-annually) have also shown to help prevent independence violations.
- Disciplinary actions: Finally, some firms are implementing new processes, including disciplinary actions, for failure to comply with firm policies and independence requirements.
Supervision and Review
- Metrics: Firms are using technology to start tracking supervision and review, measuring actual reviews against targeted timelines. Achieving these milestones, or failing to, is also being incorporated into performance evaluations. Similarly, firms are establishing certain ranges for various metrics, such as an engagement partner’s and EQR’s hours as a percentage of total audit hours. For partners and EQRs who fall outside the range, firms are meeting to understand the circumstances and conclude on whether additional measures are needed to ensure audit quality.
- Templates: As mentioned above, templates (and training) can help guide reviews in accordance with standards.
Key Takeaways
- Whew! Breathe for a minute; that’s a lot of information.
- Recurring findings are apparent and the PCAOB expects firms to drive change to remediate these issues.
- There are several resources (as evidenced by all the links) to help better understand the identified issues and to help resolve the deficiencies.
- You don’t have to go it alone; so, don’t hesitate to reach out if you don’t know where to start.
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.
