The Audit Landscape 2025: PCAOB Findings and the Path Forward

One of main objectives of Sarbanes Oxley Act 2002 (SOX), was to improve audit quality, for which it established the Public Company Accounting Oversight Board (PCAOB), who has been achieving the objective of audit quality through its inspection process. 

A PCAOB inspection is done to ascertain the audit firm’s adherence to PCAOB standards and rules & also to other rules and professional standards that are applicable to CPA firms in relation to its quality control and the areas of public company audits selected for PCAOB review.

As per recent remarks by Public Company Accounting Oversight Board (PCAOB) Chair Erica Y. Williams at the U.S. Securities and Exchange Commission (SEC)’s Open Commission Meeting regarding the PCAOB’s proposed 2025 budget, he said “By the end of 2024, PCAOB staff would have inspected 232 audit firms and more than 920 audits across domestic annual, domestic triannual, international, and broker-dealer audits. These numbers include 79 international inspections of firms and more than 220 audits, including audits of firms in Mainland China and Hong Kong.”

The above statistics imply that PCAOB is rigorously inspecting audit quality in CPA firms who are conducting PCAOB regulated audits and is bound to increase its inspections in the year 2025.

PCAOB issued Inspection report is divided into two parts part one deals with Inspection observations and Part two deals with Observations related to Quality control. Part one is further divided into three parts i.e. first – Audit with unsupported Opinion, second – Other instances of non-compliance with PCAOB standards or rules, and third- Independence

A recent release by PCAOB has brought forward the discrepancies being observed PCAOB Inspectors in audits, our white paper focuses on these discrepancies, which will help you to understand what needs to be improved in your audit firm audit techniques in order to improve quality, improve user confidence and keep the regulator satisfied.

In the era where investor confidence is low on numbers presented in financial statements, it is very important that auditors follow prescribed auditing standards in both letter and spirit.

Key Discrepancies Identified in PCAOB Inspections

As discussed above, PCAOB has been rigorously picking up various firms for review and has been identifying discrepancies primarily divided as follows:

• Audit with unsupported Opinion: This implies that there is a lack of sufficient appropriate audit evidence to support its opinion(s) on the issuer’s financial statements and/or Internal control on financial reporting (ICFR)
• Other instances of non-compliance with PCAOB standards: These are Instances of non-compliance with PCAOB standards or rules other than those where the firm had not obtained sufficient appropriate audit evidence to support its opinion(s)
• Independence: Instances of potential non-compliance with SEC rules or instances of non-compliance with PCAOB rules
• Quality Controls in Firm: Potential defects in quality control systems that the firm has not addressed

This review effectively covers each aspect of CPA firms’ assurance function and reflects on quality of assurance engagements carried out by audit firms.

Focus Areas in Recent PCAOB Inspections: Key Auditing Standards

The recent PCAOB Inspection of Audit firms have focused on lapses of various auditing standards and PCAOB rules. The primarily effected standards belong to the following categories as per the latest PCAOB Standard issued on Dec. 15, 2024:

1000 General Principles and Responsibilities

AS 1015: Due Professional Care in the Performance of Work

1100 General Concepts

AS 1105 Audit Evidence

1200 General Activities

AS 1215: Audit Documentation

AS 1220 Engagement Quality Review

1300 Auditor Communications

AS 1301 Communications with Audit Committees

AS 1305 Communications About Control Deficiencies in an Audit of Financial Statements

2100 Audit Planning and Risk Assessment

AS 2101 – Audit Planning

AS 2110 Identifying and Assessing Risks of Material Misstatement

2200 Auditing Internal Control Over Financial Reporting

AS 2201 – An Audit of Internal Control Over Financial Reporting that is Integrated with An Audit of Financial Statements

2300 Audit Procedures in Response to Risks—Nature, Timing, and Extent

AS 2301 – The Auditor’s Responses to the Risks of Material Misstatement

AS 2305: Substantive Analytical Procedures

AS 2310 – The Auditor’s Use of Confirmation

AS 2315: Audit Sampling

2400 Audit Procedures for Specific Aspects of the Audit

AS 2401 Consideration of Fraud in a Financial Statement Audit

2500 Audit Procedures for Certain Accounts or Disclosures

AS 2501: Auditing Accounting Estimates, Including Fair Value Measurements

AS 2510: Auditing Inventories

2800 Concluding Audit Procedures

AS 2805 – Management Representations

AS 2810: Evaluating Audit Results

3100 Reporting on Audits of Financial Statements

AS 3101: The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion

The CPA firms are affected by such lapses pointed out by PCAOB inspection reports resulting in issues such as negative public image, loss of client faith leading to loss of audit clientele, effect on its M & A activities, potential legal troubles, lack of employee confidence and potential increase of Insurance premium.

PCAOB standards and practices are constantly evolving, which needs stringent audit quality and compliance practices in audit firms especially the small audit firmsthat need to investigate their audit processes to ensure compliance with PCOAB standards and rules.

PCAOB will be maintaining or even increasing its oversight on CPA firms conducting assurance engagements for publicly listed entities, to ensure audit quality is maintained and CPA firms conduct stringent audit practices to ensure transparency and reliability on numbers presented in financial statements released by publicly traded entities. 

Measures for CPA Firms to Improve Audit Quality and Ensure PCAOB Compliance

The measures that CPA firm can take to improve quality and ensure compliance with PCAOB auditing standards and rules can be:

• Training – More staff and partner Training on PCAOB Auditing standards and rules
• Increasing Auditing hours on Publicly traded clients with increased audit fee
• Resigning from non-publicly traded clients to increase focus on publicly traded clients
• Increase in rightly trained audit staff and maintain client & audit staff ratio.
• In case the right audit staff is not available consider co-sourcing or outsourcing of audit to specialist outsourcing firms in countries such as India.

Co-sourcing (collaborating outsourcing) or outsourcing of audits to trained auditors in India has been an effective, qualitative, and cost-effective solution for CPA firms, especially small and medium CPA firms’ conducting public companies audit. The outsourced audit process carries out detailed planning, execution and finalization of audits helping CPA firms to focus on critical areas of audits including review of audits leading to overall improvement of audit quality, and compliance with PCAOB Audit standards and rules. The auditors in India are well trained and aware of PCAOB Auditing standards, rules, recent changes, and audit software such as Caseware, CCH Profx Engagement, Advance flow & Audit File leading to effective Co-sourcing (collaborating outsourcing) or outsourcing of audits.

How AcoBloom Can Help CPA Firms Ensure PCAOB Compliance and Improve Audit Quality

The Public Company Accounting Oversight Board (PCAOB) continues to elevate its oversight of CPA firms, demanding higher audit quality, transparency, and adherence to updated auditing standards. As the PCAOB prepares for heightened inspections in 2025, CPA firms must take proactive steps to address discrepancies highlighted in PCAOB inspection reports, including unsupported audit opinions, non-compliance with standards, independence issues, and quality control defects. AcoBloom, a leading outsourcing partner for audit support, offers tailored solutions to help CPA firms overcome these challenges.

1. Expertise in PCAOB Standards and Rules

AcoBloom’s team is highly trained in PCAOB auditing standards, rules, and practices, including the latest updates issued in December 2024. Our auditors are proficient in standards spanning general principles, audit planning, risk assessment, internal control auditing, and specific audit procedures. This expertise ensures that every outsourced or co-sourced engagement aligns with PCAOB expectations.

2. Cost-Effective Audit Process Support

AcoBloom provides a cost-effective alternative to traditional staffing by offering outsourcing services to trained auditors in India. These auditors are skilled in advanced audit tools such as Caseware, CCH ProSystem fx Engagement, AdvanceFlow, and AuditFile, enabling seamless integration with your existing audit processes. This approach is particularly beneficial for small and medium CPA firms striving to balance limited resources with increasing regulatory demands.

3. Comprehensive Audit Support

Through detailed planning, execution, and finalization of audits, AcoBloom ensures meticulous compliance with PCAOB standards. By handling routine and labor-intensive tasks, we enable CPA firms to focus on critical areas of audits, such as risk assessment, fraud considerations, and substantive procedures.

4. Flexibility and Scalability

AcoBloom offers flexible co-sourcing or outsourcing models to suit your firm’s specific needs. Whether you need temporary support during peak seasons or ongoing assistance with audit engagements, our services scale to match your requirements.

5. Enhanced Training and Knowledge Sharing

AcoBloom provides continuous training and knowledge-sharing opportunities to CPA firms’ staff. By leveraging our insights into PCAOB inspection trends and audit best practices, firms can strengthen their internal processes and avoid common pitfalls identified during inspections.

6. Strategic Focus on Public Company Audits

For firms aiming to prioritize their publicly traded clients, AcoBloom helps manage workload effectively. By outsourcing non-core or non-critical tasks, CPA firms can allocate more resources to engagements requiring stringent PCAOB compliance, thereby improving audit quality and client satisfaction.

Conclusion

The PCAOB’s rigorous inspection process underscores the need for CPA firms to enhance audit quality and compliance practices. AcoBloom serves as a reliable partner in this journey, offering cost-effective, high-quality, and scalable audit support services. By leveraging our expertise, CPA firms can ensure compliance with evolving PCAOB standards, maintain client confidence, and uphold their reputation in the competitive landscape of public company audits.

With AcoBloom as your partner, you can confidently navigate the audit landscape of 2025 and beyond, ensuring transparency, reliability, and compliance in every engagement. Let us help you meet the challenges of tomorrow with solutions tailored to your firm’s success.