The tension is about the practical application and additional pressure on the auditor in the field .
accounting & auditing
BY SUZAN DENNIS , CPA
A Year Later
Do Not Forget About NOCLAR the AICPA ’ s Code of Professional Conduct covers the U . S . auditor ’ s ethical responsibilities for integrity , public interest , loyalty , independence and due care . The CPA performs audits by using professional skepticism . The continuous and updated detailed auditing standards from the various authorities — including the PCAOB — have increased the responsibilities on the outside CPA firms at the same time pricing pressure on the audit has made the audit profession challenging .
Coupling this pressure is the retirement of older CPAs and the lack of a pipeline of younger generations entering the field , which have created cost and time pressure on the CPA performing audits . With the latest round of PCAOB audits , we are seeing more deficiencies in the audit workpapers and especially in the testing documentation .
The AICPA ’ s NOCLAR interpretations ( ET Sec . 1.180.010 and ET Sec . 2.180.010 ) have the objective to harmonize the international rules with the U . S . rules and to clarify the process for the auditor after finding non-compliance at the audit client . The tension is not about the ideological goal of the NOCLAR proposal , but the practical application and additional pressure on the auditor in the field .
The intent of NOCLAR interpretation is that the auditors would not just withdraw from an engagement when a noncompliance item is found .
This article uses two examples to show how the Interpretations might be implemented in near real-life examples . These are not authoritative application of the interpretations but illustrations to promote thoughtful consideration of how NOCLAR could affect your practice as a CPA .
NOCLAR
It ’ s important to note that while providing services to clients or as an employee and you encounter an issue of noncompliance , you should seek guidance regarding your responsibilities under professional standards , state board rules and potentially seek legal advice as well . Currently , state boards may not have adopted the interpretations and there may other issues regarding client confidentiality . There may also be other prohibitions in laws and regulations , which potentially creates a trap for the unwary .
If you are reporting to the appropriate authority , it should be considered an exceptional circumstance with consideration of whether this would not be a breach of confidentiality but a good faith acting in the public interest .
Example No . 1 : Theranos Let ’ s take a hypothetical audit of Theranos as an example of how NOCLAR ’ s requirements could have played out with a client that had a product failure that was noncompliant with the FDA rules .
The auditors are to take the following steps : 1 ) Identification and assessment 2 ) Internal reporting 3 ) Documentation and consultation 4 ) Potential third-party reporting
During the audit , the audit staff member , John , notices significant discrepancies between the reported capabilities of
The tension is about the practical application and additional pressure on the auditor in the field .
Theranos ’ bloodtesting technology and the actual performance results from test samples . He also identifies unusual financial transactions and revenue figures that do match with typical industry practices .
John conducts a preliminary assessment and gathers evidence of misrepresentation and potential fraud . He reviews internal documents , emails and performance reports , and compares them with industry benchmarks . John raises his concerns with the audit engagement partner and the audit firm ’ s risk management team . He documents the findings and highlights the potential for significant non-compliance and fraud .
The audit engagement partner escalates the issue to Theranos ’ management and the audit committee , insisting on a more thorough investigation . John meticulously documents all findings , communications and actions taken regarding the suspected non-compliance . This includes
16 CALIFORNIA CPA OCTOBER 2024 www . calcpa . org