PCAOB Inspection Findings PCAOB Audit Committee Dialogue Auditor Assessment Toolkit Doug Morally Senior Audit Manager September 14, 2015

Overview 2 PCAOB Inspection Findings PCAOB Audit Committee Dialogue Auditor Assessment Toolkit

PCAOB Inspection Findings 3 Inspections of over 650 audit firms Annually inspect the largest firms – BDO USA, LLP – Crowe Horwath LLP – Deloitte & Touche LLP – Ernst & Young LLP – Grant Thornton LLP – KPMG LLP – Malone Bailey, LLP – Marcum LLP – McGladrey LLP – PricewaterhouseCoopers LLP

Summary of Deficiencies 4 BIG 4 vs. BIG Total Audits Inspected213 Total Audits with Deficiencies %37% AS-5Integrated audit of ICFR and Financial Statements30%31% AU 342Auditing Accounting Estimates14%8% AS-13Auditors' Response to the RMM13%16% AU 328Auditing FV Measurement and Disclosures11%8% AS-14Evaluating Audit Results9%8% AU 350Audit Sampling7%9% AS-15Audit Evidence6%4% AU 329Substantive Analytical Procedures4%6% Various 4%6% AU 322Auditors' Consideration of Internal Audit1%4%

Summary of Deficiencies (Continued) 5 BIG 4 vs. Non-BIG BIG 4Non-BIG 4 Total Audits Inspected21394 Total Audits with Deficiencies %52% AS-5Integrated audit of ICFR and Financial Statements30%28% AU 342Auditing Accounting Estimates14%9% AS-13Auditors' Response to the RMM13%15% AU 328Auditing FV Measurement and Disclosures11%9% AS-14Evaluating Audit Results9%10% AU 350Audit Sampling7%10% AS-15Audit Evidence6%9% AU 329Substantive Analytical Procedures4%3% Various 4% AU 322Auditors' Consideration of Internal Audit1%

PCAOB Audit Committee Dialogue 6 Inspectors consider two broad questions: – What recurring audit concerns identified in past inspections are expected are expected to continue to be significant? – What emerging risks might require increased focus by auditors and audit committees in the future? Key Recurring Areas of Concern New Risks PCAOB is Monitoring

Key Recurring Areas of Concern 7 Auditing internal control over financial reporting (ICFR) Assessing and responding to risks of material misstatement Auditing accounting estimates, including fair value measurements In cross-border audits, deficient “referred” work - work performed by other audit firms and used by the signing audit firm

Auditing internal control over financial reporting 8 A properly executed audit of ICFR Deficiencies in audits of ICFR – Testing the effectiveness of controls – Evaluation of identified deficiencies Impact of material misstatements Potential questions for the auditor – Where could material misstatements occur? – Audit approach to significant unusual transactions? – Accuracy of descriptions of potential material weaknesses or significant deficiencies?

Assessing and responding to risks of material misstatement 9 Identification of risks or responding effectively to existing risks PCAOB insights based on experience of deficiencies identified: – When risks change, audit plans should change – Insufficient audit procedures at certain locations or business segments Potential questions for the auditor – Significant audit areas with risks of material misstatement? – How have risk areas changes since the prior year? – Address the risks in a multi-location environment? – Identification of specific risks in countries experiencing political instability?

Auditing estimates, including fair value measurements, and disclosures 10 Audit deficiencies identified in areas such as revenue, inventory reserves, fair value measurements and tax-related estimates Identification and evaluation of indicators of asset impairments Potential questions for the auditor – What is the auditors’ approach to auditing critical estimates? – Assessment of all separate intangible assets when assessing goodwill for possible impairment? – Will the engagement team use the firm’s in-house valuation specialists?

Referenced work in cross-border audits 11 Quality of the referred work PCAOB found significant problems in over 40% of referred work engagements at non- US member firms Potential questions for the auditor – How does the engagement partner assess the quality of the audit work performed in other jurisdictions? – Were the firms participating in the audit recently inspected by the PCAOB? – How does your auditor review the work?

New Risks the PCAOB is Monitoring 12 Increase in mergers & acquisitions Falling oil prices Undistributed foreign earnings Maintaining audit quality while growing other businesses

Auditor Assessment Toolkit 13 Role of the audit committee Assessment Process – Draw upon prior experience – Observations from management and internal audit – Private meetings between committee chair and engagement partner – Review of regulator inspection reports and peer review findings – Communication of process with shareholders

Evaluation of the auditor 14 Quality of services and sufficiency of resources provided by the auditor Communication and interaction with the auditor Auditor independence, objectivity, and professional skepticism Obtaining input from company personnel about the external auditor

Quality of services and sufficiency of resources provided by the auditor 15 Assessment of the primary members of the audit engagement team – Demonstrated skills and experience to address financial reporting risk – Access to appropriate specialists – Provide a sound risk assessment at the onset of the audit – Demonstrated a good understanding of the company’s business, industry and economic environment – Audit responses to auditing and accounting issues Quality of the audit in various domestic locations or in other countries

Quality of services and sufficiency of resources provided by the auditor (continued) 16 Firm’s relevant industry expertise Geographical reach necessary to serve the company Results of the firms’ most recent inspection results of the PCAOB and peer review

Communication and interaction with the auditor 17 Quality of communications Frequency of discussions Communications should focus on accounting and auditing issues Required communications under PCAOB standards and SEC rules Communications held with management present or in executive session

Auditor independence, objectivity, and professional skepticism 18 Communication to the committee that the auditor is independent Auditor’s evaluation of the methods and assumptions used by management Auditor’s responses to open-ended questions from the committee – Financial reporting challenges of the company – Changes in accounting methods – Key assumptions underlying critical estimates – Accounting issues discussed with management

Obtaining input from company personnel about the external auditor 19 Responsiveness and communicative Proactively identifies opportunities and risks Delivers value for the money Assigned sufficient resources to complete work in a timely manner Forthright in dealing with difficult situations

Contact Information 20 Douglas J. Morally, CPA Senior Audit Manager Schneider Downs & Co., Inc. One PPG Place, Suite 1700 Pittsburgh, PA Direct Phone:

21 Questions?