The Public Company Accounting Oversight Board released two preliminary reports Tuesday offering previews of its 2015 inspections of firms that audit publicly traded companies and broker-dealers.
In the first
Areas that showed improved audit quality at certain firms may have been a result of firms' better monitoring of audit work performed, among other things, the PCAOB noted.
“Auditors should take note of the matters discussed in this inspection brief in planning and performing their audits,” said PCAOB Director of the Division of Registration and Inspections Helen Munter in a statement. “It is particularly important for the engagement partner and senior team members to focus on these areas and for engagement quality reviewers to keep these matters in mind when performing their reviews.”
For firms that are required to be inspected at least once every three years, the inspections staff observed an overall high number of audit deficiencies in preliminary 2015 inspection results.
In preliminary 2015 inspection results for annually inspected and triennially inspected firms, the most frequent audit deficiencies continue to be in three key areas: auditing internal control over financial reporting, assessing and responding to risks of material misstatement, and auditing accounting estimates, including fair value measurements.
In the area of internal control over financial reporting, however, the PCAOB inspections staff continued to identify frequent audit deficiencies related to noncompliance with AS 2201 (currently AS No. 5), An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements. Inspectors saw improvement in 2015 in the nature and extent of the audit issues in this area at certain firms, but believe continued focus on testing controls is needed to improve and sustain audit quality.
In reference to assessing and responding to risks of material misstatement, the deficiencies identified in 2015 related to noncompliance with the Risk Assessment Standards decreased at certain firms when compared to inspections from 2012 to 2014; but these deficiencies continue to be commonly identified. As in prior years, the risk assessment deficiencies observed in 2015 were most frequently related to AS 2301 (currently AS No. 13), The Auditor's Responses to the Risks of Material Misstatement; AS 2810 (currently AS No. 14), Evaluating Audit Results; and AS 1105 (currently AS No. 15), Audit Evidence.
In the area of accounting estimates, including fair value measurements, the PCAOB said the audit deficiencies frequently identified during the 2015 inspections cycle related to estimates arising from the valuation of assets and liabilities acquired in a business combination and impairment analyses for goodwill and other long-lived assets. Other areas where deficiencies were identified include financial instruments, revenue-related estimates and reserves, the allowance for loan losses, inventory reserves, and tax-related estimates.
In addition to focusing on areas of recurring audit deficiencies, the PCAOB said its inspections staff takes into account the economic environment when determining where to focus inspections. As detailed in a
Broker-Dealer Inspections
In the other document released Tuesday, on audits of broker-dealers, the PCAOB staff published an
“This staff inspection brief offers an advance view of 2015 inspection results for auditors of broker-dealers," said Munter. “The 2015 inspection cycle was the first in which all audits of broker-dealers were required to be conducted in accordance with PCAOB standards.”
PCAOB inspectors focused on and identified deficiencies in the following areas in 2015: auditor independence, financial statement audit procedures, audit procedures on the supplemental schedules to the financial statements, the examination of compliance reports and the review of exemption reports under newly applicable PCAOB standards, and engagement quality review.
In 2015, PCAOB inspectors observed fewer independence impairments of auditors of broker-dealers than in prior years. Inspectors did, however, continue to observe situations where auditors were involved in the preparation of the financial statements or accounting records of their audit clients.
The PCAOB inspections staff continued to observe deficiencies in financial statement audit areas similar in nature to the deficiencies observed in the past. These deficiencies related to audit procedures over revenue recognition, financial statement presentation and disclosures, and the risks of material misstatement due to fraud.
In addition, inspections staff observed deficiencies related to the audit procedures required to be performed on the supporting schedules for the computations of net capital and the required reserve.
Inspections staff also noted deficiencies in the procedures performed for the now required attestation engagements related to the compliance and exemption reports by broker-dealers.
Inspections staff found that some firms did not have an engagement quality review performed for either the audit or the attestation engagement and, in some cases, the engagement quality reviewer did not sufficiently evaluate the significant judgments and conclusions reached by the engagement team.
PCAOB staff inspected 75 firms during 2015, a 14 percent increase from 2014, covering 115 audit and attestation engagements. The selected audit and attestation engagements were for fiscal years that ended during the period from June 1, 2014, through June 30, 2015.
Observations from the inspections performed during 2015 will be covered in detail in the next "Annual Report on the Interim Inspection Program Related to the Audits of Brokers and Dealers," that is expected to be issued in August 2016.
The interim inspection program will continue until rules for a permanent program take effect. The Board is taking a careful and informed approach in establishing a permanent inspections program. PCAOB staff is currently working toward a rule proposal for the PCAOB to consider later this year.
