Results of PCAOB’s Latest Staff Inspection Brief on Audits of Issuers

The PCAOB prepares Staff Inspection Briefs to assist auditors, audit committees, investors, and preparers in understanding the results of inspections of issuer audits.  The following highlight some of the more significant findings from the 2016 inspection cycle, which were the result of examining portions of over 780 issuer audits:

Assessing and responding to risks of material misstatement – An effective audit process includes applying proper judgments about risk, and performing audit procedures commensurate with that assessed risk.  The auditor must perform substantive procedures, including tests of details, that are specifically responsive to significant risks, including fraud risks.  For example, limiting tests of details to revenue recorded between confirming accounts receivable as of an interim date and rolling that balance forward to year-end does not adequately address the risk that revenues recognized in other earlier periods may be materially misstated.  In addition, evaluating the risk of the accuracy and completeness of disclosures was not always properly identified, assessed, and addressed in the audit plan.

Auditing internal control over financial reporting (ICFR) – Insufficient testing of the design and operating effectiveness of selected controls, particularly those controls that include a review element, are common.  For example, lack of adequate testing of controls over management’s cash-flow forecasts or other assumptions used in estimates.

Auditing accounting estimates, including fair value measurements – Common deficiencies in this area relate to evaluating impairment of long-lived assets, including goodwill.  Other areas include revenue-related reserves, inventory reserves, financial instruments, and the allowance for loan losses.  Models, subjective factors, complex judgments, and management bias make many accounting estimates higher risk.

Other topics covered include such items as multinational audits, business combinations, Investment portfolios, going concern, related-party transactions, economic risks, certain financial reporting areas, cybersecurity, auditor independence, audit committee communications, and a firm’s system of quality control.

ABOUT THE AUTHOR

Jennifer Louis has over 25 years of experience in designing and instructing high-quality training programs in a wide variety of technical and “soft-skills” topics needed for professional and organization success. In 2003, she founded Emergent Solutions Group, LLC, where she focuses her energy on designing and delivering practical and engaging accounting and auditing training. Jennifer started her career in Audit for Deloitte & Touche LLP. Jennifer graduated summa cum laude from Marymount University with a B.B.A. in Accounting.

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