The Public Company Accounting Oversight Board (PCAOB) noted a high number of recurring deficiencies in its audits reviewed despite improvements over the previous year as part of its 2020 inspection observations spotlight released this week.

The report previews results of the PCAOB’s inspections of 153 audit firms and more than 600 audits of financial statements for 2019 and the first half of 2020.

For most of the firms inspected annually, fewer deficient findings were noted in 2020 than in 2019, and there were also some improvements for those firms inspected every three years.

The Board changed its inspection approach because of the COVID-19 pandemic, performing all its inspections remotely while also modifying its procedures to reflect the pandemic’s impact on public companies and their auditors.

There was an increased focus on how auditors addressed the effect of the pandemic on internal controls over financial reporting (ICFR), interim reviews, and firms’ quality control systems. The Board accelerated its inspections by reviewing audits with year-ends between March 31 and June 30 in 2020 rather than 2021, to get an earlier understanding of how the pandemic was affecting audits.

The following were analyzed as common financial statement deficiency areas:

  • Revenue and related accounts
  • Inventory
  • Business combinations
  • Goodwill and intangible assets
  • Allowance for loan losses
  • Investment securities
  • Long-lived assets
  • Cash and cash equivalents

PCAOB 2020 inspections

Source: PCAOB

Except for cash and cash equivalents, each area was also identified as commonly deficient in auditing ICFR, because of noncompliance with AS 2201.

Revenue was the area with the greatest number of financial statement and ICFR audit deficiencies. Although firms have devoted much attention and training to the Financial Accounting Standards Board’s revenue accounting standard, ASU 2014-09, the PCAOB noted frequent deficiencies in how audit procedures were designed and performed, including testing revenue to evaluate whether the criteria for recognition under the standard were met and obtaining sufficient and appropriate audit evidence. Deficiencies were also noted in auditors’ testing of the accuracy and completeness of data and reports provided by management used in their revenue testing, and in their use of technology-based data analysis tools.

Other areas highlighted in the PCAOB’s report included:

Accounting estimates: Although improvements were noted, deficiencies continued in this area, especially related to allowances for loan losses, business combinations, investment securities, and long-lived assets. These included auditors not obtaining and evaluating evidence to support the reasonableness of management assumptions and not performing sufficient procedures to resolve contradictory evidence in their evaluation. The Board’s findings related to requirements for auditing accounting estimates prior to new mandates that will be effective for 2020.

Critical audit matters (CAMs): New requirements to determine and communicate CAMs were effective for 2020 audits. Common deficiencies noted in this area were that auditors did not include all matters in their determination that met the criteria to be a potential CAM, and that communications of CAMs in audit reports did not describe the considerations that led the auditor to determine the matter was a CAM and how it was addressed in the audit.

Audit firm quality control: Areas of concern and noncompliance noted by the Board in this area included independence, engagement quality reviews, and internal inspection and monitoring.

The Board also observed and highlighted good practices it believes can enhance audit quality. These included:

  • Changing firm quality control procedures in response to the pandemic, including client acceptance and continuance, consultations, and training and assistance for auditors;
  • Monitoring audits in process in real-time;
  • Increasing supervision of and better communication with specialists;
  • Providing teams with practice aids to identify risks related to management estimates;
  • Improvements related to engagement quality reviewers, including monitoring their workload and expertise and hiring qualified third-party reviewers; and
  • Using industry-specific training and tailored work programs.

The PCAOB shared its preview to assist auditors in planning and performing their audits and audit committees in working with their auditors. It is also intended to help educate investors and others about inspection results. The organization issues full inspection reports for all individual audit firms.