Auditors have been handed yet another prod from leaders in their profession to pay special attention to some high risk areas as they prepare for the upcoming year-end audit cycle.
The Center for Audit Quality issued a year-end audit alert reminding auditors to sharpen their pencils for some extra work on touchy subjects like internal control over financial reporting, revenue recognition, going concern findings, and accounting estimates and fair value measurements. It follows a pair of reminders from the Public Company Accounting Oversight Board on what inspectors are looking for in their annual audit inspections and what auditors should be focusing on with respect to the new revenue recognition standard.
The CAQ alert gives companies a good summary of where auditors will be digging deepest as a result of regulatory demands, emerging auditing standards, and economic factors that add risk either to financial statement assertions or the audit process, or both. Here’s what the CAQ alert covers:
New Accounting — Auditors are on notice to scrutinize what companies are doing to adopt huge new accounting standards that are not yet effective, especially the method for recognizing revenue taking effect in 2018. It will be auditors’ duty to check up on how well companies are complying with requirements under Staff Accounting Bulletin No. 74 to give investors advance notice of how pending accounting changes will affect the company’s financial statements.
Soon after revenue recognition, companies will also have to adopt new rules on lease accounting in 2019 and credit losses in 2020. The CAQ alert reminds auditors to consider the progressive nature of SAB 74 disclosures as companies get closer to implementation dates. Auditors are tasked to consider the accounting policies companies have established, quantitative and qualitative disclosures about the expected effects of the new rules, the status of implementation, internal controls, and footnote disclosures.
Current Accounting — The CAQ is telling auditors to pay special attention to two key areas in financial statements — the going concern analysis and the evaluation of income tax accounting and disclosures. With respect to the going concern analysis, the alert reminds auditors that companies have an obligation under accounting standards to arrive at their own conclusion, but auditors still have a duty to do their own analysis and arrive at their own opinion as well. As for the tax issue, the alert steers auditors to ask questions about any large or growing undistributed earnings in foreign jurisdictions and whether that makes sense given any cash needs the entity may have in other locations.
Recurring Audit Deficiencies — The CAQ alert summarizes key areas that have become recurring themes in PCAOB inspection reports where regulators are still looking for improvements in audit performance. Those focus especially on the audit of internal control, auditors’ performance in identifying, assessing, and responding to risks of material misstatements, and the audit of accounting estimates and fair value.
Economic Factors — Auditors need to keep in mind external factors that might also affect a company’s financial statement risk — things like volatility in oil and gas pricing, the ongoing search for high-yield investments, mergers and acquisitions, geopolitical factors, among others.
Additional hot buttons addressed in the CAQ alert include auditor independence, multinational audits, new rules on naming engagement partners, engagement quality reviews, audit documentation, software audit tools, and cyber-security risks. The alert even addresses a new audit rule that’s not yet been approved by the Securities and Exchange Commission that would expand the audit report.