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Deloitte Report Unveils New Theme in Audit Failures

Tammy Whitehouse | June 2, 2014

The Public Company Accounting Oversight published its first major inspection report of the 2013 cycle, giving Deloitte a 28-percent audit failure rate after studying 53 audit files.

In raw numbers, that's a mild decline in the failure rate Deloitte posted in its 2012 inspection cycle when the PCAOB found fault with 13 of 52 audits inspected, or 25 percent, For that audit cycle, that was a big improvement over 41 percent in 2011 and 45 percent in 2010.

However, the audit failures called out by the PCAOB in Deloitte's 2013 inspection report presented a new buzz phrase that promises to be the theme for 2013 inspection reports for the major firm -- “level of precision.” The inspection report calls out a number of instances where Deloitte auditors failed not to identify or test controls, but instead to show that a particular control operated at a level of precision necessary to prevent or detect a material misstatement in financial statements.

With only 13 Deloitte audits flagged, 12 of them contained problems in the internal controls audit, an area the PCAOB has identified as one that needs work. Beyond internal controls, the PCAOB flagged eight cases where auditors had difficulty responding to the risk of material misstatement. The inspection report calls out far fewer cases where auditors had trouble with areas like evaluating audit results, obtaining audit evidence, considering the internal audit department's work, auditing fair value measurements and disclosures, and others.

In its letter attached to the inspection report, Deloitte says it evaluated inspection findings and took appropriate actions under auditing standards after considering inspection findings. “We believe that the PCAOB's inspection process serves an important role in the achievement of our shared objectives of  improving audit quality and serving investors and the public interest,” the firm said in a statement. “We are confident that the investments we have made and are continuing to make are resulting in significant enhancements to our audit quality.”

PCAOB member Jay Hanson said in a recent speech that the 2013 inspection reports will show audit firm have increased their testing of controls, but still are having trouble showing that controls are operating effectively, as is required under Auditing Standard No. 5. The PCAOB has hounded firms through the inspection process in recent years to get tougher on controls, and firms have responded with increased training and focus on controls.