Auditors are under yet another reminder, this time from the Center for Audit Quality, that their year-end work should include some careful attention to difficult, complex audit issues.
The CAQ published an alert to auditors to summarize the hot audit issues that should be top of mind for auditors as the prepare to dig into year-end financial statement and internal control audits. “This alert summarizes potential areas of risk and can be a useful resource for our auditing firm members as they head into the 2014 audit cycle,” said Cindy Fornelli, executive director of the CAQ, in a statement. She indicated the CAQ intends to update the alert annually.
The alert covers the latest concerns that have been raised with auditors on revenue recognition, internal control over financial reporting, going concern reporting, and auditing accounting estimates, including fair value. It also covers demands for professional skepticism, related party and other significant unusual transactions, and engagement quality reviews. The alert is directed at auditors, but it gives companies a good summation of the pressures auditors have faced, along with a preview of the demands they may be making in the year-end audit as a result.
With respect to revenue recognition, auditors have been warned by the Public Company Accounting Oversight Board to tighten down their scrutiny of revenue and the controls around it, the CAQ points out. At the same time, accounting rule makers delivered a massive new standard on recognizing revenue that doesn’t take effect until 2017, but should be considered by auditors this year. “The auditor should evaluate management’s required disclosure of the impact the new accounting standard is likely to have on the financial statements, including evaluating the form, arrangement, and content of the disclosure,” the CAQ advises in the alert.
Internal controls have been a constant area of focus throughout 2014 as many companies adopted a new internal control framework while auditors studied guidance from the PCAOB to get tougher and more detailed in their audits of internal control. The CAQ reminds auditors that the PCAOB will be looking for more audit scrutiny in a variety of areas, including risk assessments, control testing, testing of management review controls, consideration of IT issues, roll-forwards of controls tested at interim dates, using the work of others, and evaluating identified control deficiencies.
Going concern is an issue at year-end because companies are under new guidance from the Financial Accounting Standards Board to provide a disclosure from management when there are uncertainties about an entity’s ability to remain viable. Before the new standard, that duty to fell to auditors under auditing standards. The PCAOB issued an alert soon after the rule was published to remind auditors that the requirement for auditors to arrive at their own conclusions did not vanish with the new accounting standard. The CAQ says auditors should remember that a company’s conclusion about whether a disclosure is warranted does not determine whether auditors should be issuing a going concern opinion of their own.