Audits of internal control over financial reporting are starting to improve somewhat, but it’s still too early to say if audit practice has turned the corner as fully as regulators are demanding.

Jeanette Franzel, a member of the Public Company Accounting Oversight Board, says 2015 inspections are ongoing, but not far enough along to identify any trends. “While our staff has seen more examples where auditors have gotten the auditing of ICFR right, they also continue to identify frequent findings in this area,” she said during a recent speech at a conference of the American Accounting Association.

Internal control over financial reporting continues to be the most frequent finding in PCAOB inspections, Franzel said. In 2013, for example, the last year for which complete inspection data is publicly available, 36 percent of the integrated audits inspected by the PCAOB at the Big 4 firms exhibited problems with internal control. That percentage grew from 32 percent in 2012 and 23 percent in 2011, she said. Franzel said she is hopeful the next round of reports will show a reduction in both the number and severity of internal control audit deficiencies.

Speaking to a crowd of academics with an interest in audit, Franzel said the inspections data on adverse internal control opinions is “noisy,” warranting close study. “The data show an apparent contradiction that would benefit from additional inquiry,” she said. “An overall increase in the percentage of adverse opinions on ICFR while, at the same time, an overall increased in the percentage of “clean ICFR” opinions for issuers that announce a restatement.”

Franzel also urged examination of the connection between inspection findings and audit fees. “The data does not indicate any systemic impact on audit fees that could be attributable to recent changes in ICFR auditing or inspections,” she said. “However, there are variations in audit teams' and firms' effectiveness in implementing changes to their ICFR audit procedures, which may be impacting the amount of audit work for some issuers.” Also relevant, she said, is that audit fees can be affected simply by the fact that issuers have inadequate controls.

Audit firms generally have been making some progress in their efforts to remediate internal control audit deficiencies, said Franzel, but she added: “some firms still have significant work to do to meet the requirements of PCAOB auditing standards in this area.” In the 2014 inspection cycle, the most frequent deficiencies focused on a handful of areas, including selecting the appropriate controls to test, testing design effectiveness to determine whether controls satisfy the objectives and can effectively prevent or detect errors or fraud, and testing the operating effectiveness of the controls.

Franzel said audit engagement teams often did not obtain an understanding of a company's flow of transactions so that they could properly identify and select the appropriate controls to test. Another common mistake: auditors selected controls to test that were not responsive to the fraud risks that they had identified.

Auditors also continue to struggle with the testing of management review controls, said Franzel, an area that came under great scrutiny especially after the PCAOB issued guidance in Audit Alert No. 11 nearly two years ago. “They often did not evaluate whether the management review controls operated at the necessary level of precision that would address the assessed risk of material misstatement,” she said. “Inspections staff have also seen engagement teams rely on management review controls to compensate for other identified deficiencies without fully understanding or appropriately testing whether that management review control operated effectively at the necessary level of precision.”