Audit regulators are leaving no one reason to guess what they’re looking for as they continue their 2015 inspections. They’ve published a staff inspection brief to explain it in detail.
The Public Company Accounting Oversight Board says its inspectors are under orders to look closely at three general areas in public company audit work -- the audit of internal control over financial reporting, the auditor’s assessment of and response to risks of material misstatements, and the audit of accounting estimates, including fair value measurements.
With respect to the internal control audit, inspectors will be looking at auditors’ testing of the design and/or operating effectiveness of controls, the paper says. As for risk, inspectors too often find auditors do not properly identify risks, or don’t properly respond to risks they identify, so that is on inspectors’ radar. And in the area of estimates, inspectors are zeroing in on testing of key data and assumptions used by management to develop estimates.
Not coincidentally, those are the most common areas for inspection findings in previous cycles, the PCAOB says. The board has delivered blistering inspection reports across all the major audit firms leading to an intense focus in recent years on improving results, particular around internal controls. The corporate community has even begun to push back, claiming inspection results are driving unnecessary audit work.
In various speeches and public statements, PCAOB board members and staff have called out specific areas of concern where inspectors would be focusing their attention, but the briefing paper puts everything in one place. "Our 2015 inspection cycle for auditors of public companies and issuers is well under way," said Helen Munter, director of registration and inspections at the PCAOB, in a statement. "We hope that audit firms and other stakeholders find this information about our inspection focus and scope informative."
In addition to the classic audit problem spots, inspectors also are instructed to consider current economic conditions, like the high pace of mergers and acquisitions, the search for high-yielding investment returns in a market offering low interest rates, and volatility in oil prices with the various ways that might create financial reporting risks for companies in different industries.
During 2015, the PCAOB says it will inspect 10 firms that meet the criteria for annual inspection because they audit 100 or more registrants. That includes the Big 4 as well as Grant Thornton, BDO USA, Crowe Horwath, and McGladrey. In all, inspectors will visit about 220 firms, about 60 outside the United States in 25 different jurisdictions. The scope of the inspection program will be similar to the number of firms inspected in 2014, the board said.