Audit inspectors saw some improvement in the audit of management review controls during their 2018 inspections, but it’s still the highest area of internal control findings and will continue to be a focus in 2019.
“Although the number of deficiencies has decreased the past few years, it continues to be the most frequent finding” when it comes to inspections of audit work over internal controls, said George Botic, director of inspections at the Public Company Accounting Oversight Board, at a year-end conference of the American Institute of Certified Public Accountants.
For the past handful of years, the PCAOB inspections process has zeroed in on audit deficiencies in the audit of internal control over financial reporting, especially with respect to management review controls. Inspectors are looking for evidence that auditors have adequately assessed the design effectiveness and the level of precisions at which such controls are operating, which has produced some tension with the preparer community.
Inspectors also still found problems in the audit of accounting estimates, said Botic, including the testing of areas like assets and liabilities in business combinations and in allowances for loan losses. That’s been another common pain point in inspections, prompting the board to develop new auditing standards, which are expected to be finalized by the end of the year.
Revenue recognition is a hot topic in inspections, said Botic. As inspections performed in 2018 focused on 2017 financial statements, they scrutinized the audit of revenue recognition under historic accounting standards.
Still, inspectors found challenges, he said, but for reasons more focused on risk assessments than accounting requirements. “In many cases, deficiencies can be attributed to insufficiently performed risk assessments,” said Botic. “A well-performed risk assessment is fundamental, especially in revenue, where there may be several complex revenue streams.”
The PCAOB has indicated it plans to put more emphasis on the inspection of audit firms’ quality control processes in future inspection cycles. “In a spirit of putting greater emphasis on prevention, we believe by looking at quality controls systems and building quality into the overarching control environment, it will reduce deficiencies in the future,” said PCAOB Member Duane DesParte earlier at the same conference.
The board is also planning other changes to its inspection approach, including engaging directly with audit committee members. “We plan to reach out to the audit committee chairs for all the issuers we choose for inspections,” said DesParte. “That’s new for us.”
Although a little further into the future, the board plans to make changes to its inspection reporting process, looking to communicate in more plain English and with more use of graphics over text, said DesParte. The board also wants to look for ways to identify and report on practices at firms that promote quality audits rather than reporting exclusively on deficiencies.
Given the backlog of inspection reporting—2017 inspection reports have yet to be published, and those were performed under prior board leadership—significant changes to inspection reports are likely to roll out as the new board begins publishing its own reports, said PCAOB Chairman William D. Duhnke III. The board is looking for ways to streamline the reporting process, he said, to get results out to market in a more timely manner.