Audit regulators say their preliminary counts from inspections performed in 2015 suggest the number of audit deficiencies for the largest firms has fallen, although deficiencies at smaller firms overall is high.
The Public Company Accounting Oversight Board has not yet published any 2015 inspection reports for the largest global audit networks, but the board summarized its preliminary findings to get information out to audit committees, investors, issuers, and others sooner than by waiting for reports to be published. The board says its inspectors observed “indications of improved audit quality over time in some of the firms inspected,” attributing those improvements to new practice aids and checklists, coaching and support to audit teams, and monitoring of the quality of audit work performed.
Among firms that are inspected annually because they produce at least 100 audit reports, the board says its inspectors scrutinized 321 audits across 10 firms in 2015, compared to 315 audits across nine firms in 2014. The report does not say how many of the 321 audits exhibited deficiencies in 2015, except to say “the overall number of audit deficiencies identified has decreased compared to the results from the 2014 inspection cycle.”
Where inspectors spotted deficiencies, they are focused on the same areas that have dominated earlier years -- the audit of internal control over financial reporting, assessing and responding to risks of material misstatement, and auditing accounting estimates, including fair value measurements. In fact, inspectors focused their search on those areas because they have figured so prominently as problem areas in earlier inspection cycles, the report says.
In internal control, inspection staff noted improvements in the nature and extent of audit issues, but the board still is calling for continued focus on testing controls to improve and sustain audit quality. The report says, for example, that some firms showed improvement in identifying and testing controls that are important to mitigate risk of material misstatement.
“Some firms enhanced or modified their audit guidance and audit tools for engagement teams to perform more effective walkthroughs and develop a better understanding of the issuer’s processes, transactions, controls, and the associated risks,” the report says. “These efforts may have contributed to fewer deficiencies in this area at some firms.” The board called out management review controls and controls over system-generated data and reports as continued areas of focus as well.
With respect to responding to risk and auditing accounting estimates, the report frequently indicates that some firms or some auditors have made improvements in the usual trouble spots, but inspectors also found deficiencies. Aside from those themes, the board also identified deficiencies worth calling out in revenue and receivables, non-financial assets, inventory, financial instruments, and allowances for loan losses. The statement of cash flows and income taxes also cropped up in certain audits, the report says.
In summarizing 2015 observations, the board also called out problems with auditor independence, although the report notes the majority of deficiencies occurred at smaller firms, or those that are inspected every three years. Some examples include problems with auditors providing prohibited non-audit services, failures to rotate the engagement partner off an audit after five years, failures to check with the audit committee before performing non-audit services, failures to fully apprise the audit committee of the scope of tax services, and other failures to communicate appropriately with the audit committee.
The report also praises firms that have performed root cause analyses of audit failures to determine what went wrong and how to prevent it in the future. “Establishing appropriate processes for root cause analysis at the firms is in varying phases of development at different firms,” the report says. “Certain firms are analyzing positive quality indicators in addition to audit deficiencies.”
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