The Public Company Accounting Oversight Board issued updated briefs explaining what inspectors are looking for in 2016 as they inspect public company auditors, as well as auditors of broker-dealers. The board earlier issued briefs in April 2016 and in October 2015, and the messaging has not changed substantially.
In their dig into public company audit work, the board is targeting 10 firms that are inspected annually because they audit at least 100 issuers, plus 200 additional firms that audit public companies. Of those, about 60 firms are located outside the United States in 25 different countries, the PCAOB says.
The PCAOB says inspectors are focusing on the hot spots that have been problematic in recent inspection cycles, including auditing internal control over financial reporting, assessing and responding to risks of material misstatement, and auditing accounting estimates, including fair value. In terms of where in financial reports inspectors will zero in, auditors can expect questions on revenue, nonfinancial assets, inventory, and financial instruments, among others.
Areas that require judgment are getting some extra attention from inspectors, like going concern, income tax accounting, and segment reporting. Audit procedures involving information technology, particularly auditors’ use of software tools, will raise inspectors’ eyebrows, as will and procedures to assess and address risks of material misstatement posed by cyber-security. In terms of economic conditions that will be top of mind for inspectors, think increased merger and acquisition activity, corporate searches for higher yielding investment returns, and continued fluctuations in oil and natural gas prices.
Inspectors will also be looking for auditor compliance with a new standard in 2015 audit cycle on transactions with related parties and other significant unusual transactions. The board adopted the new standard to drive more audit scrutiny around relationships and transactions with related parties, significant unusual transactions, and financial relationships and transactions with executives. Auditors warned companies to assure their processes and controls would capture and report to auditors all transactions that would be subject to the new standard, as a corporate failure to identify a relevant transaction would be regarded as a heightened fraud risk.