The audit profession’s chief inspector has provided auditors with a year-end checklist, giving companies some fair warning about what they can expect auditors to be focused on in their upcoming audit cycles.
The most common deficiencies found in 2014 inspections still relate to audits of internal control, said Helen Munter, director of the Division of Registration and Inspections for the Public Company Accounting Oversight Board, at a recent national accounting conference on regulatory issues. Those internal control problems include assessing and responding to risks of material misstatements, audits of fair value measurements and estimates, and testing of data and reports, she said. “It is critical for the auditor to understand an issuer's operations, including how transactions flow and the controls in place to detect a risk of material misstatement,” she said.
The 2014 inspection cycle -- completed by the PCAOB but not yet reported widely in published inspection reports -- revealed some improvements at some firms, Munter said, although internal control audit deficiencies continued to dominate inspection findings. As such, auditors, preparers, and audit committees should focus on a few specific questions, she said. “Do you understand the flow of transactions, the points within that flow where a misstatement could occur, and how internal controls are designed to address those risks?” she asked. “Are the controls designed and operating at a level that is effective to detect a material misstatement? Are there audit procedures designed to identify the risks of material misstatement? And will those procedures be effective?”
Auditor should take care to assure they understand the assumptions and methods used to develop estimates, including fair value measurements, Munter advised. Auditors should look to see if the information that management or a specialist used in developing such measurements has been audited, she said. Finally: “Are audit procedures designed to test data and schedules produced by the company that are used as part of the procedures?” she said. “How does one know the data is complete and accurate?
On the financial statement side, findings were most frequent in 2014 on revenue recognition, inventory, goodwill, intangible assets, and business combinations, Munter said, which have been common themes in prior year inspections. “It concerns me that we continue to find significant audit deficiencies in the riskier audit areas that we select for inspection,” she said. “The nature and extent of deficiencies appears to change over time, reflecting improvement in certain areas by some firms and new risks and continuing challenges in other areas.”
Inspectors are already beginning to plan for 2015 audit inspections based on 2014 findings, she said, and it includes consideration of trends not specific to the audit, but that will affect audit work. That includes, for example, environmental risks, like merger and acquisition activity, income taxes, investment returns, falling oil prices, big data, and cyber-security risks.
PCAOB Chairman James Doty said the board is preparing a general summary report to provide audit committees and investors with earlier insights into inspection findings that will be made available before final firm reports can be provided. It will show some firms have made some improvements, but some firms have not, he said. Munter echoed that finding. “Our 2014 inspections have shown some promising improvements in the audit work performed at certain firms,” she said. “We have seen remedial actions taken by certain firms begin to take hold, and as a result we have found fewer situations where a firm failed to support the opinion it issued. This result is not across all firms. Deficiencies still remain, and many reflect recurring deficiencies.”