PCAOB Staff Inspection Brief Reveals Audit Problems Continue

December 14, 2017

Public Company Accounting Oversight Board (“PCAOB”) inspectors continue to find the same issues during accounting firm inspections that were discovered in previous years. In its 18-page Staff Inspection Brief: Preview of Observations from 2016 Inspections of Auditors of Issuers, the PCAOB identified the following recurring audit deficiencies last year:

  • Auditors’ assessments and responses to the risk of material misstatements
  • Audits of internal controls over financial reporting (“ICFR”)
  • Audits of accounting estimates such as fair value measurements

Of the three audit deficiencies identified, the audits of internal controls were the most cited problem among accounting firms. The more common ICFR deficiencies were inadequate tests of the design and effectiveness of selected controls, specifically the controls that featured a review element in AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements. Per the staff brief, auditors often failed to test controls over cash-flow forecasts appropriately, or other assumptions management used to predict estimates concerning matters like revenue, business combinations, asset impairments, and reserves.

The PCAOB says the deficiencies could be due to auditors failing to understand the board’s standards and defects in an accounting firm’s approaches for performing an ICFR audit. In other cases, however, management may be heavily relied upon when the controls are tested.

Issued on November 10, the staff inspection brief was released to help audit firms comply with the PCAOB’s Regulation and Inspections office. The staff brief features observations from over 780 public company audits and the review of quality control systems at over 190 accounting firms.