Summary of Smaller Firm PCAOB Inspection Deficiency Analysis
The public portion of 324 PCAOB smaller firm inspection reports issued between January 21, 2005, and August 15, 2006, were identified in this analysis.
Ten financial statement line items or disclosures found to be deficient in audit procedures performed, including departures from GAAP, would be examined first. Five top audit areas found by the PCAOB in firm’s audit performance will follow this listing.
The top ten deficiencies found, in the order of their percentages found in financial statements were:
- Revenue (about 18 percent). The deficiencies included documenting or failing to perform audit procedures, revenue consolidation items, revenue accounting on a gross basis and specific items such as foreign royalty and long-term construction contract revenues.
- Equity and stock transactions (above 11 percent). Inadequate audit procedures were topped by failure to perform and/or document audit procedures concerning the fair value of securities and stock issued to employees and non-employees for services. The reporting and disclosure of equity transactions made the list as well.
- Allowance for loan losses (about 8 percent). These deficiencies were isolated to performance and documentation of audit procedures items.
- Expenses (about 7.7 percent). These included inadequate valuation items and performance and documentation items concerning audit procedures, as well as legal, payroll and salary expensing.
- Inventory (about 7.1 percent). The issues found here included performance and documentation issues concerning audit procedures, observation of physical inventory counts and costing and transaction items.
- Accounts receivable (about 6.9 percent). These items included performance and documentation issues and resolution of confirmation exceptions.
- Accrued expenses; reserves; contingencies (about 5.8 percent). The issues found here included performance and documentation issues concerning audit procedures, reserve items and accrued compensation.
- Debt (about 5.2 percent). The issues found here included inadequate testing of compliance practices, debt classification, descriptions, disclosures and maturity issues, as well as performance and documentation issues concerning audit procedures.
- Business combinations and/or acquisitions (about 4.9 percent). These items include goodwill accounting issues and evaluation of an issuer’s lack of disclosure, as well as performance and documentation issues concerning audit procedures.
- Investments (about 4.7 percent). Surprisingly, these items are at the bottom of this list including performance and documentation issues concerning audit procedures, the evaluation of costing issues and the impairment or disposal of long-lived assets.
The five top audit performance issues consisted less of performance and documentation issues than the previous items. These are listed in their report order.
- Service organizations (about 4.4 percent). These items include unsupported reliance on controls and failure to the effectiveness of controls for periods not covered.
- Other auditors (about 3.9 percent). These complex items include inappropriate reliance on the work of other auditors, improper references to the work of other auditors’ reports not filed properly and failure to make professional inquiries concerning other auditors’ reputation and technical knowledge.
- Overall audit performance and documentation (about 2.5 percent). These items include failure to plan, perform, and/or document audits.
- Specialists (about 2.2 percent). Items in this list include unsupported reliance on specialists; failure to access the competency and objectivity of specialists and deficiencies noted where specialists were auditing pension benefit obligations.
- Internal control (about 1.7 percent). The fact that these items appear in this position on this list may be a testament to the PCAOB itself. In addition to performance issues concerning evaluation procedures, failures in testing controls to support a firm’s control risk assessment were found.
Many of the deficiencies, when categorized as line items on a balance sheet, are valuation and cost-based, while the rest sort into failures to perform and document procedures or the testing of accounts, inadequate accounting, improper compliance, identification and impairment issues, errors in the classification of assets and liabilities and reserve and disclosure issues.
When categorized as line items on an income statement, several items are testing and disclosure-based, inappropriate accounting and evaluations, improper documentation and analytical procedures relating to expenses and some impairment issues.
These deficiencies, when categorized by audit performance, strayed from several audit standards, including AU 341, AU 530, AU 543, AU 315, AU 336, AU 322, AU 722, AU 311, AU 324, AU 319, AU 334, AU 312, AU 316, AU 560, AU 330 and PCAOB Auditing Standard No. 3.
The GAAP departures found extended to Statement Nos. 141, 142, 144, 143, 52, 13, 16, 154, 146, 122, as well as FASB Statements Nos. 19, 25, 33, 39 and 69.