PCAOB Targets 3 Key Areas in 2015 Audit Firm Inspectionsby
Though the Public Company Accounting Oversight Board's (PCAOB) inspections of registered auditors of public companies has already begun, the US audit regulator last week released a brief describing this year's three key inspection target areas.
âWe hope that audit firms and other stakeholders find this information about our inspection focus and scope informative,â Helen Munter, director of the PCAOB Division of Registration and Inspections, said in a prepared statement.
The three target areas include:
1. Auditing internal control over financial reporting, especially the design and effectiveness of controls.
2. Assessment of material misstatement risks, because some auditors did not sufficiently identify or respond to risks.
3. Auditing accounting estimates, which includes fair value measurements, especially in testing of key data and management's assumptions in developing estimates.
Why these targets? Inspectors found âsignificant deficienciesâ in each area during the 2013 and 2014 inspection cycles, including situations in which firms were not the principal auditor, according to the brief.
Inspectors select focus areas within the audits based on the following risks:
- An issuer or specific industry's characteristics, including market capitalization, nature of the operations, and industry risks.
- Likely audit or accounting issues, such as more complicated revenue recognition considerations.
- Geographic locations, including emerging markets.
- Issues pertinent to a specific firm, practice, or partner, including previous inspection findings.
Economic developments also have played a role in past inspections, and this year is no different. Inspectors will consider the following three economic aspects:
1. Mergers and acquisitions. This includes how auditors handled fair value measurements of acquired assets and assumed liabilities, which could be components of material misstatement; identified intangible assets; assigned goodwill to reporting units; and contingent consideration measurements.
2. Higher-yielding investment returns. Inspectors will assess how auditors handled the risk of overvalued assets, errors in securities valuations, and other financial reporting risks in issuers' portfolios.
3.The effect of oil price fluctuations on reporting risks. Key here is how auditors handled the risk, including impairment and valuation and collectability of loans and receivables. Companies don't have to necessarily be in the oil and gas industry.
Risks within industry sectors also factor into inspection selections. Inspectors will examine the following areas:
- Financial reporting, including cash-flow statements and income tax accruals.
- IT, including software audit tools, how well staff uses those tools for big data studies, professional skepticism, and cybersecurity.
- Multinational audits, including the multifirm audit work performed by both domestic and non-US firms that played a role in the audit, but were not the principal auditor.
- Quality control, including root-cause analysis, independence and nonaudit services, engagement quality review, professional skepticism, and related parties.
This year, the PCAOB will inspect about 220 registered audit firms â about the same number as last year. Of those, about 60 are located outside of the United States in 25 different jurisdictions. And, for 10 of the total number of firms, this year will be their annual inspection because they audit more than 100 issuers. (The remaining firms that audit 100 or less are inspected once every three years.)
The board inspects firms to assess compliance with the Sarbanes-Oxley Act, PCAOB rules, US Securities and Exchange Commission rules, and professional standards.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.