By Jason Bramwell, Staff Writer
A report released by the Public Company Accounting Oversight Board (PCAOB) found that audit firms may not be executing engagement quality reviews appropriately under a particular auditing standard.
Auditing Standard No. 7, Engagement Quality Review, requires an engagement quality review for every audit engagement and every engagement to review interim financial information.
"Properly executed engagement quality reviews serve as important safeguards against erroneous or insufficiently supported audit opinions because they can identify significant audit deficiencies before the audit report is issued", the PCAOB noted in its report, Observations Related to the Implementation of the Auditing Standard on Engagement Quality Review, which was made public on December 6.
The PCAOB added that its engagement quality review requirement enhances investor protection by providing for a rigorous review that will serve as a meaningful check on the work performed by the engagement team.
"As part of the PCAOB's oversight activities, the board reviews the implementation of our recently issued auditing standards", PCAOB Chairman James Doty said in a written statement. "I encourage audit firms, engagement quality reviewers, audit committees, investors, and others to review the report, which also describes the Inspections staff's view of potential root causes of the deficiencies they observed related to Auditing Standard No. 7."
The report is based on inspections made by the PCAOB in 2011 of 213 domestic and non-US-registered public accounting firms and approximately 820 audit engagements.
The inspections included engagement quality reviews of the first audits for which firms were required to implement Auditing Standard No. 7, which became effective for audits and interim reviews for fiscal years beginning on or after December 15, 2009.
"The inspections identified approximately 310 engagements where the firm, at the time it issued its audit report, had failed to obtain sufficient appropriate audit evidence to support its audit opinion on the financial statements and/or the effectiveness of internal control over financial reporting", the PCAOB stated in the report. "For 141 of the 213 firms inspected, Inspections staff reviewed the relevant provisions of firms' methodologies and assessed whether the methodologies were consistent with the requirements of Auditing Standard No. 7."
What Inspections staff found was firms' methodologies were generally consistent with the requirements of the standard, but it did not always result in an appropriately executed engagement quality review.
"In a number of the engagements, including approximately 39 percent of the 111 audits of seven large domestic firms in which the Inspections staff identified that the audit opinion was insufficiently supported, Inspections staff concluded that the audit deficiency should have been identified by the engagement quality reviewer", the report noted. "For example, Inspections staff noted instances where an engagement quality reviewer reviewed significant judgments made by an engagement team but failed to detect deficiencies in those significant judgments. Observations from the board's 2012 inspections indicated that audit deficiencies and the related deficiencies in engagement quality reviews continued to be high."