Question

research and discuss the top 5 audit concerns of the PCAOB.  If you are an auditor , what would your top concerns be. Are there any examples of these audit concern issues in the news ?

Answer 1

REVENUE

1.Nearly one-third of all audit deficiencies noted in the 2015 PCAOB inspection reports related to auditing revenue, including accounting receivable, deferred revenue and the allowance for doubtful accounts. From failure to evaluate whether the issuers’ accounting was in conformity with GAAP to failure to identify and test controls, the auditing standards attributable to the deficiencies in this area ran the gamut.

INVENTORIES

2.Relating to risk assessment, many the deficiencies related to not doing enough test work over certain inventory balances. Specifically, auditors would plan on performing limited substantive procedures, such as analytical procedures, over certain balances as they planned to rely on controls. However, when their tests of controls indicated deficiencies, the audit plan was not subsequently revised.Most of the audit deficiencies attributable to business combinations, including contingent consideration, related to internal control over financial reporting and auditing estimates and fair value measurements.

BUSINESS COMBINATION

3.Auditors failed to perform sufficient procedures to test controls over the valuation of assets acquired and liabilities assumed. Specifically, auditors failed to evaluate whether these management review controls were designed and operated at a level of precision that would prevent or detect material misstatements. In addition, auditors failed to ascertain the nature of the review procedures that the control owners performed, including criteria used by the control owners to identify matters for follow up and whether those matters were appropriate resolved.

LOANS AND ALLOWANCES

4.Inquiry of management alone is not sufficient audit evidence! Many of the deficiencies related to auditors inquiring of management without obtaining corroborating evidence of the explanations they received. In addition, the allowance for loan losses (ALL) is a significant estimate made by management using probably-of-default and loss-emergence-period assumptions, among others. It is imperative that auditors test these assumptions, including testing the accuracy and completeness of the underlying data. Finally, when testing controls over the ALL, auditors inquired of control owners and inspected documentation used in the operation of the controls, but failed to evaluate the expectations applied in the reviews, the criteria used to identify matters for follow-up, and the resolution of such matters.

When testing internal controls in this area, auditors relied heavily on management inquiry and inspecting documentation indicating the control had been performed. However, their testing did not include evaluating the procedures performed, including the basis for the control owners’ expectations and whether matters identified for follow up were appropriately resolved.

IMPAIRMENT OF GOODWILL AND INTANGABLE ASSETS

5.Assessing and measuring goodwill and intangible assets for impairments requires fair value measurements so it makes sense that several deficiencies in this area related to auditing fair value measurements. Specifically, the firms failed to perform sufficient procedures to test the issuers’ analyses of possible impairment, heavily relying on internally-produced memoranda and schedules, as well as inquiry of management, without any corroboration

No examples