PCAOB Issues Staff Update and Preview of 2019 Inspection Observations

Charles Soranno, Managing Director Internal Audit and Financial Advisory

On October 8, 2020 the Public Company Accounting Oversight Board (PCAOB) published its Staff Update and Preview of 2019 Inspection Observations. In 2019, the PCAOB inspected approximately 175 audit firms and reviewed portions of roughly 710 public company audits in the United States and abroad. Through the inspections, the board identified potential areas of improvement for all firms and good practices that enhance audit quality. It also reviewed how auditors are responding to technology-related developments.

Monitoring the PCAOB’s activities is always useful. It provides a window into the board’s evolving inspections regime and thinking around quality control standards for auditing firms. The latest inspection findings shed light not only on the PCAOB’s current areas of inspection focus, but also its ongoing effort to constantly improve its inspection process. These inspections also may offer insight as to potential adjustments to auditing procedures in forthcoming audits.

The published findings are primarily focused on identified deficiencies and good practices related to external auditing firms. The report also includes the perspectives of a target team established last year to focus on multi-location audits. It also contains observations on audit communications based on discussions in 2019 with audit committee chairs.

In a Protiviti-issued Flash Report, we discuss some of the most notable areas in the PCAOB findings. We offer the top-level highlights below. The full Staff Update and Preview of 2019 Inspection Observations can be found here.

Notable Areas of Deficiency in the PCAOB Report

The PCAOB identified the following areas of deficiency:

  • Recurring audit deficiencies related to revenue using the new revenue accounting standard
  • Deficiencies related to independence, specifically violations of financial relationship requirements of Rule 2-01 of SEC Regulations S-X and deficiencies related to PCAOB Rule 3524, Audit Committee Preapproval of Certain Tax Services and PCAOB Rule 3526, Communication with Audit Committees Concerning Independence.
  • Deficiencies in accounting estimates in the areas of allowance for loan losses (ALL), accounting for acquired assets, and the testing of data accuracy.
  • Deficiencies related to internal control over financial reporting (ICFR), specifically in evaluating whether controls are precise enough to detect material misstatement, testing enough controls to address risks related to certain significant accounts, and testing the accuracy and completeness of system-generated reports.

Observations in Other Areas of Focus

In its update, the PCAOB offers additional observations related to cybersecurity risk, technology, multi-location audits based on inspections conducted by a target team, and audit committee communications. Distributed Ledger Technology (DLT) and software audit tools, including third-party tools, are two areas where the PCAOB noted insufficient procedures and testing deficiencies.

Target Team Activities

The board established a target inspection team last year to work on current audit risks and emerging topics focused on multi-location audits based in the United States and also on issuer audits at annually inspected firms in which the U.S. firm played a role but was not the principal auditor. The team provided the following, mostly positive, observations:

  • There is an improved audit quality when there is regular, consistent communication between the principal auditor and the other auditors, with specific examples.
  • Good practices observed include: External quality reviews (EQRs) of audits conducted by other auditors; assigning a partner experienced in International Financial Reporting Standards (IFRS) as an additional reviewer of work referred to a U.S. firm; automating the collection of global hours to compile the information required for Form AP filings; and using site visits to obtain additional information.

Audit Committee Communications

The board noted generally good communication between audit committees and their auditors. However, certain triennially inspected firms failed to communicate all significant risks identified during audit planning, or changes to those risks.

Observations of Good Audit Practices

The PCAOB identified several good audit practices that would be helpful for reporting companies to know, including:

  • Conducting interactive meetings and coaching workshops
  • Earlier involvement of the engagement quality reviewer
  • Narrative descriptions of quality control protocols
  • Increased partner involvement when planning tests of controls
  • Use of firm specialists during audit planning to assist with the risk assessment
  • Implementing coaching programs and refining audit tools for specific audit areas

The PCAOB inspection process continues to evolve. Last year, the board initiated a transformation, incorporating unpredictability into more areas of its inspection process, deploying a team to target specific areas of focus or emerging risk across firms, and expanding its inspection procedures to compare approaches for monitoring quality control, among other changes.

For auditors, the findings in this PCAOB staff update may lead to a reassessment and adjustments to the nature, timing and extent of audit procedures in future audits. Reporting companies and their audit committees may also find it insightful as they evolve their financial reporting protocols, dynamically consider inherent and emerging risks, consider personnel skills enhancement and development, and ultimately engage with their auditors on a proactive, open and frequent basis.

Download the detailed Protiviti Flash Report from our website.

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