The Public Company Accounting Oversight Board has released reports on the audit deficiencies that its inspectors found last year at BDO Seidman and Grant Thornton.
In the BDO report, the PCAOB found deficiencies in testing of revenue in five audits, saying that the firm failed to obtain sufficient evidence to support its audit opinion. For example, with one audit client in the technology industry, BDO auditors apparently failed to test the operating effectiveness of controls over revenue, or to test the completeness and accuracy of the companys accounts receivable and revenue data.
In response, BDO said that the appropriate audit procedures had been performed and evidence obtained at three of the audit clients in the report, but that it enhanced its workpaper documentation of previously completed procedures or performed some additional procedures at another audit client. However, the performance of the additional procedures did not impact the firms conclusions and previously issued reports.
It should be recognized that the sufficiency of evidential matter required to support an informed audit opinion is determined through the exercise of the auditors professional judgment after a careful study of the particular circumstances, said BDO Seidman. It is often difficult to reach a common understanding of what is sufficient because of the variety of judgments involved in that analysis by professionals having different levels of knowledge of the issuers businesses.
In the report on Grant Thornton, the PCAOB inspectors found deficiencies in the testing of assets held by company pension plans in five of the firms audits. In four of the audits, the firm failed to test the existence and valuation of assets held in the defined-benefits plan, according to the PCAOB. In another audit, the firms auditors failed to test the valuation of real estate and hedge fund investments and a guaranteed investment contract held by the issuers defined-benefit pension plan.
The PCAOB also found deficiencies in the testing of auction rate securities in two audits. In one of the audits, when reviewing the companys assessment of goodwill for impairment, the Grant Thornton auditors failed to test the revenue and expense projections, including the underlying assumptions, used to estimate the fair value of the issuer's largest reporting unit. In addition, the firm failed to evaluate whether certain intercompany payables were appropriately included in the carrying amount of the reporting unit.
Grant Thornton defended its work in response to the report. We have had communication with the PCAOB on certain comments included in this draft report and we disagree with certain views of the PCAOB, said the firm. We base our views on significant discussion and consultation between the engagement teams and specialists with Grant Thornton. We believe these judgments were appropriately supported and well-reasoned. While we believe that the PCAOB should continue to challenge judgments and documentation during the inspection process, we do not believe that, in the end, reasonable judgments should be criticized and second-guessed. Such a process will ultimately lead to inefficient audits due to the fear of unnecessary criticism.
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