PCAOB previews audit firm inspection findings

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The Public Company Accounting Oversight Board has posted a preview of its inspection staff’s observations from 2018, describing some of the main deficiencies it uncovered for auditing firms, along with ways to improve audit quality.

The Staff Preview of 2018 Inspections Observations includes, for the first time, “good practices” for improving audit quality. It also describes some of the common deficiencies found by the PCAOB inspection staff, along with their observations on technology, and implementation of new accounting and auditing standards and rules. The preview includes finding for both U.S. and non-U.S. audit firms that inspected both annually and every three years.

Among the positive practices cited by the PCAOB are expanding accountability and revising training programs, as well as establishing a network of specialized professionals to address emerging risks.

Root cause analyses have also proven to be helpful. “We observed that many audit firms continue to take steps intended to improve audit quality,” said the PCAOB. “These audit firms are achieving improvements by performing root cause analyses to understand the primary factors that contributed to positive and negative audit quality. Root cause analyses coupled with effective design and implementation of remedial actions can drive audit quality.”

On the negative side, some of the deficiency areas observed last year include internal controls over financial reporting and revenue risk assessments, along with accounting estimates such as the Allowance for Loan and Lease Losses, or ALLL for short.

“We continue to identify deficiencies in areas involving accounting estimates such as allowance for loan and lease losses (ALLL), accounting for business combinations, and the fair value of financial instruments,” said the PCAOB. “Developing these estimates often involves unobservable inputs, complex valuation models, and/or subjective judgments. To test accounting estimates effectively, auditors should exercise professional skepticism and involve senior engagement team members throughout the audit process.”

In the area of new standards, the report also discusses the changes in the auditor’s report, which will require audit firms to disclose critical audit matters, or CAMs, in their reports.

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