PCAOB Warns of Audit Concerns in Volatile Economy

The Public Company Accounting Oversight Board has published a staff alert cautioning auditors to beware of the risks of material misstatements in the financial statements they audit in today’s volatile economic environment.

Staff Audit Practice Alert No. 9: Assessing and Responding to Risk in the Current Economic Environment, updates an earlier alert that was issued in December 2008, at the height of the financial crisis. The new alert updates that alert in light of current global economic conditions, which remain dicey amid heightened concerns in the Eurozone, along with recent changes in PCAOB standards.

For example, the alert notes the risks of sovereign debt default or currency volatility, and said they could add a higher level of complexity in determining the ultimate collectability of sales or the appropriateness of other significant assumptions used in certain fair value determinations or estimates, including the fair value of certain financial instruments.

The alert aims to help auditors identify matters that require additional attention. “Today’s volatile economic environment may affect companies’ operations and financial reporting, which has implications for audits,” said PCAOB chairman James R. Doty in a statement. “The alert reminds auditors of their responsibilities under these conditions.”

Many of the matters discussed in the earlier Practice Alert No. 3, Audit Considerations in the Current Economic Environment—including fair value measurements, accounting estimates, going concern, and financial statement disclosures—continue to be critical in audits of 2011 financial statements, the PCAOB noted. Certain PCAOB standards referenced in that alert regarding the assessment of, and response to, risk, however, were superseded in 2010 with the board’s adoption of eight new risk assessment standards in Auditing Standard Nos. 8-15.

“This practice alert discusses issues posed by the current economic situation and highlights certain requirements in the new risk assessment standards,” said PCAOB chief auditor and director of professional standards Martin F. Baumann. “Auditors should be alert to the new requirements contained in the risk assessment standards and how those requirements relate to audits performed in the current economic climate.”

The alert contains four sections: 1) considering the impact of economic conditions on the audit; 2) auditing fair value measurements and estimates; 3) the auditor's consideration of a company's ability to continue as a going concern; and, 4) auditing financial statement disclosures.