Auditing


- Revenue recognition, internal control over financial reporting, and professional skepticism are among the seven key areas for 2014 audit consideration, according to an alert sent by the Center for Audit Quality (CAQ), which is affiliated with the AICPA.

The alert is designed to help public company auditing firms address risks quickly and proactively and remind them of considerations that may be relevant for the 2014 audit cycle.

The 2014 alert, available at tinyurl.com/l8w5rjm, covers the following auditing considerations, some of which were the subject of recent PCAOB reports:

1.  Revenue recognition. The PCAOB’s practice alert and the converged accounting standard on revenue recognition, jointly adopted by FASB and the International Accounting Standards Board (IASB), make revenue recognition top of mind for auditors this year.

2.  Going concern. The PCAOB issued a practice alert in September that stated that auditors are still responsible for going-concern evaluation under PCAOB rules, despite FASB’s release in August of a new standard related to going-concern evaluation.

3. Internal control over financial reporting. The CAQ alert reviews seven areas related to the audit of internal control over financial reporting, which was the subject of a PCAOB audit practice alert in October 2013.

4.  Auditing accounting estimates, including fair value measurements. The auditor is responsible, when auditing accounting estimates such as fair value measurements, for evaluating how those accounting estimates have been developed, the CAQ alert says.

5.  Engagement quality review. “The responsibilities of the engagement quality reviewer should be carried out with objectivity and the application of due care,” the CAQ alert says.

6.  Professional skepticism. This requirement, also on last year’s alert list, involves “critically evaluating all evidence” and “considering what can go wrong with the financial statements,” the CAQ alert says.

7. Related parties and amendments to certain PCAOB auditing standards regarding significant unusual transactions.   The PCAOB approved rules in June that are designed to strengthen auditor scrutiny in this area.

 

- The CAQ and the AICPA issued a joint alert to provide audit firms with an overview of SEC and PCAOB independence rules that apply to financial statement audit and attestation engagements for certain nonissuers.

The alert, available at tinyurl.com/ondd7yl, is intended for auditors of:

  • SEC-registered, nonissuer broker-dealers; and
  • Where the engagement is subject to the requirements of the SEC “custody rule”: Rule 206(4)-2 (17 C.F.R. 275.206(4)-2), SEC-registered and state-registered investment advisers, related-party custodians, and private funds such as pooled investment vehicles.

The alert is a follow-up to independence guidance provided in a CAQ/AICPA joint alert issued in May. The new alert also provides relevant guidance as reflected in recent PCAOB staff guidance for auditors of SEC-registered brokers and dealers, in light of a recent PCAOB report on the progress of its interim inspection program for audits of brokers and dealers. The PCAOB expressed concern in that report about the continued high number of independence findings related to audits of broker-dealers.

Audit firms are advised in the CAQ/AICPA alert to continue to assess services and relationships with clients to ensure permissibility within the rules, and keep open lines of communication with management and audit committees to ensure understanding of issues that may affect a firm’s independence.

 

- U.S. public company proxy reports often discuss how nonaudit services may affect independence but seldom discuss audit fees and their connection to audit quality and disclose auditor tenure about half the time, a new analysis shows.

These are the findings of a new Audit Committee Transparency Barometer report that measures the content of proxy statement disclosures in areas such as auditor oversight and scope of audit committee duties.

The CAQ partnered with Audit Analytics to perform the analysis of disclosures by 1,500 Standard & Poor’s (S&P) composite companies. The analysis reviewed the most current proxies filed through the end of June 2014 by companies in the S&P 500, S&P 400 (S&P MidCap), and S&P 600 (S&P SmallCap).

The study found that 83% of S&P 500, 69% of S&P MidCap, and 58% of S&P SmallCap companies discussed in their proxy statements how nonaudit services may affect independence.

Disclosure of the length of time an auditor has been engaged was included in 47% of S&P 500, 42% of S&P MidCap, and 50% of S&P SmallCap company proxy statements.

A discussion of audit fees and their connection to audit quality was included in just 13% of S&P 500, 4% of S&P MidCap, and 1% of S&P SmallCap proxy statements.

The report is available at tinyurl.com/n2y8fz3.

 

- Audits of employee benefit plan (EBP) financial statements are an important public service in which quality performance is essential.

But studies by the U.S. Department of Labor (DOL) have found significant deficiencies in some of these plan audits, and stepped-up enforcement of the audit requirement carries risks for plan administrators.

The DOL has the right to reject plan filings and assess penalties of up to $1,100 a day, without limit, on plan administrators with deficient filings.

This makes selection of a quality audit firm essential for plan administrators. A new AICPA publication, available at tinyurl.com/oxv7xua, discusses steps for hiring a quality auditor for an EBP audit, with step-by-step instructions for the proposal process and documenting the agreement.

Evaluating the auditor’s qualifications, the publication says, is a critical step that includes considering licensing and independence rules, and reviewing the auditor’s experience and professional development.

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