Six key risk areas merit attention in 2013 audit cycle

BY KEN TYSIAC
December 17, 2013

Auditing of internal control over financial reporting, a topic that has received a lot of attention from the PCAOB this year, is among the key risk factors for the 2013 audit cycle, according to a new Center for Audit Quality (CAQ) alert.

The alert describes six key areas of potential risk in auditors’ work. Many of the areas have been the subject of recent PCAOB reports. The six areas are:

1. Internal control over financial reporting. The PCAOB issued an audit practice alert in October on applying board standards to audits of internal control over financial reporting. In December 2012, the PCAOB issued a report on common problems to avoid in audits of internal control over financial reporting. The CAQ report summarizes areas of focus in the October audit practice alert. “Understanding the flow of transactions and identifying the risks of material misstatement—including the types of potential misstatements that can occur and the likely sources of those potential misstatements—is necessary for the auditor to select appropriate controls to test and to evaluate whether those controls adequately address the risks,” the report says.

2. Professional skepticism. The requirement for the auditor to exercise professional skepticism was the topic of a PCAOB audit practice alert in December 2012. Auditors should maintain a questioning mind and have the confidence to challenge management representations after gathering and evaluating appropriate evidence, according to the CAQ report.

3. Engagement quality review. Earlier this month, the PCAOB released a report advising audit firms to take steps to make sure that engagement quality reviews identify the audit deficiencies they are meant to detect. The CAQ report advises the engagement quality reviewer to carry out responsibilities with objectivity and application of due care, with the firm appropriately addressing the reviewer’s findings before issuing the audit report.

4. Accounting estimates, including fair value estimates. When evaluating how reasonable an estimate is, auditors normally focus on inputs and assumptions that are significant to the estimate; are sensitive to variations; deviate from historical patterns; and are subjective and susceptible to misstatement and bias, the CAQ report says.

5. Substantive analytical procedures. Although substantive analytical procedures may be effective tests for relevant assertions related to certain accounts, these procedures may not always be effective in providing the appropriate level of assurance, according to the CAQ report.

6. Inaccurate or omitted disclosures. Auditors should communicate to management or the audit committee, as appropriate, whether the financial statements are presented fairly in all material respects, in conformity with the applicable financial reporting framework, the CAQ report says.

The CAQ, which is affiliated with the AICPA, plans to update the alert at least annually.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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