7 risk areas for the 2014 audit cycle

By Neil Amato

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 Thursday by the Center for Audit Quality (CAQ).

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 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), makes revenue recognition top-of-mind for auditors this year. “These auditing matters likely will continue to have relevance to auditing revenue under the new accounting standard,” the CAQ alert says. “Further, although the new accounting standard is not yet effective, the auditor should evaluate management’s required disclosure of the impact the new accounting standard is likely to have on the financial statements, evaluating the form, arrangement, and content of the disclosure.”

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. Auditors should look to the existing requirements when evaluating whether “substantial doubt regarding the company’s ability to continue as a going concern exists for purposes of determining whether the auditor’s report should be modified to include an explanatory paragraph.”

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. Among those seven areas are IT considerations, testing management review controls, and using the work of others (such as internal auditors).

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. For instance, when evaluating and testing management’s control over an accounting estimate, an auditor should evaluate the reliability of data used in developing the estimate. In August, the PCAOB requested comments as it weighed standard-setting activities related to auditing accounting estimates and fair value measurements. The comment period closed Nov. 3.

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. Reviewers should follow procedures in accordance with Auditing Standard No. 7, Engagement Quality Review.

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. Auditors “should not be satisfied with less than persuasive evidence because of a belief that management is honest.”

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 rules require the auditor to perform specific procedures to evaluate a company’s identification of, accounting for, and disclosure of the transactions and relationships between a company and its related parties. A significant, unusual transaction is defined as one that is outside the normal course of business for the company or that otherwise appears unusual because of its timing, size, or nature. Also, under the rules, auditors are required to obtain an understanding of the company’s financial relationships and transactions with its executive officers. The auditor is not required to determine whether the compensation of executives is reasonable or to make recommendations regarding compensation.

The CAQ plans to update the alert annually. The CAQ is affiliated with the American Institute of CPAs.

Neil Amato ( namato@aicpa.org ) is a JofA senior editor.


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