PCAOB inspectors identified three areas where audit deficiencies were most frequently identified in 2016, according to a recently published board staff inspection brief.
The areas with most common deficiencies were:
- Assessing and responding to risk of material misstatement. For example, in some cases the auditor did not perform tests of details specifically related to fraud risks assessed by the auditor.
- Auditing internal control over financial reporting. Consistent with previous years' results, this was the area with the most frequent deficiencies. The most common deficiency in this area was insufficient testing of the design and operating effectiveness of selected controls, particularly those controls that included a review element.
- Auditing accounting estimates, including fair value measurements. Common deficiencies in this area related to evaluating impairment analyses for goodwill and the valuation of assets and liabilities acquired in business combinations.
The PCAOB developed the staff inspection brief to assist audit firms in complying with PCAOB rules. PCAOB inspectors examined portions of more than 780 issuer audits in 2016 and reviewed the systems of quality control at more than 190 firms.
The brief suggests that firms may wish to:
- Continue to evaluate the effectiveness of their systems of quality control.
- Perform root-cause analyses of recurring deficiencies.
- Remain vigilant when planning and performing procedures in the challenging areas identified in the brief in upcoming audits.
- Have engagement quality reviewers keep the challenging areas in the brief in mind when they perform their reviews.