PCAOB Reminds Auditors of Requirements Related to Unusual Transactions

The PCAOB on Wednesday issued an alert reminding public company auditors of their responsibilities related to the risk of material misstatements stemming from error or fraud associated with significant unusual transactions.

“The PCAOB’s message to auditors, in this challenging economic environment, has consistently emphasized attention to audit risk and adherence to existing audit requirements,” Martin F. Baumann, chief auditor and director of Professional Standards, said in a press release. 

Staff Audit Practice Alert no. 5, Auditor Considerations Regarding Significant Unusual Transactions, complements Staff Audit Practice Alert no. 3, Audit Considerations in the Current Economic Environment, by taking a deeper look at risks of material misstatement associated with significant unusual transactions, a risk that the PCAOB said it believes continues to exist today. 

The alert describes significant unusual transactions as “significant transactions that are outside the normal course of business for the company, or that otherwise appear to be unusual given the auditor’s understanding of the company and its environment.”

“Significant unusual transactions, especially those close to period end that pose difficult ‘substance over form’ questions, can provide opportunities for companies to engage in fraudulent financial reporting,” it says.

The alert compiles existing requirements from PCAOB auditing standards regarding significant unusual transactions and groups them into the following categories: 

• Identifying and assessing risks of material misstatement.
• Responding to risks of material misstatement.
• Consulting others.
• Evaluating financial statement presentation and disclosure.
• Communicating with audit committees.
• Reviewing interim financial information. 

“Practice Alert no. 5 will assist auditors as they begin their work related to 2010 quarterly reviews and audits of financial statements,” Baumann said in the release.