Efforts by auditors in three key areas have led to improved quality in audits, PCAOB inspections show.
Helen Munter, the PCAOB’s director of registration and inspections, said Wednesday that results so far for the board’s ongoing 2016 audit inspections show a downward trend in the overall number of findings. These inspections reviewed firms’ work during the 2015 audit cycle.
At the AICPA Conference on Current SEC and PCAOB Developments in Washington, Munter said three positive trends in auditing were identified in 2016 inspections:
- Developing appropriate understanding of the issuer: Walk-throughs are one tactic auditors are using to better understand their clients.
- Coaching: At both the engagement team level and engagement member level, coaching is leading to improvement.
- Monitoring: Firms’ monitoring of engagement teams’ high-level processes and “inflight reviews” of audit work in progress are making a difference.
Internal control over financial reporting (ICFR) remained one of the top three areas of concern identified in inspection findings, Munter said. Management review controls continue to be at the top of the list of problem areas related to ICFR.
Other top areas of focus in inspection findings were assessing and responding to risks of material misstatement, and auditing accounting estimates, including fair value measurements. Munter acknowledged that auditing accounting estimates is a challenging area for firms.
“Firms are taking a hard look to ensure that the remedial actions and tools that they have in place are really able to move the bar,” she said.
2017 inspection focus
During the 2017 inspection cycle, inspectors will continue to focus on ICFR, assessing and responding to risks of material misstatement, and auditing accounting estimates, Munter said.
“With respect to ICFR and risk assessment, auditors will note that inspectors will be increasing their probing to understand the risks identified by engagement teams and how engagement teams design and perform procedures to address the risks that the team itself has specifically identified, including risk of fraud,” Munter said.
Inspectors will continue to focus on the economic risks in 2017 that they targeted in 2016. These will include continuing fluctuations in oil and gas prices and the search for higher-yielding investments.
New accounting standards for revenue recognition and leases also will be an area of focus. Inspectors will be reviewing audit firms’ tools and requirements at a national office level. Inspectors also will try to understand how auditors are maintaining independence during client implementation and appropriately reporting concerns about clients’ readiness or technical ability to the audit committee on a timely basis.
Keys for auditors’ success
New political leadership and implementation of new standards ensure that 2017 will be a time of significant change. In an environment of change, Munter said the following skills and actions can help auditors:
- Judgment: “Technology can assist us, help make things more efficient and more effective,” Munter said. “But we will still need experience and appropriate judgment to make sure we’re doing the right thing.”
- Adaptability: “Just as the market ebbs and flows, auditors should continually monitor emerging risks, react timely … and consider adjusting their audit approach as appropriate,” she said.
- Responding: Targeted actions in response to emerging risks are a key to investor protection and audit quality, she said.
- Challenging the status quo: Munter encouraged auditors to constantly ask how they can do better.
- Embracing change: “Be it in the environment, accounting or auditing standards, [or] technology, change brings opportunity and promise and new ways of looking at things,” she said.
- Making a difference: “What can you do to make things better?” Munter asked. “… Each person is critical to affecting the quality of the audit, and each person is critical to a system of quality control.”
- Keeping your eye on the investor: “That goal of investor protection is really where the focus of audit and inspection work needs to be,” she said.
—Ken Tysiac (firstname.lastname@example.org) is a JofA editorial director.