Top 5 PCAOB Auditing Standards with Deficiencies

Posted on May 1, 2024 by Rachel Klein, CPA | Tags: PCAOB Inspections,

Reading the PCAOB inspection reports is an annual tradition here at GAAP Dynamics. We spend hours looking at the reports of the annually inspected firms and compiling data to use in our PCAOB eBook. Over the next few weeks, we will have a series of blog posts discussing what we found when we reviewed the 2022 PCAOB inspection reports, so be sure to stay tuned for those, too! The most recent version of the eBook is in the final stages before being published, but I couldn’t wait to share which PCAOB auditing standards resulted in the most inspection deficiencies for the annually inspected firms. Let’s go through the top 5 PCAOB auditing standards with deficiencies.

Graph of the auditing standards associated with the most audit deficiencies noted in PCAOB inspection reports

#1: AS 2201, An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements

27%

If you’ve taken any of our Audit Update courses in the years past or read our PCAOB eBook, it won’t shock you that this is the number one source of inspection deficiencies (27% in 2022). Despite the fact that integrated audits have been required for public companies for more than 20 years, the testing of internal controls continues to be a prevalent problem. While management is responsible for internal controls, the auditor must do more than just make sure a document is signed off on and dated to evidence the control was performed. The auditor must first evaluate the design and implementation of a control prior to testing it for operating effectiveness. Common inspection findings related to this auditing standard related to:

Identifying, selecting and testing controls
Controls over completeness and accuracy of information used in controls
Management review controls

Our Internal Control: The Essentials eLearning course collection (5.0 CPE) covers all the topics you need to know regarding internal control. It includes:

Understanding the Entity, Including its System of Internal Control (1.5 CPE)
Evaluating the Design and Implementation of Identified Controls (1.5 CPE)
Testing the Operating Effectiveness of Identified Controls (1.0 CPE)
Evaluating Control Deficiencies and Communicating with Management (1.0 CPE)

Consider adding our Considerations for an Integrated Audit under AS 2201 course if you are conducting PCAOB audits!

#2: AS 1105, Audit Evidence

20%

Evidence is the foundation for an auditor’s conclusion. While there is an abundance of information available when performing an audit, the auditor must be keenly aware of the information used as audit evidence. Information obtained by the auditor must be evaluated for its completeness and accuracy as well as its relevance and reliability. All information must be considered – both corroborative and contradictory! Frequently management and auditors will utilize specialists, and their work must also be thoroughly understood and evaluated, too! Common inspection findings related to this auditing standard related to:

Testing completeness and accuracy of data
Evaluating relevance and reliability of information
Use of work from specialists

Our Audit Evidence CPE-eligible (1.0) eLearning course will help you understand the definition of audit evidence, how much audit evidence is required, and how to tell if it is relevant and reliable. The interaction between audit evidence and financial statement assertions, specific audit procedures, selecting items for testing, and evidence obtained from others is also discussed in this course.

The use of specialists, whether by management or the auditor, on an audit continues to be on the rise. The specialist and the work performed must be evaluated to determine if it can be used as audit evidence. Our Using the Work of Specialists CPE-eligible (1.0 CPE) eLearning course explores the types of specialists (auditor and management) used in an audit, and the related requirements for using each type, including how to assess the specialist and their work, and communicating with the specialist.

#3: AS 2301, The Auditor’s Responses to the Risks of Material Misstatement

18%

The auditor’s level of response is directly proportional to the perceived risk associated with a specific account balance or class of transactions. Determining the level of risk of an account or transaction will often require professional judgment. Because of the professional judgment involved with risk assessment and determining the planned audit approach, the auditor’s considerations must be thoroughly documented. The audit response must be designed to appropriately respond to the assessed level of risk. While relying on controls that are designed, implemented and operating effectively may reduce the level of substantive audit procedures the auditor needs to perform, there must always be some level of substantive procedures to address each relevant assertion for significant accounts, transactions and/or disclosures.

Failure to perform substantive procedures
Failure to perform sufficient substantive procedures
Insufficient sample sizes as a result of overreliance on controls

Before you can design an audit response, the risk must be identified and assessed. Our Risk Assessment: Identifying and Assessing Risks of Material Misstatement eLearning course begins with the foundational concepts of risk and risk assessment and then discusses how to identify risks. Identifying risks involves a thorough understanding of the entity and its environment, the applicable financial reporting framework and system of internal control, which are all discussed along with the related risk assessment procedures in this CPE-eligible (1.5 CPE) course. Once risks are identified, auditors must then assess these risks using the inherent risk spectrum to determine whether risks rise to a level of significant risk.

The requirements for designing and implementing an audit response to address the risks of material misstatement are discussed in our Audit Procedures in Response to Risk course. This CPE-eligible (1.0) eLearning course covers the nature, timing and extent of responses as well as the various types of responses.

Insufficient sample sizes were a common PCAOB observation. To gain a better understanding of when it is appropriate to use an audit sample, the relevant considerations when determining the sample size, and how to evaluate the results of an audit sample are found in our CPE-eligible (1.0 CPE) eLearning course Audit Sampling.

#4: AS 2501, Auditing Accounting Estimates, Including Fair Value Measurements

13%

Accounting estimates can be tricky… why? Well, because they are estimates! Translating the impact of a qualitative statement (i.e., launching a new product and expecting significant growth) into a concrete, quantitative input in a calculation (i.e., 35% revenue growth) is no easy feat! When auditing an accounting estimate, the auditor needs to understand management’s process, consider the data used in the estimate, and evaluate the reasonableness of the estimate and significant assumptions used to form it. Fair value measurements are estimates too and they can have additional complexity! Common inspection findings related to this auditing standard related to:

Testing accounting estimates
Testing fair value measurements
Following one of the three prescribed approaches for testing the estimate

Need help auditing accounting estimates? Check out our CPE-eligible (1.0 CPE) eLearning course, Auditing Accounting Estimates. This course features a measuring tool theme to help you understand the requirements for auditing accounting estimates, including the approaches used and considerations for fair value measurements.

#5: AS 2810, Evaluating Audit Results

7%

In order for the auditor to form an opinion on whether the financial statements are presented fairly in accordance with the applicable financial reporting framework, the auditor must evaluate all of the audit evidence obtained. This includes performing an overall review analysis (e.g., final analytical procedures), evaluating the misstatements accumulated during the audit, considering fraud risk, evaluating the presentation and disclosure of the financial statements and determining whether sufficient, appropriate audit evidence has been obtained. Common inspection findings related to this auditing standard related to:

Evaluating technical accounting
Evaluating presentation and disclosure

Although our eLearning course on this auditing standard is currently being developed, GAAP Dynamics has no shortage of resources! It’s hard to audit the technical accounting if you don’t understand it! You name an accounting topic and I bet we’ve got a course on it! Be sure to check out our U.S. GAAP and IFRS online courses available on the GAAP Dynamics Learning Library.

Want to learn more?

Be sure to check out the Free Resources section of our website. It’s here where you will find our PCAOB eBook and CPE-eligible webinars and playbacks. If need training immediately, be sure to check out the GAAP Dynamics Learning Library where you’ll find hundreds of online courses in U.S. GAAP, IFRS, and Audit related topics. Of course, if you have any questions about this post or anything else, don’t hesitate to reach out!

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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.