Performing a Quality Audit: PCAOB Spotlight

Erika Williams, PCAOB chair, has the following to say in a recent speech about inspection report findings:

“When inspection reports are finalized, PCAOB inspectors expect that approximately 40% of the audits they reviewed in 2022 will have had one or more deficiencies…This means audit opinions were signed without completing the audit work required to verify the accuracy of the financial statements. That is a serious problem at any rate, and 40% is completely unacceptable.”

To help auditors, audit committees, investors, and preparers understand the board’s activities and observations, the PCAOB staff prepares various staff publications. One such publication is the PCAOB Spotlight, and there were two Spotlight documents that were released in December 2023 that are applicable to auditors wishing to reduce the number of audit deficiencies and achieve a quality audit.

The purpose of this post is to provide a high-level summary of these PCAOB Spotlight documents.

PCAOB Spotlight: Observations from the target team’s 2022 inspections

This Spotlight document provides auditors and other stakeholders with a view into the target team’s work in 2022, including observations that result in the issuance of comment forms, good practices, and key insights. The target team focused on inspection audits of public companies related to three key areas:

1. Traditional IPOs and de-SPAC transactions
2. Shared service centers
3. Climate-related matters

1. Traditional IPOs and de-SPAC transactions

The target team identified deficiencies in 20% of the post-IPO audits reviewed, specifically related to revenue. Deficiencies noted included instances where the auditor did not:

• Identify a departure from GAAP;
• Perform sufficient substantive procedures; and
• Identify and test relevant controls.

The Spotlight document provides some observations and good practices related to fraud procedures in IPO audits, although no deficiencies were noted in this area. 

2. Shared service centers

A shared service center (SSC) refers to an entity – affiliated with on or more audit firms – that mostly provides resources and services remotely to core engagement teams. Typically, the procedures performed by SSCs are more routine in nature, such as testing the mathematical accuracy of schedules prepared by the public company. However, the target team did note that SSCs are performing audit procedures in complex or judgmental areas. Just a reminder that SSCs are part of the engagement team and, thus, proper supervision is required and the U.S. engagement team remains ultimately responsible for all work performed by the SEC.

3. Climate-related matters

Many stakeholders are very interested in climate-related matters and, as a result, the target team reviewed audit engagements with a focus on climate-related matters that could materially affect the public company’s filings with the SEC. All engagement teams considered the potential impact of climate matters as part of their planning and risk assessment procedures, an no deficiencies were identified. That said, be aware that climate-related matters can affect commitments disclosed in the financial statements, estimates of the useful life and valuation of long-lived assets, and going concern assessments.

The target team noted that in all the audits they reviewed, the public companies reported climate-related matters in a separate “sustainability” report, so, if you’re not already doing so, you might want to obtain (and read) your clients’ sustainability reports during your planning and risk assessment procedures.

For more information on recent inspection findings, download our PCAOB eBook, which provides updated information on the most recent inspection reports. Not only does our eBook summarize main areas of audit deficiencies, it also provides practical tips to improve audit quality. 

PCAOB Spotlight: Staff priorities for 2024 inspections and interactions with audit committees

This Spotlight document aims to provide an overview of inspection priorities for 2024, including reminders and information on effective practices.

The PCAOB’s 2024 inspection program will consider overall business risks present in the audits inspected including the following:

• High interest rates, tightening of credit, and/or inflationary challenges
• Supply-chain disruptions and rising costs
• Impact of rapidly changing technology on business models
• Geopolitical conflicts
• Financial statements that include areas with higher fraud risk, estimates involving complex models or processes, and/or complexity of a company’s activities and its impact on presentation and disclosures

When planning and performing risk assessment procedures, auditors should take note of the following areas where the PCAOB has indicated that they will focus during inspections:

• Testing controls with a review element
• Areas of recurring deficiencies
• Evaluating audit evidence
• Understanding the company and its environment
• Use of other auditors
• Going concern
• Critical audit matters
• Broker-dealers

The Spotlight document also talks about rapidly changing technology and the risks imposed on the audit. Specifically, the inspectors will focus on the following technology-related areas:

• Digital assets
• Cybersecurity
• Use of data and technology

Interestingly, none of the PCAOB inspection reports related to the 2022 inspections of the annually inspected firms have been released (and we’re almost done with February 2024)! I wonder what that means. Well, good luck this year in achieving quality audit!

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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.