PCAOB Releases Staff Inspection Brief Previewing 2015 Inspection Findings

The staff of the Public Company Accounting Oversight Board today published an inspection brief that previews the results of 2015 inspections.

Preliminary inspection results of annually inspected firms indicate the overall number of audit deficiencies identified in 2015 decreased compared to the results from 2014. Audit firms are inspected annually if the firm provides audit reports for more than 100 issuers. In 2015, 10 firms met that threshold.

Areas that showed improved audit quality at certain firms may have been a result of firms' better monitoring of audit work performed, among other things.

"Auditors should take note of the matters discussed in this inspection brief in planning and performing their audits," said Helen Munter, PCAOB Director of the Division of Registration and Inspections. "It is particularly important for the engagement partner and senior team members to focus on these areas and for engagement quality reviewers to keep these matters in mind when performing their reviews."

For firms that are required to be inspected at least once every three years, inspections staff observed an overall high number of audit deficiencies in preliminary 2015 inspection results.

In preliminary 2015 inspection results for annually inspected and triennially inspected firms, the most frequent audit deficiencies continue to be in three key areas:

  • Auditing internal control over financial reporting
  • Assessing and responding to risks of material misstatement
  • Auditing accounting estimates, including fair value measurements

Internal Control Over Financial Reporting

Inspections staff continued to identify frequent audit deficiencies related to noncompliance with AS 2201 (currently AS No. 5), An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements. While inspectors saw improvement in 2015 in the nature and extent of the audit issues in this area at certain firms, continued focus on testing controls is needed to improve and sustain audit quality.

Assessing and Responding to Risks of Material Misstatement

Deficiencies identified in 2015 related to noncompliance with the Risk Assessment Standards decreased at certain firms when compared to inspections from 2012 to 2014; but these deficiencies continue to be commonly identified. As in prior years, the risk assessment deficiencies observed in 2015 were most frequently related to AS 2301 (currently AS No. 13), The Auditor's Responses to the Risks of Material Misstatement; AS 2810 (currently AS No. 14), Evaluating Audit Results; and AS 1105 (currently AS No. 15), Audit Evidence.

Accounting Estimates, including Fair Value Measurements

The audit deficiencies frequently identified during the 2015 inspections cycle related to estimates arising from the valuation of assets and liabilities acquired in a business combination and impairment analyses for goodwill and other long-lived assets. Other areas where deficiencies were identified include financial instruments, revenue-related estimates and reserves, the allowance for loan losses, inventory reserves, and tax-related estimates.

In addition to focusing on areas of recurring audit deficiencies, PCAOB inspections staff takes into account the economic environment when determining where to focus inspections. As detailed in a staff inspection brief issued last year, additional areas of focus for 2015 inspections included audit areas affected by economic risks, auditing of certain financial reporting areas, audit work regarding financial reporting risks, and risks related to information technology, multinational audits, and certain aspects of a firm's system of quality control.