PCAOB Publishes Staff Inspection Brief Previewing 2016 Inspection Findings

The Public Company Accounting Oversight Board today published a staff inspection brief that previews the results of 2016 inspections of auditors of public companies and other issuers.

The brief highlights certain observations from 2016 inspections, including three recurring areas where audit deficiencies were most frequently identified:

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

"Staff Inspection Brief, Vol. 2017/4: Preview of Observations from 2016 Inspections of Auditors of Issuers," is intended to provide insights into PCAOB inspections to investors, auditors, audit committees, and others.

"The number and significance of the recurring audit deficiencies that were identified suggests that some firms may need to consider whether additional or different steps need to be taken to improve and sustain audit quality," said Helen Munter, PCAOB Director of Registration and Inspections.

In 2016, PCAOB inspectors continued to identify audit deficiencies in auditors' assessment of, and response to, risks of material misstatement. Audit deficiencies were identified, for example, where the auditor did not perform tests of details specifically related to fraud risks assessed by the auditor.

Deficiencies in audits of internal control over financial reporting continued to be the most frequent deficiencies identified by PCAOB inspectors in 2016, consistent with prior years' results. The most frequent ICFR deficiencies were insufficient testing of the design and operating effectiveness of selected controls, particularly those controls that included a review element.

During 2016 inspections, PCAOB inspectors also continued to identify instances in which auditors did not fully understand how a company's accounting estimates were developed or did not sufficiently evaluate the assumptions used by management. Audit deficiencies in this area commonly related to evaluating impairment analyses for goodwill and the valuations of assets and liabilities acquired in business combinations.

The brief also highlights other audit areas with continued audit deficiencies, including areas affected by certain economic risks, auditing of certain financial reporting areas, audit work regarding multinational audits, and certain aspects of a firm's system of quality control.

PCAOB inspectors in 2016 also continued to explore how firms develop and use software tools in the audit and how engagement teams evaluate risks of material misstatement and related controls associated with cybersecurity.

PCAOB staff examined portions of more than 780 public company audits in 2016 and reviewed the system of quality control at more than 190 firms.