PCAOB Inspection Findings
PCAOB Audit Committee Dialogue
Auditor Assessment Toolkit
Doug Morally
Senior Audit Manager
September 14, 2015
Overview
• PCAOB Inspection Findings
• PCAOB Audit Committee Dialogue
• Auditor Assessment Toolkit
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PCAOB Inspection Findings
• Inspections of over 650 audit firms
• Annually inspect the largest firms
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BDO USA, LLP
Crowe Horwath LLP
Deloitte & Touche LLP
Ernst & Young LLP
Grant Thornton LLP
KPMG LLP
Malone Bailey, LLP
Marcum LLP
McGladrey LLP
PricewaterhouseCoopers LLP
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Summary of Deficiencies
BIG 4 vs. BIG 4
AS-5
AU 342
AS-13
AU 328
AS-14
AU 350
AS-15
AU 329
Various
AU 322
Total Audits Inspected
Total Audits with Deficiencies
2015
213
70
33%
2014
213
79
37%
Integrated audit of ICFR and Financial Statements
Auditing Accounting Estimates
Auditors' Response to the RMM
Auditing FV Measurement and Disclosures
Evaluating Audit Results
Audit Sampling
Audit Evidence
Substantive Analytical Procedures
Various
Auditors' Consideration of Internal Audit
30%
14%
13%
11%
9%
7%
6%
4%
4%
1%
31%
8%
16%
8%
8%
9%
4%
6%
6%
4%
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Summary of Deficiencies (Continued)
BIG 4 vs. Non-BIG 4
Total Audits Inspected
Total Audits with Deficiencies
AS-5
AU 342
AS-13
AU 328
AS-14
AU 350
AS-15
AU 329
Various
AU 322
Integrated audit of ICFR and Financial Statements
Auditing Accounting Estimates
Auditors' Response to the RMM
Auditing FV Measurement and Disclosures
Evaluating Audit Results
Audit Sampling
Audit Evidence
Substantive Analytical Procedures
Various
Auditors' Consideration of Internal Audit
2015
BIG 4
Non-BIG 4
213
94
70
49
33%
52%
30%
14%
13%
11%
9%
7%
6%
4%
4%
1%
28%
9%
15%
9%
10%
10%
9%
3%
4%
1%
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PCAOB Audit Committee Dialogue
• Inspectors consider two broad questions:
– What recurring audit concerns identified in
past inspections are expected are expected to
continue to be significant?
– What emerging risks might require increased
focus by auditors and audit committees in the
future?
• Key Recurring Areas of Concern
• New Risks PCAOB is Monitoring
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Key Recurring Areas of Concern
• Auditing internal control over financial
reporting (ICFR)
• Assessing and responding to risks of
material misstatement
• Auditing accounting estimates, including
fair value measurements
• In cross-border audits, deficient “referred”
work - work performed by other audit firms
and used by the signing audit firm
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Auditing internal control over financial
reporting
• A properly executed audit of ICFR
• Deficiencies in audits of ICFR
– Testing the effectiveness of controls
– Evaluation of identified deficiencies
• Impact of material misstatements
• Potential questions for the auditor
– Where could material misstatements occur?
– Audit approach to significant unusual
transactions?
– Accuracy of descriptions of potential material
weaknesses or significant deficiencies?
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Assessing and responding to risks of
material misstatement
• Identification of risks or responding effectively
to existing risks
• PCAOB insights based on experience of
deficiencies identified:
– When risks change, audit plans should change
– Insufficient audit procedures at certain locations or
business segments
• Potential questions for the auditor
– Significant audit areas with risks of material
misstatement?
– How have risk areas changes since the prior year?
– Address the risks in a multi-location environment?
– Identification of specific risks in countries
experiencing political instability?
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Auditing estimates, including fair value
measurements, and disclosures
• Audit deficiencies identified in areas such as
revenue, inventory reserves, fair value
measurements and tax-related estimates
• Identification and evaluation of indicators of
asset impairments
• Potential questions for the auditor
– What is the auditors’ approach to auditing critical
estimates?
– Assessment of all separate intangible assets when
assessing goodwill for possible impairment?
– Will the engagement team use the firm’s in-house
valuation specialists?
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Referenced work in cross-border audits
• Quality of the referred work
• PCAOB found significant problems in over
40% of referred work engagements at nonUS member firms
• Potential questions for the auditor
– How does the engagement partner assess the
quality of the audit work performed in other
jurisdictions?
– Were the firms participating in the audit recently
inspected by the PCAOB?
– How does your auditor review the work?
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New Risks the PCAOB is Monitoring
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Increase in mergers & acquisitions
Falling oil prices
Undistributed foreign earnings
Maintaining audit quality while growing
other businesses
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Auditor Assessment Toolkit
• Role of the audit committee
• Assessment Process
– Draw upon prior experience
– Observations from management and internal
audit
– Private meetings between committee chair
and engagement partner
– Review of regulator inspection reports and
peer review findings
– Communication of process with shareholders
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Evaluation of the auditor
• Quality of services and sufficiency of
resources provided by the auditor
• Communication and interaction with the
auditor
• Auditor independence, objectivity, and
professional skepticism
• Obtaining input from company personnel
about the external auditor
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Quality of services and sufficiency of
resources provided by the auditor
• Assessment of the primary members of the
audit engagement team
– Demonstrated skills and experience to address
financial reporting risk
– Access to appropriate specialists
– Provide a sound risk assessment at the onset of
the audit
– Demonstrated a good understanding of the
company’s business, industry and economic
environment
– Audit responses to auditing and accounting issues
• Quality of the audit in various domestic
locations or in other countries
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Quality of services and sufficiency of
resources provided by the auditor (continued)
• Firm’s relevant industry expertise
• Geographical reach necessary to serve the
company
• Results of the firms’ most recent
inspection results of the PCAOB and peer
review
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Communication and interaction with
the auditor
• Quality of communications
• Frequency of discussions
• Communications should focus on
accounting and auditing issues
• Required communications under PCAOB
standards and SEC rules
• Communications held with management
present or in executive session
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Auditor independence, objectivity, and
professional skepticism
• Communication to the committee that the
auditor is independent
• Auditor’s evaluation of the methods and
assumptions used by management
• Auditor’s responses to open-ended
questions from the committee
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Financial reporting challenges of the company
Changes in accounting methods
Key assumptions underlying critical estimates
Accounting issues discussed with
management
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Obtaining input from company
personnel about the external auditor
• Responsiveness and communicative
• Proactively identifies opportunities and
risks
• Delivers value for the money
• Assigned sufficient resources to complete
work in a timely manner
• Forthright in dealing with difficult
situations
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Contact Information
Douglas J. Morally, CPA
Senior Audit Manager
Schneider Downs & Co., Inc.
One PPG Place, Suite 1700
Pittsburgh, PA 15222-5416
Direct Phone: 412.697.5389
Email: dmorally@schneiderdowns.com
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Questions?
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