Corporate Governance Flash Report - September 2017

September 2017

PCAOB 2017 Inspections Will Continue to Focus Where Risk Resides

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Summary

The PCAOB will continue to select the majority of issuer audits for inspection review on a risk-weighted basis – focusing on audit work on the most challenging areas, including financial statement accounts and disclosures requiring the highest degree of management judgment. Key areas of inspection focus continue to stem from recurring audit deficiencies, recent economic developments, and areas of significant judgment. Additionally, new accounting and auditing standards, multinational audits, and audit firms’ use of information technology and systems of quality control make the list as well.
 

Details

Timing and Population
The PCOAB has issued its August 2017 Staff Inspection Brief detailing information about the upcoming 2017 PCOAB inspections of registered audit firms.

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Key Areas of Inspection Focus in 2017
Recurring audit deficiencies will again be key areas of focus this year including assessing and responding to risks of material misstatement, auditing accounting estimates, and internal control over financial reporting. While some corporations continue to argue that requirements from Sarbanes-Oxley Section 404(b) come at significant cost without perceived benefit, a study in the current issue of Auditing: A Journal of Practice & Theory provides statistical data correlating internal control environments with identified material weaknesses with significantly higher fraud risk than is found in the general population. 

Recent economic developments are garnering attention from the PCAOB and this may include M&A activity, international events such as Brexit, investments in higher risk instruments, fluctuations in oil and natural gas prices, and other industry specific risk factors.

Areas of significant judgement continue to represent more challenging audit areas and generally greater risk, including  considerations related to going concern analyses and income tax disclosures.

New accounting standards and new reporting requirements this year include the hot topics of FASB issued guidance on revenue recognition and lease accounting in addition to the newly enacted PCAOB audit rules requiring public auditor disclosures on Form AP. While the revenue and lease accounting guidance is not yet effective, audit firms can expect to answer questions on how they are assessing the readiness of their issuer clients’ plans for addressing and reporting on the pending accounting changes.

Audit firms themselves will attract PCAOB reviews for multinational audits, use of information technology, and audit firm systems of quality control. In today’s environment, firms are challenged to facilitate transparency and opine on the integrity of financial statements while managing similar external and competitive risk factors as issuers.  The PCAOB has expressed it is particularly interested in firms’ software audit tools, consideration of cybersecurity risk, and systems of quality control including: root cause analysis, independence, engagement quality reviews, and professional skepticism.

The Staff Inspection Brief also includes an appendix that contains historical data related to inspections of registered firms. This data indicates that revenues, receivables, non-financial assets, financial instruments, inventory, income taxes, and equity transactions as the most frequently inspected areas due to both materiality and risk.

For more information and educational opportunities on these and other topics related to audit committee oversight, please visit BDO’s Center for Corporate Governance and Financial Reporting.
 

For more information, please contact one of the following practice leaders: 
 
Amy Rojik
Partner

Lee Sentnor
Senior Manager