And you thought the PCAOB inspection reports are only for audit firms?

Yes and no. Just like an audit firm hones its audit programs as a reflection of improvements resulting from the inspection reports, a CAE can leverage these reports to improve their in-house audit programs as well.

The current trend of the PCAOB inspection continues to have an emphasis on internal controls. We read through inspection reports issued in the past couple of years for a few large CPA firms and noted some issues were more frequent and pervasive than others. A few of these were related to failure to sufficiently:

-        test the effectiveness of controls.

-        evaluate significant assumptions or data used in developing an estimate.

-        test the accuracy and completeness of issuer-produced data or reports.

Most of these issues are a result of not just sufficiency of the work performed but the improvements in the documentation of work papers that could have identified these issues during the quality review. 

As a CAE you would have already looked into your audit programs to make adjustments, especially in the planning stage of the audit, then if needed, you would highlight these recurring issues noted in the inspection reports. If not, then this blog is a good reminder to review your audit program and quality review of work papers in place for the year 2020.

Here is an example. Let’s say the key audit area included in the PCAOB inspection report noted deficiencies in the testing surrounding key accounts of accounts receivable and the determination of the adequacy of the Company’s allowance for doubtful accounts. The issuer established controls that required (quarterly lists & commentary): full allowance where the entity noted customer experienced financial hardship; apply loss factors for certain past-due amounts based on aging, and establish an additional allowance for certain other customers.

The audit firm tested:

·       Quarterly list with commentary for past due (watch list)

·       Evidence of review of the watch list & its calculations

·       Inquiry of the issuer personnel

·       Reconcile underlying reports to watchlist & GL

·       Inspect emails/documents with tick marks & signatures

·       Compare allowance recommended to the worksheet & GL support

Before you read further, pause and think, what may be the PCAOB inspection comment here? What additional test step does your team perform that should have been performed?

The firm failed to evaluate the nature of the review procedures that the control owner performed, including the criteria used to identify matters for follow up and whether those matters were appropriately resolved.

Need a Sounding Board? 

Do you feel you need a sounding board?  Let’s connect with me, personally over a brief call or better yet, if you are in or around Los Angeles then let’s meet up over breakfast or lunch, my treat! Yes, I’m serious about a free casual breakfast or lunch. I’m so serious that I included a link to my calendar for you to block a brief meeting time. It's my way of giving back to the profession with an opportunity to connect with like-minded colleagues.  

Cheers!