On December 4, the Center for Audit Quality published an Alert entitled Select Auditing Considerations for the 2014 Audit Cycle to identify and discuss seven audit areas that it believes will be most relevant to the 2014 audit cycle. The Alert describes these issues as “some of the more judgmental or complex audit areas, including those that have recently been the subject of attention and focus by regulators.” The seven areas are --
- Revenue Recognition
- Going Concern
- Internal Control Over Financial Reporting
- Auditing Accounting Estimates, Including Fair Value Measurements
- Engagement Quality Review
- Professional Skepticism
- Related Parties and Significant Unusual Transactions
These topics are unquestionably ones that regulators have been scrutinizing and that auditors are likely to regard as carrying high likelihood of attention and criticism in PCAOB inspections. As the CAQ points out, most of the audit areas discussed in its Alert mirror topics as to which the PCAOB has issued audit practice alerts or other forms of guidance. In particular –
- Revenue is a perennially area of fraud risk and is the subject of a recent PCAOB practice alert: Staff Audit Practice Alert No. 12, Matters Related to Auditing Revenue in an Audit of Financial Statements (September 9, 2014). See September 2014 Update.
- The PCAOB also recently issued an alert on going concern in response to new FASB guidance on determining when and how to disclose going concern uncertainties in financial statements: Staff Audit Practic e A lert N o. 13 , Ma tter s Re lat ed t o th e Au dit or’s Cons id erat ion of a Com pan y’ s Abi li t y to C ont inu e as a G oing Concern (September 22, 2014). See September 2014 Update.
- The PCAOB’s focus on ICFR auditing and dissatisfaction with audit firm performance was the subject of Staff Audit Practice Alert No. 11, Considerations for Audits of Internal Control Over Financial Reporting (October 24, 2013). See November- December 2013 Update.
- Accounting estimates and fair value measurements were cited as deficiency areas in 34 percent and 26 percent, respectively, of all of the deficiencies identified in 2013 PCAOB Big Four inspection reports. See October-November 2014 Update.
- The PCAOB has stated that professional skepticism is essential to the performance of effective audits and appears to regard lapses in skepticism as a root cause of many audit deficiencies. The Board issued a practice alert on professional skepticism in 2012: Staff Practice Alert No. 10, Maintaining and Applying Professional Skepticism in Audits, (December 4, 2012).
- The PCAOB published a release in 2013, Observations Related to the Implementation of the Auditing Standard on Engagement Quality Review, which criticizes the implementation of the Board’s standard on engagement quality review (i.e., second partner reviews of public company audits). This release also urged audit committees to ask questions about the EQR. See January 2014 Update.
- In June, 2014, the PCAOB adopted a new auditing standard on related party transactions. This is one of the few audit performance standards the Board has adopted in the past several years. Although the new standard will not be in effect for audits of calendar year 2014 financial statements, it reflects the importance the Board attaches to this subject. See June 2014 Update.
Comment: While the CAQ’s statement is aimed at auditors, not audit committees, the Alert provides a road map for audit committees regarding the topics that auditors are likely to view as posing the greatest risks – and the highest likelihood of PCAOB inspection attention. As such, it may help audit committees better understand the perspective from which their audit firm will approach its 2015 engagements.