On June 30, the Public Company Accounting Oversight Board released the public portion of its Report on 2013 Inspection of PricewaterhouseCoopers LLP. PWC’s report is the second 2013 Big Four inspection report the PCAOB has published.
The 2013 inspection of PWC (which took place between December 2012 and November 2013) included reviews of 57 public company audits (and two additional engagements in which PWC USA played a substantial role, but was not the principal auditor). In 19 of the 59 engagements reviewed, (32 percent), the inspection team identified deficiencies that, in its view, were of such significance that the firm, at the time it issued its audit report, had not obtained sufficient appropriate audit evidence to support its opinion. The 32 percent deficiency rate is lower than the 39 percent rate in PWC’s 2012 inspection report; for the four largest firms as a group, the 2012 deficiency percentage was 37 percent. As the Board notes, audit work is selected for inspection based on factors that “heighten the possibility that auditing deficiencies are present, rather than through a process intended to identify a representative sample.” In addition, audit deficiencies included in the public portion of a report do not necessarily indicate that the audited financial statements were
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misstated or that there were undisclosed material weaknesses in the company’s internal control over financial reporting.
Of the 19 PWC engagements in which the Board identified audit deficiencies, two related only to the audit of the financial statements, while five related only to the ICFR audit. In the remaining 12 engagements, the Board’s inspectors found deficiencies in both the ICFR audit and the financial statement audit.
The 2013 PWC report notes that four of the 19 deficiencies “relate to auditing aspects of an issuer's financial statements that the issuer restated after the primary inspection procedures.” In addition, in five of the 19 deficient audits, PWC “revised its opinion on the effectiveness of the issuer's internal control over financial reporting (ICFR) to express an adverse opinion or the issuer subsequently disclosed that there was a previously undisclosed material weakness as of the date of the Firm's opinion on ICFR.”
The PWC inspection report includes a chart summarizing the auditing standards as to which deficiencies were found. The five standards most frequently cited as the basis for audit deficiencies were –
Number of Engagements in Which
PCAOB Auditing Standard Standard Was Deficiency Basis
AS No. 5, An Audit of Internal Control
Over Financial Reporting That is Integrated
with An Audit of Financial Statements 17
AU Section 328, Auditing Fair Value 7
Measurements and Disclosures
AU Section 342, Auditing Accounting Estimates 7
AS No. 14, Evaluating Audit Results 6
AS No. 13, The Auditor's Responses to the Risks
of Material Misstatement 5
In a response appended to the 2013 inspection report, PWC US Chairman and Senior Partner Bob Moritz, and US Assurance Leader Vincent Colman, said: “The top priority of the Firm and our partners continues to be consistently performing high-quality audits in order to serve the investing community and bring value to the capital markets. To deliver on this responsibility, we must listen to and respond to the evolving needs of our stakeholders while meeting the expectations of our regulators, including the PCAOB. In this regard, we recognize the value of the inspection process and have taken all of the Board’s observations into account in formulating our plan to continuously improve audit quality.”
Comment: Audit committees should discuss the results of the firm’s most recent PCAOB inspection with their engagement partner. If the company’s audit is mentioned in either the public or nonpublic portion of the inspection report, the audit committee should understand the reasons for the reference to the audit and how it will affect the engagement in the future. If the company’s audit is not cited in the report, the audit committee should explore with the auditor how deficiencies identified in
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other audits might have affected the company’s audit and how changes in the firm’s procedures might affect future audits. Audit committees should also have an understanding of how the firm intends to remediate quality control deficiencies described in the nonpublic portion of the report. An agenda for an audit committee discussion of the firm’s PCAOB inspection report is available from the undersigned.