On December 20, 2010, the PCAOB issued Staff Audit Practice Alert No. 7, Auditor Considerations of Litigation and Other Contingencies Arising From Mortgage and Other Loan Activities, to advise auditors that the potential risks and costs associated with mortgage and foreclosure-related activities or exposures could have implications for audits of financial statements or of internal control over financial reporting. These implications might include accounting for litigation or other loss contingencies and the related disclosures. The alert stems from allegations that companies may have misrepresented the quality of many mortgages sold and that those companies could be required to repurchase the affected mortgages. Additionally, allegations have surfaced that irregularities in the foreclosure process could result in further losses.
In December 2008, the PCAOB issued Staff Audit Practice Alert No. 3, Audit Considerations in the Current Economic Environment, to assist auditors in identifying matters related to the current economic environment that might affect audit risk and require additional emphasis. According to Alert No. 7, audit risk that existed in December 2008 with respect to contingencies and guarantees as well as other issues continues to exist today. These audit risks could affect the risk of a material misstatement, and these issues could affect the nature, timing and extent of planned audit procedures.