Regulators have given auditors a promised practice alert on where they want to see improvements in the audit of internal control over financial reporting.
The Public Company Accounting Oversight Board published a staff audit practice alert to tell auditors to pay closer attention to specific areas of internal control auditing based on deficiencies the board has found in three years worth of inspection reports across all firms broadly. The board published a similar report in December 2012 based on inspection findings in 2010, but has continued to find problems in subsequent years. Based on 2010 inspections, the board says it found failures to obtain sufficient evidence to support audit opinions in 15 percent of the engagements inspected. Failure rates have been similar each year since, the PCAOB said.
The alert tells auditors to take extra care in their risk assessments, their selection of controls to test, their testing of management review controls, and their consideration of information technology issues, including reliance on system-generated reports and data. The alert also focuses on the auditor's roll-forward of control testing performed at interim dates, concerns around using the work of others, and issues related to evaluating identified control deficiencies.
"Auditors should take note of the matters discussed in this alert in planning and performing their audits, given the importance of the controls companies use to produce their financial statements," said PCAOB Chairman James Doty in a statement. Chief Auditor Martin Baumann said engagement partners and senior engagement team members are expected to put added focus on the areas noted in the alert, as are those who review the quality of engagements after the audit is complete. Firms also should consider whether they need to provide additional training to audit personnel around the issues described in the alert, he said. "Appropriate application of the top-down, risk-based approach pursuant to PCAOB standards can result in an effective audit of internal control while avoiding unnecessary work," he said.
The alert also advises audit committees to take note of the board's concerns and ask their auditors how they plan to address them in the upcoming year-end audit. The board tells audit committees to as their auditors about the level of auditing deficiencies related to internal controls that were identified in the firm's own inspection report, and ask auditors to explain potential root causes of findings. “In particular, audit committees may want to inquire about the involvement and focus by senior members of the firm on these matters,” the PCAOB says.
Earlier this year, the PCAOB summarized its concerns around inspections of smaller firms and promised all auditors it was developing guidance based on its continued observation of problems with internal control auditing. Auditors have said they expect to focus a great deal of attention at year-end on issues that have been called out by the PCAOB as areas for improvement, including internal control issues.
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