Audit regulators are kicking off their 2006 inspection season with a reminder that they want a more reasoned, efficient audit process this year, and one that integrates the audit of financial statements with the audit of internal controls.
The Public Company Audit Oversight Board says it will begin its newest round of inspections this month, looking for signs that audit firms fully digested the Board’s guidance last year to take a top-down, risk-based approach to the audit.
Gradison
“A key emphasis of the 2006 inspections will be the efficiency of the firms’ performance of audits of internal control over financial reporting,” PCAOB Acting Chairman Bill Gradison said in a statement. “As part of PCAOB’s efforts to improve the cost-effectiveness of these audits, our inspectors, as they go into the field, will be making a focused effort to ascertain that auditors have achieved the objectives described in the Board’s internal control auditing standard with the least expenditure of effort and resources.”
Inspectors will look for the degree to which auditors have integrated the two audits into a single process, a top-down approach to planning the audit, a focus on risk to determine a plan for the audit, and some evidence that auditors relied on credible work of others, such as the internal audit staff, to reach their conclusions.
With two full years of inspections under its belt, the PCAOB appears still behind pace to meet its Sarbanes-Oxley mandate to audit about one-third of the United States’ 1,661 registered CPA firms each year. (See more on inspections in the box above, right.)
SOX requires the Board to inspect annually firms that audit more than 100 public companies, which applies to eight firms in the United States and one in Canada. For other firms, the PCAOB must inspect every three years. Many of the currently registered firms, however, have no public company clients and therefore no audits to inspect. The Board places the number of firms that actually require inspection at about 900.
In 2005, the PCAOB reported that it inspected a total of 281 firms, including 16 non-U.S. firms. In 2004, the Board completed inspections for 99 firms overall. For the two years combined, the Board has issued 276 inspection reports, leaving more than 100 inspection reports still unpublished.
“The Board is comfortable that its inspection schedule for 2006 will cover the U.S.-based firms whose registration date would make them subject to inspection in the first three years of the Board’s inspection program,” spokeswoman Christi Harlan says.
Selling
The release “raises some general awareness that the inspection focus will be on auditor cost and efficiency,” says Thomas Selling, a former SEC academic fellow who now teaches accounting at the American Graduate School of International Management in Arizona.
Recent congressional testimony characterized Sarbanes-Oxley’s Section 404 requirements as “the greatest wealth transfer from shareholders to audit firms in the history of the world,” Selling says. “There’s no question that audit firms became more profitable from this new business.”
The most recent release serves as a reminder of the Board’s expectation of reasonable audit scope. “It says AS2 is not a license to steal from shareholders by overauditing,” Selling says.
Separately, the PCAOB also issued last week a four-page summary of Auditing Standard No. 4, which gives auditors the option to issue an opinion on a company’s assertion that it corrected a material weakness in internal controls.
The Board approved the new standard in February, to give auditors a procedure for providing such an opinion if a company asks its auditor to weigh in. The Board promised the summary when it issued the new standard in February.
Selling says he doesn’t see a great deal of significance to the standard or the recent summary. “This looks a lot like a market test,” he says. “This is a voluntary procedure that companies can buy from their auditors if they want to, but they don’t have to. To have an auditor’s blessing on a cured material weakness before the next annual attest is of questionable value.”
AICPA Issues Practice Aids On Variable Interest Entities
The American Institute of Certified Public Accountants is offering some technical insights into the finer points of Financial Interpretation No.46(R), issued by the Financial Accounting Standards Board to shore up differences in practice applying rules on variable interest entities.
The technical practice aids issued by the AICPA address questions such as when a company should issue combined or consolidated financial statements, the presentation of stand-alone financial statements for a VIE, audit implications of not consolidating, and implications for financial statements prepared under the income tax basis of accounting.
Noll
“These are some of the frequently asked questions that our technical hotline has been getting,” so the AICPA decided to publish them as technical practice aids for the benefit of others, says Dan Noll, the AICPA’s director of accounting standards. The four issues are basic implementation issues, he says.
Details and related coverage on VIEs can be found in the box at right.
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