Audit Deficiencies – What’s The Effect – Not Often Openly Discussed – An Elephant In The Room?

If you tune into PCAOB developments you are probably aware that the PCAOB publishes some of the results of its investigations of auditing firm audits of public companies. The PCAOB looks at auditor compliance with auditing standards, rules and regulations. Frequent areas in which significant deficiencies occur have included, for example:

  • Auditing internal control over financial reporting (ICFR)
  • Assessing and responding to risks of material misstatement
  • Auditing accounting estimates, including fair value measurements
  • In cross-border audits, deficient “referred” work — work performed by other audit firms and used by the signing audit firm

This raises a question – if an auditor improperly or insufficiently audits an important issue or area, is the audit still valid, or is it simply invalid, or does additional auditing work then need to be done after the fact? The issue is one of cause and effect. The two areas first listed above, auditing internal control over financial reporting, and assessing and responding to risks of material misstatement, both go to the core of the audit, the audit planning, and how the audit is performed. We don’t want to jump to conclusions, and I am sure that each audit and each situation must be looked at independently, but it is not hard to envision an argument that the audit might be invalid or that additional work now needs to be done after the fact to ensure that the audit is sufficient. If I’m on an audit committee – audit insufficiency and what to do about it make my job unnecessarily more difficult – in other words, I’m not happy with my auditor.

Enjoy. Dave Tate, Esq. (San Francisco)

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