The Public Company Accounting Oversight Board (PCAOB) has found shortfalls related to Internal Control over Financial Reporting (ICFR) in the audits of eight US firms inspected during 2010, according to a report released this week.

The inspections fall within the watchdog’s efforts to implement its auditing standard No 5 (AS No5), An Audit of Internal Control over Financial Reporting That is Integrated with An Audit of Financial Statements.

Among the firms scrutinised by PCAOB are the Big Four and mid-tier firms such as BDO Seidman, Grant Thornton and Crowe Horwarth.

The US watchdog has found that in 15% of the audits reviewed (46 out of 309), firms failed to obtain sufficient audit evidence to support their audit opinions on the internal control.

Firms also failed to obtain sufficient audit evidence to support the financial statement audit opinions in 39 cases, 13% of the total audit works examined.

PCAOB remarked, however, the findings described in its report "should be considered against the broader background", where it said no other significant deficiencies had been detected in ongoing inspections, "an encouraging fact that reflects well on the firms’ ability to implement AS No5 appropriately."

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Among the most widespread shortfalls identified in the report are failures to address material misstatement risks, and failures to manage review controls such as monthly comparisons of budget to forecasted revenues and expenses.

PCAOB warned that the weaknesses in ICFR are mainly due to an improper application of AS No5, which requires a top-down approach that some firms have not adopted.

Other contributing factors are decreases in staff numbers, workload pressures and insufficient training in how to apply PCAOB standards.

The Center for Audit Quality (CAQ) embraced the PCAOB’s report, with executive director Cindy Fornelli commenting:

"The profession recognizes the need to improve performance in this important area. We encourage preparers and audit committee members to familiarize themselves with the report as it may contain observations that might be useful in improving upon the design or operating effectiveness of internal controls over financial reporting."

 

Related links

Public Company Accounting Oversight Board: Report on Inspection Observations Related to Audits of Internal Control over Financial Reporting

Center for Audit Quality