On Friday, the Public Company Accounting Oversight Board announced that it had issued Staff Audit Practice Alert No. 3, Audit Considerations in the Current Economic Environment, which addresses six matters:
1. Overall audit considerations
2. Auditing fair value measurements
3. Auditing accounting estimates
4. Auditing the adequacy of disclosures
5. Auditor’s consideration of a company’s ability to continue as a going concern
6. Additional audit considerations for selected reporting areas, listed further below.
Fraud risk considerations, and internal control considerations, are among the issues discussed under overall audit considerations.
Within the guidance on fair value measurements are cites to the SEC-FASB Sept. 30 clarification on fair value in inactive markets, and FASB’s FSP FAS 157-3 on the same topic issued on Oct. 10. Additionally, the PCAOB states its Audit Practice Alert No. 2 issued last year on Matters Related to Auditing Fair Value Measurements of Financial Instruments and the Use of Specialists (which in turn cites other auditing literature) is still relevant.
On the related issue of auditing accounting estimates, PCAOB references existing auditing literature (AU 316, Consideration of Fraud in a Financial Statement Audit) in stating: “When assessing audit differences between estimates best supported by the audit evidence and the estimates included in the financial statements, the auditor should consider whether such differences, even if they are individually reasonable, indicate a possible bias on the part of the company's management, in which case the auditor should reconsider the estimates taken as a whole.”
“As part of the audit, the auditor also should perform a retrospective review of significant accounting estimates reflected in the financial statements of the prior year to determine whether management judgments and assumptions relating to the estimates indicate a possible bias on the part of management,” adds the PCAOB, citing again AU 316 on fraud. “With the benefit of hindsight,” says PCAOB, “a retrospective review should provide the auditor with additional information about whether there may be a possible bias on the part of management in making the current year estimates.”
The discussion in the alert about auditing the adequacy of disclosures specifically cites, among other requirements, AICPA Statement of Position No. 94-6 ("SOP 94-6"), Disclosure of Certain Significant Risks and Uncertainties. The PCAOB adds, citing to AU 431: “If management omits from the financial statements, including the accompanying notes, information that is required by GAAP, the auditor should express a qualified or adverse opinion and should provide the information in his or her report, if practicable, unless its omission from the auditor's report is recognized as appropriate by a specific PCAOB auditing standard.”
The alert cites existing literature on going concern. [In related news, today is the comment deadline to FASB on its Exposure Drafts released Oct. 8 on Going Concern and Subsequent Events. FASB's ED's would move the guidance on these matters from the auditing literature to accounting literature or GAAP, with some changes. Only a few comment letters have been filed so far, here and here, which is not unusual prior to a comment deadline, although a FASB board member recently noted at a board meeting that some constituents have indicated it is difficult to respond to all matters open for comment at the current time.]
“Additional audit considerations” covered in the PCAOB alert include: Consolidation, Contingencies and guarantees, Credit derivatives, Debt obligations, Deferred tax assets, Derivatives (other than credit derivatives), Goodwill, intangible assets and other long-lived assets, Inventory, Other-than-temporary impairment, Pension and other postretirement benefits, Receivables, Restructuring, Revenue recognition, Share-based payments.
Reports on Inspections of Eight Largest Firms, More
In other news, the PCAOB also released on Friday its “Repot on the PCAOB’s 2004, 2005, 2006 and 2007 Inspections of Domestic Annually Inspected Firms.” As noted in PCAOB’s press release, the report summarizes the findings of PCAOB’s inspections of the eight largest U.S. audit firms during the past four years. The PCAOB also posted some new inspection reports (generally, dated in November) on its inspections of firms other than the largest eight firms. See Top Audit Firms Still Have Room to Improve,PCAOB Says in Reviewing Inspection Findings, by Tina Chi in today's BNA Daily Report for Executives. In other news on the audit firm front, see Denise Lugo's article in BNA, Co-Chairman of Treasury Audit Panel Says Big Four Weak on Their Own Disclosure, reporting on former SEC Chief Accountant and co-chair of the Treasury Advisory Committee on the Auditing Profession (ACAP) remarks at a conference last week. ACAP published its final report in October, approving the report for release at its final meeting on September 26, as we reported here.
Also last week, the PCAOB voted to adopt an amendment to Rule 4003 and to issue for public comment a separate proposed amendment to that rule relating to the timing of certain inspections of registered non-U.S. firms. Further details are in PCAOB’s press release
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