A new PCAOB staff report shows a year-over-year increase in the number of audits with deficiencies at audit firms that the PCAOB inspected in 2021. The report, Staff Update and Preview of 2021 Inspection Observations, presents aggregate observations from the PCAOB’s inspections of 141 annually and triennially inspected audit firms in 2021.
According to the report, PCAOB staff expects approximately 33% of the audits reviewed will have one or more deficiencies that will be discussed in Part I.A of the individual audit firm’s inspection reports, up from 29% in 2020. Part I.A of the individual audit firm’s inspection report discusses deficiencies, if any, that were of such significance that PCAOB staff believes the audit firm, at the time it issued its audit report(s), had not obtained sufficient appropriate audit evidence to support its opinion on the public company’s financial statements and/or internal control over financial reporting.
Comment forms are the initial communication to audit firms of potential observed deficiencies from the PCAOB’s inspections. Audit firms are allowed the opportunity to provide a written response to the comment form.
The 2021 preview report also notes the following:
PCAOB staff continued to identify auditing deficiencies that have recurred for many years.
PCAOB staff expects that approximately 40% of the audits reviewed will have one or more deficiencies discussed in Part I.B of the individual firm’s inspection reports, up from 26% in 2020. In Part I.B of our inspection reports, the PCAOB’s staff provide observations regarding instances of noncompliance with PCAOB standards or rules that do not relate directly to the sufficiency or appropriateness of evidence the audit firm obtained to support its opinion(s), such as critical audit matters, Form AP, and certain independence related deficiencies.
PCAOB staff noted that a significant portion of the increase in deficiencies was driven by an increase in deficiencies related to critical audit matters (CAMs), particularly among triennially inspected audit firms (those with fewer than 100 public company audit clients). December 15, 2020 was the effective date for the requirements related to CAMs for companies other than large accelerated filers, meaning that many firms were complying with CAMs requirements for the first time. Among the CAMS-related deficiencies, most were instances in which auditor procedures to determine CAMs did not include every matter that should have been analyzed as a potential CAM. These instances of non-compliance do not necessarily mean that other CAMs should have been communicated in the auditor’s report.
Some audits have both Part I.A and Part I.B deficiencies, and so PCAOB staff expects that approximately 55% of the 690 audits the PCAOB reviewed in 2021 will have one or more Part I.A and/or Part I.B deficiencies, up from 44% percent in 2020.
PCAOB staff also observed good practices that may be effective in enhancing audit firms’ systems of quality control and audit quality generally, for example: making it easier for audit firm employees to import information from their financial holdings directly into the firm’s internal tracking systems as a safeguard against conflicts of interest; the use (and proper integration) of specialists; robust risk assessment; and proper/timely responses to audit supervision.