On February 2, 2021, the PCAOB released the 2019 inspection reports for the U.S. affiliates of the six largest global network audit firms. The overall percentage of inspected audits that the PCAOB found deficient fell slightly from 27 percent last year to 24 percent. Similar to prior years, the majority of deficient audits included one or more violations of the standard governing the audit of internal control over financial reporting (ICFR); of the 70 deficient audits described in these six inspection reports, 57 included an ICFR auditing deficiency.
Comparisons of Firm Inspection Reports
The table below summarizes the results of the 2019 inspections of the six firms. A similar table, which appeared in 2018 PCAOB Large Firm Inspection Reports (and the PCAOB’s Guide to its New Reporting Format), June 2020 Update, showing results of the 2018 inspections, follows the 2019 table.
The tables above focus on the percentage of inspected engagements found to have at least one audit deficiency. Another way of comparing the six inspection reports is to look at the number of auditing standard (AS) violations cited in each report. That metric differs from the percentage-of-deficient engagements measure because an engagement may involve more than one auditing standard violation. The following table compares the 2019 inspection results of the six firms based on the number of auditing standards violations in each report.
Aggregate Deficiency Data
The ten auditing standards most frequently cited as the basis for audit deficiencies in the 2019 inspection reports of the six firms are listed in the table below. The table also shows the percentage of deficiencies in the six reports that were based on each auditing standard. The same auditing standard may have been cited more than once in the Board’s description of an engagement if the inspectors found more than one deficiency based on that standard in the audit.
Each inspection report lists the most frequently identified audit deficiencies, divided between the most frequent deficiencies in financial statement (FS) audits and the most frequent deficiencies in ICFR audits. The table below aggregates these deficiencies lists for the six firms. The table also indicates what percentage of the engagements in Part I of the six reports included these deficiencies.
Each report also lists the financial statement accounts or auditing areas in which deficiencies in Part I of that report most frequently occurred. For the six firms, on an aggregate basis, these areas were:
Revenue and related accounts – 41 deficiencies
Inventory – 9 deficiencies
Allowance for loan losses – 7 deficiencies
Business combinations – 7 deficiencies
Income Taxes – 7 deficiencies
Investment securities – 7 deficiencies
Goodwill and intangibles – 3 deficiencies
Long-lived assets – 3 deficiencies
Derivatives – 2 deficiencies
Part I.B Deficiencies
The 2019 inspection reports include a section (Part I.B) that describes auditing standard or PCAOB rule violations discovered in the inspections that did not affect the auditor’s opinion. The 54 violations in the six reports related to:
Rule 3211, Auditor Reporting of Certain Audit Participants (requiring the auditor to file Form AP with the PCAOB identifying, among other things, other participating audit firms) – 18 violations
AS 1301, Communications with Audit Committees (requiring the auditor to communicate certain matters to the audit committee) – 11 violations
Rule 3524, Audit Committee Pre-approval of Certain Tax Services (requiring the auditor to document discussion with the audit committee of potential effects of permissible tax services) -- 8 violations
AS 1215, Audit Documentation (requiring the auditor to assemble a final set of work papers) – 7 violations
AS 1205, Part of the Audit Performed by Other Independent Auditors (requiring the principal auditor to, among other things, review and retain management representation letters that component auditors obtained) – 5 violations
AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements (requiring, among other things, the auditor’s report on the ICFR audit to include certain disclosures) – 2 violations
AS 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (requiring the audit opinion to describe and discuss critical audit matters) – 1 violation
AS 2805, Management Representations (requiring the auditor to, among other things, provide management with a list of uncorrected misstatements to be included in the management representation letter) – 1 violation
Rule 3526, Communication with Audit Committees Concerning Independence (requiring the auditor to document discussion with the audit committee of potential effects of relationships that might bear on independence) – 1 violation
Comments and Analysis
In its inspection reports, the PCAOB cautions against drawing broad conclusions from its inspections because “our inspection results are not necessarily comparable over time or among firms.” While that warning should certainly be kept in mind, below are some observations that seem to emerge from the 2019 reports.
Audit quality may have improved slightly. As measured by these PCAOB inspection findings, audit quality seems to have improved, compared to last year. For the six U.S. global network firm affiliates as a group, the overall deficient engagement rate fell from 27 percent of inspected engagements in 2018 to 24 percent in 2019. For the Big Four, the deficiency rate declined from 25 percent to 22 percent of all inspected engagements. D&T’s deficiency rate dropped to 10 percent – a record low for these six firms. It is however possible that the improvement in aggregate deficiency rates is a result of a change in the engagements selected for review. In the 2019 inspection cycle, the PCAOB increased the percentage of inspected engagements selected at random from 18.7 percent to 23.7 percent and, correspondingly, decreased the percentage of those selected based on an assessment of the engagement’s risk. Deficiencies are presumably less likely to be found in engagements selected at random than in those selected because they involve challenging issues and elevated audit risk.
There is a range of inspection results among the six firms. The gap between the firm with the lowest deficiency percentage in 2019 reports (D&T) and the firm with the highest (BDO) was 32 percent (10 percent for D&T versus 42 percent for BDO). There are also wide differences between the inspection results based on the number of auditing standards violations cited in each report. On average, the inspectors found 1.15 auditing standards violations in each engagement they inspected. (This is a small increase from 1.06 deficiencies per inspection last year.) However, in the D&T inspection, eighteen violations were found out of 52 engagements inspected – an average of 0.31 violations per engagement. At the other end of the spectrum, in 31 Grant engagements inspected, the staff found 60 violations – an average of 1.94 per engagement. PwC was not far behind (or ahead of) Grant with 107 auditing standard violations in 60 inspected engagements or 1.78 violations per inspected engagement.
ICFR audit deficiencies continue to dominate. The 2019 inspection results suggest that the PCAOB continues to focus on ICFR auditing – and that this focus continues to uncover deficiencies. The PCAOB found deficiencies in the ICFR audit in 23 percent of the integrated audits it inspected, and 81 percent of all audit engagements with deficiencies included an ICFR deficiency. By comparison, in 2018, the Board found ICFR deficiencies in 26 percent of the integrated audit engagements it inspected, and 89 percent of all deficient engagements included an ICFR audit deficiency. Moreover, over half (55.3 percent) of the most frequently cited deficiencies affected the ICFR audit, and the two most common audit deficiencies were control-related, with “Did not perform sufficient testing of the design and/or operating effectiveness of controls selected for testing” at the top of the list.
Estimates remain a financial statement audit challenge. The PCAOB found violations in the financial statement audit in 21 percent of the engagements it inspected, and 87 percent of all deficient audit engagements included a financial statement audit deficiency. In 2018, the Board also found financial statement audit deficiencies in 21 percent of the audits it inspected, and 79 percent of all deficient engagements included at least one financial statement audit deficiency. (Deficiencies in the financial statement audit do not, of course, necessarily mean that the financial statements were misstated.) The most frequent deficiencies affecting the financial statement audit were “Did not sufficiently evaluate significant assumptions or data that the issuer used in developing an estimate” and “Did not perform sufficient testing related to an account or significant portion of an account or to address an identified risk” – each of which accounted for 12.8 percent of all frequently-cited deficiencies. Deficiencies related to evaluating assumptions underlying estimates also topped the 2018 list of financial statement audit deficiencies.
Checklist. As noted in past years, the audit deficiency description and auditing standard deficiency tables could be used as a checklist for topics audit committees may want to discuss with their auditor to understand how the auditor addressed, or plans to address, the most challenging areas in the company’s audit.