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by: Selina Doyle


Marketplace > University of Texas at Austin > Accounting > ACC 358C > INTRO TO ASSURANCE SERVICES
Selina Doyle
GPA 3.52

Mark Bradshaw

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Mark Bradshaw
Class Notes
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This 3 page Class Notes was uploaded by Selina Doyle on Monday September 7, 2015. The Class Notes belongs to ACC 358C at University of Texas at Austin taught by Mark Bradshaw in Fall. Since its upload, it has received 125 views. For similar materials see /class/181845/acc-358c-university-of-texas-at-austin in Accounting at University of Texas at Austin.




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Date Created: 09/07/15
PCAOB Inspection Reports Notes Since the inception of the Public Company Accounting Oversight Board PCAOB public accounting rms have been required to undergo inspections which lead to publicly disclosed reports After analyzing these annual inspection reports issued for Deloitte and Touche Pricewaterhouse Coopers Ernst and Young KPMG and Grant Thornton for the years 2008 and 2009 we will discuss ve areas that the PCAOB has raised concerns about The ve areas are as follows i the number of deficiencies noted in nancial statement audits vs intemal control audits ii the nature of deficiencies commonly noted by the PCAOB iii particular accounts that seem to get more scrutiny by the PCAOB iv treatment of GAAP discrepancies and v establishment of proper assumptions and estimations for valuations T quot 39 39 Noted in Financial Audits vs Internal Control Audits Overall the PCAOB noted more deficiencies with nancial statement audits than internal control audits For example the 2009 inspection report for Ernst and Young described an intemal control de ciency in only two of the ve audits In addition these de ciencies were only one of several other de ciencies the others of which related to nancial statement issues The 2008 inspection report for Pricewaterhouse Coopers described no internal control de ciencies for any of the six audits This emphasis on nancial statement audits over internal control audits is for several reasons Firstly external auditors depend on the company for a signi cant portion of the internal audit and are therefore performing less on its own Secondly there is more uncertainty inherent in the assumptions behind the numbers in nancial statement audits Intemal controls require evaluation and testing of procedures not a strict adherence to a set of standards Nature ofDe ciencies Across the board the ten reports noted different types of deficiencies in the following three general categories de ciencies of persuasive evidence failure to perform proper testing procedures and application of assumptions without proper evaluation As stated in the reports introduction rms were required to provide proper documentation and evidence of every step of their procedures For example in KPMG s 2008 report KPMG failed to provide evidence of the existence of a pension plan via a con rmation letter and they failed to provide evidence of the contents of the plan whether it contained subprime mortgagebacked securities The next common type of de ciency was a failure to perform proper testing procedures For example in 2009 when Ernst and Young audited a company s inventory it ascertained that management reviewed cost allocation procedures but did not evaluate the review process This was a critical part of the testing procedure that Ernst and Young left out The last de ciency type was an application of assumptions without proper evaluation For instance in 2008 Grant Thornton calculated the discount rate used for long term return on plan assets without evaluating the impact of the quality of the debt instruments on that calculation Without that procedure all the valuations derived from that discount rate were unsupportable Accounts that Receive More Scrutiny In general the PCAOB focuses on accounts which may in ate revenues or de ate liabilities especially due to management estimations Some examples of these accounts are the allowance for loan losses pension plan assets investment securities and other nancial instruments and goodwill In 2009 Deloitte impaired goodwill by only the scheduled amount despite overwhelming evidence in the last quarter such as failing to meet revenue expectations and a drop in stock price which implied that goodwill was signi cantly more impaired The PCAOB honed in on this error because it did not want goodwill which is an asset to be overstated In Ernst and Young s 2009 report the PCAOB demonstrated its focus on the allowance for loan losses account by noting a de ciency in the quality of EampY s data which supports its calculations for the account Clearly the Board expects the highest quality data supported by strong evidence for a sensitive liability account such as this one Treatment of GAAP Discrepancies The PCAOB identifies all departures from GAAP in order to ensure that the nancial statements for publicly traded companies are consistent It is important that they ensure that firms are implementing the standards consistently so that users of the nancial statements can make decisions that are not in uenced by deviations from proper GAAP implementation For example the PCAOB noted that Ernst and Young failed to account for future product returns in accordance with SFAS No 48 ofProper quot and F quot quot for Valuations Since estimations are the source of the majority of nancial statement problems the PCAOB requires strong support of all estimations especially those in uencing financial valuations Estimated numbers must have evidential support and all assumptions must be documented For example when a company audited by PricewaterhouseCoopers made an acquisition midway through 2008 and then valued its goodwill at the end of the year it used two different discount rates and terminal growth rates The favorable numbers for the goodwill calculation more than offset the less favorable numbers used for the acquisition The PCAOB noted this de ciency for two reasons a the lack of justi cation for using two different rates and b the lack of support for several goodwill calculations Another example of the PCAOB s expectation of strong support for estimations occun39ed the following year for another of PricewaterhouseCoopers clients The issuer used multiple pricing sources to increase the accuracy of the valuation of a high risk derivative but PwC failed to cross check those prices with independent sources outside of the issuer Again these valuations are a highly sensitive area requiring much estimation and underlying assumptions that must be justified to the PCAOB In a nutshell since the PCAOB was created public accountants have been held to a higher and more challenging standard However partners at rms have conceded that inspections have raised the bar for audits and have led to greater accountability and higher quality audits


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