By Cydney Posner
Apparently, when the PCAOB complains about the quality of auditors' review of internal controls (see News Brief dated 12/10/12, where the PCAOB found problems in connection with audits of internal control in 22% of the cases inspected), the auditors take heed and put the heat on their company clients, at least according to this article in Compliance Week. It appears that auditors are, in fact, looking for more audit evidence and documentation and applying greater skepticism and scrutiny.
The article reports that some audit committee members are hearing "presentations from audit firms explaining how they plan to approach controls differently going forward. ‘They're basically saying they're being responsive to the findings in the inspection reports, and that's increasing the work,'" commented one committee member. That same member indicated that he expected "auditors to spend more time creating flowcharts of processes and transactions to identify potential sources of misstatement. ‘Under auditing standards, you have to have an understanding of the flow of transactions as a basis for setting the scope of audit work….The PCAOB has formed a view that a lot of audits are not sufficient in documenting the flow of transactions, so the firms are moving to flowcharting.'"
The article also reports that auditors will also be "asking more questions and performing more documentation on the skills and qualifications of individuals within the company who perform various control activities. As an example, [the committee member said], most control systems have some kind of reconciliation procedure, such as reconciling a bank account to a master account. Typically, auditors accept the qualifications and the details of the reconciliation without a great deal of questioning, he says. ‘The board now is saying they think auditors should get into the detail of who did the reconciliation and how that person performed the reconciliation….If you rely on a review of the reconciliation as a control, you ought to talk to the person who does it and determine what they do when they review it.'"
Another commentator noted that "internal auditors likely do not perform documentation to the level of detail that external auditors are now demanding, … because they work more closely on a daily basis with the processes.… [C]onsensus is still very much developing on what external auditors need to do to gain the PCAOB's approval during inspections. ‘In some areas, external auditors are just not sure what's going to satisfy the reviewers….They're not always clear on what's needed or not needed.'"
Apparently, the issue of who will bear the costs has not often been raised with audit committees. "'Establishing or creating more audit evidence means doing more work, and that means incurring more cost….The cost needs to be shifted somewhere. The cost is absorbed either by paying for it directly with the external audit costs going up, or by absorbing it internally as the company does more documentation and more work.'"