PCAOB finds audit deficiencies at Big Four firms

The US watchdog found faults in the audit work of Deloitte Malaysia, EY Japan, KPMG Canada and PwC Canada, Mexico and South Africa

PwC

The Public Company Accounting Oversight Board (PCAOB) identified deficiencies in the performance of PwC Mexico’s work, which it reviewed between July and August 2017.

After reviewing one audit, it found the firm failed to perform sufficient procedures to evaluate information technology control deficiencies and did not conduct “sufficient procedures to test the design and operating effectiveness of controls over the valuation of indefinite-lived intangible assets”.

In two audits in which PwC Mexico played a role but was not the principal auditor, the PCAOB said it did not perform sufficient procedures to test the valuation of accounts receivable and inventory and to test the design and operating effectiveness of a control over the occurrence of revenue.

“In these audits, the auditor issued an opinion without satisfying its fundamental obligation to obtain reasonable assurance about whether the financial statements were free of material misstatement and/or the issuer maintained effective internal control over financial reporting (ICFR),” the report said.

PwC Canada also failed PCAOB inspections carried out between April and October 2017, which identified “matters that it considered to be deficiencies in the performance of the work it reviewed”.

After the review of portions of seven audits performed by the firm, the watchdog said PwC failed in an audit of ICFR to perform sufficient procedures to test the design and operating effectiveness of controls over the valuation of property, plant, and equipment (PPE) as well as to perform sufficient procedures to test the valuation of PPE.

In the audit where PwC was not the principal auditor, the firm failed to perform sufficient procedures to test the valuation of income tax credits.

At PwC South Africa, the PCAOB found deficiencies in the review of portions of two audits performed by the firm and on one other audit in which it was not the principal auditor.

The firm was accused of failing to perform sufficient procedures to test the design and operating effectiveness of controls over the occurrence and completeness of revenue and to perform sufficient procedures to test the design and operating effectiveness of controls over the valuation of certain long-lived assets.

Deloitte

Deloitte Malaysia failed inspections conducted between October and November 2017 of two audits where it was not the principal auditor.

The PCAOB’s report said, “One of the deficiencies identified was of such significance that it appeared to the inspection team that the firm had not obtained sufficient appropriate audit evidence to fulfil the objectives of its role in the audit.”

According to the watchdog, Deloitte failed to perform sufficient procedures to test the design and operating effectiveness of controls over the existence of inventory.

Meanwhile, Deloitte Japan received a clean bill, with no audit performance issues identified in the reviews.

EY

The Bermuda arm of EY was criticised for deficiencies in the performance of the work the PCAOB reviewed.

This included failure to identify and test controls that address risks related to the valuation of certain financial assets, and to test the valuation of these assets.

KPMG

Finally, the PCAOB found several deficiencies at KPMG Canada’s audit work, after carrying out inspections between March and October 2017.

The inspections included reviews of portions of six issuer audits performed by the firm and its audit work on one other issuer audit engagement in which it was not the principal auditor.

The PCAOB said the firm failed to assess the risk of material misstatement associated with the valuation of certain financial assets, as well as to perform sufficient procedures to test the design and operating effectiveness of controls over the valuation of these assets.

It also found KPMG Canada failed to sufficiently test the design and operating effectiveness of controls over the valuation of other financial assets and to test the valuation and presentation and disclosure of certain securities.

In its audit work, KPMG was accused of not sufficiently testing “the design and operating effectiveness of controls over the occurrence, completeness, and allocation of revenue, and the existence, completeness, and valuation of accounts receivable and deferred revenue”.

It also did not test the design and operating effectiveness of controls over the occurrence and allocation of revenue, the existence and valuation of accounts receivable and other assets, and the completeness and valuation of deferred revenue.

Responses

All the firms replied to the PCAOB in a letter explaining what steps they have taken to improve their audit work following the reviews.

KPMG Canada said it was “taking action to implement changes to our policies and practices in order to enhance audit quality”.

EY Bermuda also said it has reviewed PCAOB’s report and “taken actions where appropriate”, while stressing these actions had not changed its original audit conclusions.

Deloitte Malaysia wrote it has “evaluated the matters identified” and explained it is currently transforming the audit to leverage “innovative technologies”.

PwC South Africa, Mexico and Canada also committed to take “appropriate actions” to improve their audits.

Originally published in Economia on 20 February 2019.