Of the 14 related reports published this week, only three member firms – KPMG Colombia, KPMG Brazil and Deloitte Bermuda – were given the all clear by the US audit watchdog.
Inspectors found deficiencies in all the others, many of them so serious that the inspection team considered, at the time the firms issued their audit report, they had not obtained sufficient appropriate audit evidence to support their opinion that the financial statements were presented fairly or that the audited company had maintained effective Internal Control over Financial Reporting (ICFR).
In RSM US’s case, the inspectors found serious deficiencies in seven of the 15 audit portions they reviewed. Of these, deficiencies in five audits related to testing controls for the purposes of the ICFR opinion and to the substantive testing performed for purposes of the opinion on the financial statements.
The inspectors found the ICFR deficiency in one of the remaining two audits and the financial statement audit issue in the other.
In response, RSM said that it had “thoroughly evaluated” the matters raised and taken “appropriate action”.
In a letter to the PCAOB, the firm declared, “We support the PCAOB’s inspection process and believe that it helps us improve the quality of our audit engagements. RSM US is committed to using the inspection comments and observations to improve our system of quality controls.”
US-based PKF O’Connor Davies was found to have failed to perform sufficient procedures to test the valuation of acquired assets in one of its audits, while PwC Colombia failed to perform sufficient procedures during one of its audits to test the design and operating effectiveness of controls over the valuation, and the presentation and disclosure of long-lived assets.
Both KPMG’s Chilean and Canadian firms fell foul of the inspection teams. In four of the Canadian practice’s seven audits reviewed, the inspectors found seven serious deficiencies, including failures in the audit of ICFR to perform sufficient testing procedures in relation to the occurrence, completeness, and allocation of revenue, and to the valuation of property, plant and equipment, acquired intangible assets, goodwill and deferred revenue.
The Chilean firm had serious deficiencies in two of the three audits inspected. There were problems in the ICFR audits of one company over testing procedures relating to revenue and accounts receivable. In addition, the inspection team identified serious deficiencies related to inventory and production costs, in an audit in which the firm played a role but was not the main auditor.
Deloitte’s French practice came a cropper in all three of the audit engagements inspected. In two of them, where it was sole auditor, the team identified 10 different serious deficiencies involving failure to perform sufficient procedures to test a range of areas, from the effectiveness of controls over occurrence, completeness and allocation of revenue to accounting for certain customers’ contracts.
In the third audit engagement, where it had played a role but wasn’t the principal auditor, it was found to have failed to perform sufficient procedures to test the design and operating effectiveness of controls over the allocation of revenue.
Similar failures to perform sufficient procedures were detected in Deloitte’s Spanish firm while the Greek firm failed to identify and test controls that addressed a risk of material misstatement due to fraud.
EY’s Taiwan firm also came to grief over failure to perform sufficient procedures in one of its audits.
An audit carried out by EY’s Australian practice was also found wanting because the audit team failed to perform sufficient procedures to test the presentation and disclosure of assets held for sale.
All three audit engagements performed by EY Netherlands were found to be at fault. The inspectors found 11 different failures, again related to insufficient testing.
The PCAOB reports stress that identification by its inspectors of serious deficiencies in an audit does not necessarily mean that the financial statements are materially misstated.
However, “an auditor’s failure to obtain the reasonable assurance that the auditor is required to obtain is a serious matter”.
“It is a failure to accomplish the essential purpose of the audit and it means that, based on the audit work, performed, the audit opinion should not have been issued,” they say.
Firms which audit companies listed on US stock exchanges are required to undergo inspection as a requirement of registration with the PCAOB.