Inspectors from the Public Company Accounting Oversight Board (PCAOB) found no issues with the two audits they picked out of the 23 PwC carried out in 2017 nor with the work on one of the 168 audit engagements it did where it was not the principal auditor. Nor did the team find problems in its review of PwC’s quality control system.
However, inspections of EY’s audit of one US-listed company and its work on two other audits where it was not the principal brought to light a number of deficiencies. In both the audit and one of the two audit engagements, the inspectors found a deficiency which was “of such significance that it appeared to the inspection team that the firm, at the time it issued its audit report, had not obtained sufficient appropriate audit evidence to support its opinion about whether the issuer had maintained, in all material respects, effective internal control over financial reporting (ICFR)”.
The inspectors point out that even if one or more deficiencies in an audit reach this level of significance, it does not necessarily mean there are undisclosed material weaknesses in ICFR. Nevertheless, 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,” the inspectors say.
In the inspected audit, EY did not carry out sufficient procedures in evaluating identified internal control deficiencies to determine whether the deficiencies, individually or in combination with other deficiencies, constituted a material weakness.
In the second case, EY failed to perform sufficient procedures to test the design and operating effectiveness of controls over the valuation of oil and gas properties, the presentation and disclosure of oil and gas reserves, and the valuation and completeness of asset retirement obligations.
In both instances, the firm was in breach of Auditing Standard 2201, An Audit of Internal Control over Financial Reporting that is Integrated with an Audit of Financial Statements.
EY’s partner in charge of audit methodology, Robert Overend, told the PCAOB that the firm had considered the inspectors’ findings and taken action, where necessary, in accordance with PCAOB standards and its own policies.
“These actions did not change our original audit conclusions nor did the actions affect our reports on the issuers’ financial statements (with respect to issuer A) or our report to the principal auditor with respect to our role in the audit (with respect to issuer B),” he said.
The PCAOB has also issued reports on a number of the Big Four’s overseas practices relating to its 2017 inspections. These include Deloitte’s Chilean, Brazilian and Spanish firms, all of which gained PCAOB approval, and its Argentinian firm whose audit work was found to be significantly wanting in six areas in two audits.
KPMG Mumbai also got into trouble over failing to perform sufficient procedures in three areas of two audits it carried out.