In the draft report on the firm, the inspectors said that they had found deficiencies in one of the two audit engagements Thacker had worked on where it was not the principal auditor.
One of these, which related to failure to perform sufficient procedures to test revenue recognition, was highlighted as being 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”.
The report went on to say that many audit deficiencies involve a lack of due professional care and cited AS 2301, The Auditor’s Responses to the Risks of Material Misstatement, which specifies that due professional care requires the exercise of professional scepticism.
AS 2301 also requires the auditor to plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for the audit opinion.
“Sufficiency is the measure of the quantity of audit evidence, and the quantity needed is affected by the risk of material misstatement (in the audit of financial statements) and the quality of the audit evidence obtained,” the inspectors state.
“The appropriateness of evidence is measured by its quality; to be appropriate, evidence must be both relevant and reliable in providing support for the related conclusions.”
The inspectors also raise the question of revenue recognition in relation to the firm’s quality control system. This, they say, should provide reasonable assurance of compliance with applicable professional standards and regulatory requirements with respect to its audit practice.
“With respect to the deficiency, based on review of the work papers and discussions with the engagement personnel, it appeared to the inspection team that the deficiency was attributable, at least in part, to the engagement personnel having approached this aspect of the audit without due professional care.
“This information provides cause for concern regarding the firm’s application of due professional care with respect to auditing revenue.”
In a letter to the US audit watchdog, Thacker partner Vijay Thacker rejected the findings. He said that the issue had arisen because, under the audited company’s accounting policy, revenue was not recognised until final acceptance had been granted.
In this case, the company had received seven monthly payments, as well as acceptance test certificates for around 98% of the company’s locations but the final acceptance certificate (FAC) was not forthcoming because not all the acceptance test certificates had been received.
Thacker explained that relevant material cost was carried as closing inventory, “which had been examined in detail including the aspect that this continued in inventory (and not as revenue) because the FAC was pending.”
He pointed out that not only were these work papers available to the principal auditor, but a senior manager from the principal auditor had joined in the audit onsite, was cc’d into emails and had participated in team discussions about the issue. “The principal auditor did not require us to do any further work on the matter,” he added.
“We submit that we have exercised due professional care with respect to auditing revenue, that we have performed sufficient procedures to test the revenue recognition in the contest of the issuer’s accounting policy and that therefore there is no significant audit deficiency in our work.”
The firm concedes that having the senior manager onsite may have led to “some reliance on oral instructions” but it has now made sure that in future there will be more detailed recording of oral discussions and it will also obtain more specific instructions in writing.
However, it stands by its submission that its audit work was not deficient.
The PCAOB has been contacted for comment.