7 risk areas for the 2014 audit cycle

7 risk areas for the 2014 audit cycle

Revenue recognition, internal control over financial reporting, and
professional skepticism are among the seven key areas for 2014 audit
consideration, according to an alert sent Thursday by the Center for
Audit Quality (CAQ).

The alert is designed to help public company auditing firms address
risks quickly and proactively and remind them of considerations that
may be relevant for the 2014 audit cycle.

The 2014
covers the following auditing considerations, some of which
were the subject of recent PCAOB reports:

Revenue recognition.
The PCAOB’s practice
and the converged accounting standard on revenue
recognition, jointly adopted by FASB and the International Accounting
Standards Board (IASB), makes revenue recognition top-of-mind for
auditors this year. “These auditing matters likely will continue to
have relevance to auditing revenue under the new accounting standard,”
the CAQ alert says. “Further, although the new accounting standard is
not yet effective, the auditor should evaluate management’s required
disclosure of the impact the new accounting standard is likely to have
on the financial statements, evaluating the form, arrangement, and
content of the disclosure.”

Going concern.
The PCAOB issued a
practice alert
in September that stated that auditors are still
responsible for going-concern evaluation under PCAOB rules, despite FASB’s
in August of a new standard related to going-concern
evaluation. Auditors should look to the existing requirements when
evaluating whether “substantial doubt regarding the company’s ability
to continue as a going concern exists for purposes of determining
whether the auditor’s report should be modified to include an
explanatory paragraph.”

Internal control over financial reporting.
The CAQ alert
reviews seven areas related to the audit of internal control over
financial reporting, which was the subject of a PCAOB audit
practice alert
in October 2013. Among those seven areas are IT
considerations, testing management review controls, and using the work
of others (such as internal auditors).

Auditing accounting estimates, including fair value measurements.

The auditor is responsible, when auditing accounting estimates
such as fair value measurements, for evaluating how those accounting
estimates have been developed, the CAQ alert says. For instance, when
evaluating and testing management’s control over an accounting
estimate, an auditor should evaluate the reliability of data used in
developing the estimate. In August, the PCAOB requested comments as it
weighed standard-setting activities related to auditing accounting
estimates and fair value measurements. The comment period closed Nov. 3.

Engagement quality review.
“The responsibilities of the
engagement quality reviewer should be carried out with objectivity and
the application of due care,” the CAQ alert says. Reviewers should
follow procedures in accordance with Auditing Standard No. 7,
Engagement Quality Review.

Professional skepticism.
This requirement, also on last
year’s alert list, involves “critically evaluating all evidence” and
“considering what can go wrong with the financial statements,” the CAQ
alert says. Auditors “should not be satisfied with less than
persuasive evidence because of a belief that management is honest.”

Related parties and amendments to certain PCAOB auditing
standards regarding significant unusual transactions.
PCAOB approved
rules in June
that are designed to strengthen auditor scrutiny
in this area. The rules require the auditor to perform specific
procedures to evaluate a company’s identification of, accounting for,
and disclosure of the transactions and relationships between a company
and its related parties. A significant, unusual transaction is defined
as one that is outside the normal course of business for the company
or that otherwise appears unusual because of its timing, size, or
nature. Also, under the rules, auditors are required to obtain an
understanding of the company’s financial relationships and
transactions with its executive officers. The auditor is not required
to determine whether the compensation of executives is reasonable or
to make recommendations regarding compensation.

The CAQ plans to update the alert annually. The CAQ is affiliated
with the American Institute of CPAs.

Neil Amato (
) is a JofA senior editor.

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