The regulator, which inspects the audit work of all firms registered with it as auditors of companies listed on US stock exchanges, found no problems with the issuer audits carried out by EY’s Indian and Russian firms.
Similarly, PCAOB inspectors did not uncover any problems in the two issuer audits carried out by Samil PricewaterhouseCoopers, PwC’s Korean firm, or in its audit work on one other issuer audit engagement in which it played a role but was not the principal auditor.
The reviews, they said, “did not identify any audit performance issues that, in the inspection team's view, resulted in the firm failing to obtain sufficient appropriate audit evidence to support an audit opinion or to fulfil the objectives of its role in the other engagement”.
Unfortunately for both firms, other practices within their networks did not fare so well under the regulator’s scrutiny.
One of the audits carried out by EY in Chile was found to have deficiencies “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 that the financial statements were presented fairly, in all material respects, in conformity with the applicable financial reporting framework and/or its opinion about whether the issuer had maintained, in all material respects, effective internal control over financial reporting (ICFR)”.
“In other words,” the report says, “in this audit, 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 ICFR).”
EY Chile was not alone. The five other inspections – of Deloitte Canada, Deloitte Switzerland, KPMG Netherlands, PwC Bermuda and PwC Germany – all identified deficiencies of a similar significance, mostly related to the audit of ICFR.
In EY’s case, it had failed, when auditing ICFR, to perform sufficient procedures to identify and test the design and operating effectiveness of controls over the valuation of certain financial assets. It had also failed to perform procedures to identify and test any controls over the completeness of certain other financial assets and liabilities.
PwC Bermuda also failed to perform sufficient procedures to identify and test the design and operating effectiveness of controls over the valuation of certain financial assets in one of its inspected audits, while its German arm came a cropper over identifying and testing the design and operating effectiveness of controls over raw materials inventory, the valuation of inventory and manual journal entries in one of its audits.
The German firm messed up another audit when it failed to perform sufficient procedures to test the existence of customer receivables.
Deloitte Switzerland was another firm with problems concerning the audit of ICFR. Its PCAOB report reveals that it failed to perform sufficient procedures to test controls over the existence of inventory and occurrence of revenue, as well as journal entries, and it didn’t perform sufficient procedures to evaluate whether a control that it had determined to be a compensating control had a mitigating effect on identified control deficiencies.
Deloitte Canada failed to perform sufficient procedures to test the design and operating effectiveness of controls over the existence and valuation of property, plant and equipment and the occurrence, completeness and allocation of depreciation expense.
Meanwhile, during their review of KPMG Netherlands’ audit work, the PCAOB inspectors found significant deficiencies in the two audits they had selected and one audit engagement for another auditor.
Most of the failures related to testing controls over the valuation of goodwill and intangible assets, but there were also issues with controls over income tax valuation and the presentation and disclosure of certain financial assets and financial liabilities.
Originally published in Economia on 24 July 2019.