The US Public Company Accounting Oversight Board (PCAOB) has found a number of flaws in audits conducted by PwC US and KPMG US between 2011 and 2013, according to the watchdog’s latest inspection report.

The PCAOB inspected 52 audits in the time frame conducted by PwC in the US and reviewed the firms audit work on two other issuer audit engagements in which the firm played a role but was not the principle auditor.

The inspectors found cases where it deemed there to be deficiencies, including 21 which it considered to be audit failures, or cases where it felt PwC had failed to obtain sufficient appropriate audit evidence to support its audit opinion on the financial statements or the effectiveness of internal control over financial reporting (ICFR).

In one example, the PCAOB found that the auditors failed to sufficiently test controls over the valuation of fixed maturity investment securities and of two categories of financial instruments, which represented a significant portion of the issuer’s portfolio.

In another audit, the PCAOB says the PwC failed to identify that the user had incorrectly calculated the amount of goodwill impairment it recorded during the year and failed to identify and evaluate a control deficiency related to the issuer’s goodwill impairment process.

In response to the report, US chairman and senior partner at PwC Bob Moritz and US Assurance leader Vincent Colman said the firm had evaluated the observations made and taken the appropriate actions.

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They added: "judgments are necessarily involved in the inspection process and professionals can reach different conclusions about the adequacy of audit evidence in a particular circumstance.

"In those instances where such differences exist related to the inspection observations detailed in this Report, they generally related to the significance of the observation in relation to the audit evidence taken as a whole rather than the specific nature of the observation."

KPMG audits

The PCAOB also reviewed 48 audits performed by KPMG and reviewed the firms audit work on two other issuer audit engagements in which the firm played a role but was not the principle auditor.

As with PwC, the PCAOB inspectors reported a number of deficiencies in the audits, including a deficiency relating to auditing aspects of an issuer’s financial statements that the issuer announced an intention to restate after the primary inspection procedures.

In 17 cases, the inspectors deemed the deficiencies to result in audit failures, including one example where the auditors determined the scope of its procedures for the audit of financial statements and the effectiveness of ICFR based on a materiality level was too high under the circumstances and, as a result, failed to obtain sufficient appropriate audit evidence to support its audit opinions.

In another example, the auditors failed to perform a sufficient substantive procedure to test the assets acquired and liabilities assumed in the business combination, while in a third example, KPMG failed in several respects to obtain appropriate audit evidence to support its audit opinions on the financial statements and on the effectiveness of ICFR.

KPMG US chairman and chief executive officer John Veihmeyer and the firms vice chair for audit James Liddy said: "We appreciate the professionalism and commitment of the PCAOB staff and value the important role the PCAOB plays in improving audit quality.

"We conducted a thorough evaluation of the matters identified in the Draft Report and addressed the engagement-specific findings in a manner consistent with PCAOB auditing standards and KPMG policies and procedures."

"We remain dedicated to evaluating and improving our system of audit quality control, monitoring audit quality and implementing changes to our policies and practices in order to enhance audit quality," they added.

Related Links
The Public Company Accounting Oversight Board