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December 17, 2008

PCAOB releases inspection review

The US profession has welcomed the Public Company Accounting Oversight Board’s (PCAOB) report reviewing the first four years of inspections of the nation’s eight largest audit firms.

Public policy organisation the Center for Audit Quality, which acts as a voice for the audit profession, said the board’s independent inspections provide valuable assurance to investors that areas where auditors can improve have been identified and appropriate actions are being taken.

The report summarises deficiencies identified in audits by BDO Seidman, Crowe Horwath, Deloitte, Ernst & Young, Grant Thornton, KPMG, McGladrey & Pullen and PricewaterhouseCoopers. It does not identify any shortcomings specific to the individual firms.

The most common audit deficiencies related to revenues, accounting estimates, auditing fair value measurement, analytical procedures, income taxes, internal control, audit sampling, use of specialists, materiality, audit scope and audit differences.

The board noted that in some cases the deficiencies appeared to have been caused by a failure to apply an appropriate level of professional scepticism when conducting audit procedures and evaluating audit results.

Inspectors found improvement in most areas where deficiencies had been identified.

Deficiencies declined in some well-established audit areas, including confirmation of accounts receivable and the audit of income tax accounts. Where quality control deficiencies had been identified, firms subsequently changed audit methodologies, processes or related quality control systems.

The most common GAAP departures related to income taxes, derivatives, revenues and cash flow presentations.

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