The PCAOB inspection reports for the Big Four audit firms highlight several common areas of recurring deficiencies:
Internal Control Over Financial Reporting (ICFR):
Deficiencies frequently stem from inadequate testing of design and operational effectiveness of controls.
Common issues include failure to test the accuracy and completeness of data used in controls, especially in high-risk accounts like revenue and inventory.
Revenue Recognition:
Revenue-related deficiencies are prevalent, often due to insufficient substantive testing and risk assessment.
Specific issues include ineffective testing of controls related to revenue recognition, especially under complex arrangements, and inadequate validation of the accuracy and completeness of revenue data.
Investment Valuations and Accounting Estimates:
Many audits faced challenges in validating fair value estimates, particularly for investment securities, goodwill, and intangible assets.
Deficiencies include insufficient testing of assumptions, data, and models used for fair value and impairment assessments.
Inventory Valuation:
Common issues involve inadequate testing of inventory reserves, especially for last-in, first-out (LIFO) and cycle-count controls.
Insufficient testing of the existence and valuation of inventory, as well as testing controls over these processes, is a recurring theme.
Allowance for Credit Losses (ACL) and Loan Losses:
In audits involving credit losses, firms often had issues with evaluating the adequacy of controls over ACL and the assumptions used.
Deficiencies included insufficient sampling and testing of credit loss models and lack of attention to significant data points in estimating losses.
Substantive Analytical Procedures:
Auditors often relied on analytical procedures without verifying that underlying data was relevant and reliable.
Common issues included using non-predictive data, failing to establish precise expectations, and inadequate follow-up on discrepancies.
Audit Documentation:
Instances were identified where audit teams failed to include necessary documentation to support audit conclusions.
Documentation deficiencies, particularly related to critical audit matters (CAMs) and uncorrected misstatements, affected the completeness and quality of audit records.
Risk Assessment and Material Misstatement:
Risk assessment issues involved inadequate evaluation of risks related to significant accounts and disclosures.
Firms frequently failed to identify significant risks or address them appropriately, especially in complex audit areas like revenue and business combinations.
These areas highlight the complexity and challenges in auditing high-risk accounts, internal controls, and fair value estimates, emphasizing the need for rigorous testing and documentation practices in these domains.

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