Friday, May 25, 2012

PCAOB Disciplined Audit Firm and Auditor Involved with Audits of China-Based Companies


A registered audit firm was censured by the PCAOB and its registration was revoked for at least two years based on finding that it failed to comply with PCAOB quality control standards in the audits of the financial statements of China-based companies. Without admitting or denying, the findings the firm also consented to the imposition of a civil money penalty. (In the Matter of Brock, Schechter & Polakoff, PCAOB Release No.105-2012-002, May 22, 2012)

The Board found that the firm failed to develop policies and procedures sufficient to provide it with reasonable assurance that the firm undertook only those public company audit engagements that it reasonably could expect to complete with professional competence. When it began auditing the financial statements of public companies located in the Republic of China and the People's Republic of China, said the Board, the audit firm had no prior experience auditing public companies pursuant to PCAOB auditing standards, and had no prior experience auditing companies based in Taiwan or China. Despite its lack of professional staff with relevant training or experience, the firm accepted the engagements to audit the companies’ financial statements.

The Board also found that the audit firm failed to develop quality control policies and procedures sufficient to ensure that the audit personnel assigned to work on public company audit engagements, including the auditor with final responsibility, possessed the degree of technical training and proficiency required to fulfill their engagement responsibilities. Moreover, the firm’s monitoring program, which failed to select any of the audit firm’s public company audit engagements for review, was insufficient to provide the firm with reasonable assurance that its system of quality control was effective at assessing whether the firm's audits were performed in compliance with applicable professional standards.

In addition, the audit firm failed to comply with PCAOB auditing standards related to the planning, performance, and supervision of the audits. The Board found that the audit firm failed to gather sufficient competent evidential matter, and failed to use due care and to exercise professional skepticism in the course of the audits. The audits were planned and performed by two other audit firms, one located in Taiwan and one located in China, not by the audit firm. During the audits, the audit firm had minimal contact with the foreign firms, said the Board, and performed an inadequate review of the working papers they prepared. The audit firm also failed to comply with PCAOB Auditing Standard No. 3 on audit documentation by failing to ensure that it obtained and reviewed engagement completion documents from the foreign firms prior to issuing audit reports.

In a separate proceeding, the Board barred the audit firm’s Director of Accounting and Auditing from the industry for at least two years for violating PCAOB rules and auditing standards in connection with the audits of three China-based and Taiwan-based issuer clients, and the improper creation, addition, and backdating of audit documentation prior to a Board inspection. The Director, who was the auditor with final responsibility for the audits of the financial statements of each of the issuers, settled the action without either admitting or denying the Board’s findings. (In the Matter of James R. Waggoner, CPA, PCAOB Release No.105-2012-003, May 22, 2012)

The auditor failed to comply with PCAOB auditing standards related to the planning, performance, and supervision of the audits. The Board said that he also failed to gather sufficient competent evidential matter, and failed to use due care and to exercise professional skepticism in the course of the audits. In addition, the auditor failed to comply with Auditing Standard No. 3 by failing to ensure that the firm obtained and reviewed engagement completion documents from the foreign firms prior to authorizing the firm to issue the audit reports.





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