As the PCAOB continues its 2012 inspection season, and has completed a substantial number of the inspections, the Board continue to see a high level of serious inspection findings, said Board Member Jeanette Franzel in recent remarks. The findings are serious, and represent deficiencies that are of such significance that it appeared that many firms, at the time they issued their audit reports, had failed to obtain sufficient, appropriate audit evidence to support their audit opinions on the financial statements and/or the opinions on internal control over financial reporting. These findings are reported in the public version of the report, which is referred to as "Part I."
According to Member Franzel, such deficiencies include cases where auditors issue unqualified opinions even though the audit work was incomplete or not properly conducted; financial statement information was contradicted by other available evidence; or audit conclusions on material issues were based on management's views without independent verification. She noted that these findings do not necessarily mean that the financial statements are misstated, but that they represent areas of risk where the audit work was not sufficient under the standards to support the audit opinion.
Also, PCAOB inspections are risk-based, and often focused on key areas in particular audits that pose risk to investors. Therefore, the results cannot be generalized to all audits.
Common areas where the Board found audit deficiencies include revenue recognition, fair value of financial instruments, management estimates, testing and evaluating internal controls, related party transactions, and the auditor's assessment and response to fraud risk, among others. An area that is frequently problematic for smaller issuers is the audit work related to the issuer's use of equity financing instruments to compensate employees, vendors, and others. Many of these agreements and instruments contain complex terms and conditions that impact the manner in which the instruments should be recorded and accounted for by the issuer.