Audit risk alert general accounting and auditing developments 201819

Audit Risk Alert
2018/19 | General Accounting and
Auditing Developments
Strengthening Audit Integrity
Safeguarding Financial Reporting

23574-349


Copyright © 2018
Association of International Certified Professional Accountants. All rights reserved.
For information about the procedure for requesting permission to make copies of
any part of this work, please email with your
request. Otherwise, requests should be written and mailed to Permissions Department,
220 Leigh Farm Road, Durham, NC 27707-8110.
1 2 3 4 5 6 7 8 9 0 AAP 1 9 8
ISBN 978-1-94830-629-4 QSJOU




*4#/

F1VC



iii

General Accounting and Auditing Developments — 2018/19

Notice to Readers
This Audit Risk Alert (alert) replaces General Accounting and Auditing
Developments—2017/18.
This alert provides auditors of financial statements with an overview of recent

economic, industry, technical, regulatory, and professional developments that
may affect the audits and other engagements they perform. Also, an entity's
internal management can use this alert to address areas of audit concern.
This publication is an other auditing publication, as defined in AU-C section
200, Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance With Generally Accepted Auditing Standards.1 Other auditing
publications have no authoritative status; however, they may help the auditor
understand and apply generally accepted auditing standards.
In applying the auditing guidance included in an other auditing publication,
the auditor should, using professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the audit. The auditing
guidance in this document has been reviewed by the AICPA Audit and Attest
Standards staff and published by the AICPA and is presumed to be appropriate. This document has not been approved, disapproved, or otherwise acted on
by a senior technical committee of the AICPA.

Recognition
The AICPA gratefully acknowledges those members of the Auditing Standards
Board and the AICPA Technical Issues Committee who helped identify the interest areas for inclusion in this alert. The AICPA also gratefully acknowledges Jeremy Dillard, Bob Green, and Manda Dinkel for their review of this
publication.
AICPA Staff
Liese Faircloth
Manager
Product Management and Development

Feedback
The Audit Risk Alert General Accounting and Auditing Developments is published annually. As you encounter audit or industry issues that you believe warrant discussion in next year's alert, please feel free to share them with us. Any
other comments you have about the alert would also be appreciated. You may
email these comments to A&

1

All AU-C section can be found in AICPA Professional Standards.

©2018, Association of International Certified Professional Accountants

ARA-GEN


Table of Contents

v

TABLE OF CONTENTS
Paragraph

General Accounting and Auditing Developments — 2018/19
How This Alert Helps You . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Economic and Industry Developments . . . . . . . . . . . . . . . . . . . . . . .
The Current Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key Economic Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legislative and Regulatory Developments . . . . . . . . . . . . . . . . . . . .
Tax Cuts & Jobs Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inspections of Broker-Dealer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit and Attestation Issues and Developments . . . . . . . . . . . . . .
The AICPA Enhancing Audit Quality Initiative . . . . . . . . . . . . . .
Compliance With the Risk Assessment Standards . . . . . . . . . .
Emerging Technologies: What Practitioners Need
to Know . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cybersecurity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auditing Standards Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounting and Review Services Committee . . . . . . . . . . . . . . .

Common Peer Review Findings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue Recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective or Applicability Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview of the New Guidance . . . . . . . . . . . . . . . . . . . . . . . . . .
Understanding the Five-Step Process . . . . . . . . . . . . . . . . . . . . . . .
Additional Guidance Under the New Standard . . . . . . . . . . . .
Transition Resource Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Latest Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Leases Standard Will Change Financial Statement
Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance and Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicability and Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . .
Main Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lessee Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lessor Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale and Leaseback Transactions . . . . . . . . . . . . . . . . . . . . . . . . .
Leveraged Lease Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land Easement Practical Expedient . . . . . . . . . . . . . . . . . . . . . . . .
Targeted Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounting for Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicability and Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hedge Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
©2018, Association of International Certified Professional Accountants

.01-.338

.01-.03
.04-.08
.04-.05
.06-.08
.09-.25
.09-.11
.12-.25
.26-.133
.26-.43
.44-.55
.56-69
.70-.71
.72-.93
.94-.116
.117-.133
.134-.172
.134-.136
.137-.138
.139-.141
.142-.153
.154-.155
.156-.157
.158-.171
.172
.173-.207
.173-.174
.175-.176
.177-.188
.189-.195
.196-.200

.201-.202
.203
.204-.206
.207
.208-.230
.208-.209
.210-.213
.214-.228
.229
.230

Contents


vi

Table of Contents
Paragraph

General Accounting and Auditing Developments —
2018/19 — continued
Other Accounting Issues and Developments . . . . . . . . . . . . . . . . . .
Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disclosure Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined Benefit Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal-Use Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Pronouncements at a Glance . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Auditing and Attestation Pronouncements
and Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recent Accounting and Financial Reporting Guidance . . . . .
Recently Issued Technical Questions and Answers . . . . . . . . .
Recent AICPA Independence and Ethics Developments . . . . . . .
AICPA Conceptual Frameworks Toolkits . . . . . . . . . . . . . . . . . . .
Definition of a Client . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On the Horizon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auditing and Attestation Pipeline — Nonissuers . . . . . . . . . . .
Auditing and Attestation Pipeline — Issuers . . . . . . . . . . . . . . . .
Accounting and Financial Reporting Pipeline . . . . . . . . . . . . . .
Independence and Ethics Pipeline . . . . . . . . . . . . . . . . . . . . . . . . .
Resource Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Continuing Professional Education . . . . . . . . . . . . . . . . . . . . . . . .
Webcasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Member Service Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hotlines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industry Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Contents

.231-.259
.232-.234
.235-.239
.240-.245
.246-.252
.253-.259
.260-.262
.260
.261
.262

.263-.272
.263-.264
.265-.272
.273-.321
.275-.284
.285-.292
.293-.316
.317-.321
.322-.338
.323
.324-.327
.328
.329
.330-.337
.338

©2018, Association of International Certified Professional Accountants


General Accounting and Auditing Developments — 2018/19

1

Audit Risk Alert 2018/19: General Accounting and Auditing Developments
By AICPA and CIMA
Copyright © 2018 Association of International Certified Professional Accountants

How This Alert Helps You
.01 This alert helps you plan and perform your audits and can be used by
an entity's internal management to identify issues significant to the industry.

It also provides information to assist you in achieving a more robust understanding of the business, economic, and regulatory environments in which your
clients operate. This alert is an important tool to help you identify the risks that
may result in the material misstatement of financial statements, including significant risks requiring special audit consideration. For developing issues that
may have a significant impact in the near future, the "On the Horizon" section
provides information on these topics. Refer to the full text of accounting and
auditing pronouncements as well as the full text of any rules or publications
that are discussed in this alert.
.02 It is essential that the auditor understand the meaning of audit risk
and the interaction of audit risk with the objective of obtaining sufficient appropriate audit evidence. Auditors obtain sufficient appropriate audit evidence
on which to base their opinion by performing the following:

r
r

Risk assessment procedures
Further audit procedures that comprise the following:
— Tests of controls, when required by generally accepted auditing standards (GAAS) or when the auditor has chosen
to do so
— Substantive procedures that include tests of details and
substantive analytical procedures

.03 The auditor should develop an audit plan that includes the nature
and extent of planned risk assessment procedures, as determined under AU-C
section 315, Understanding the Entity and Its Environment and Assessing the
Risks of Material Misstatement. AU-C section 315 defines risk assessment procedures as "the audit procedures performed to obtain an understanding of the
entity and its environment, including the entity's internal control, to identify
and assess the risks of material misstatement, whether due to fraud or error,
at the financial statement and relevant assertion levels." A relevant assertion
"has a reasonable possibility of containing a misstatement or misstatements
that would cause the financial statements to be materially misstated. The determination of whether an assertion is a relevant assertion is made without

regard to the effect of internal controls." As part of obtaining the required understanding of the entity and its environment, paragraph .12 of AU-C section
315 states that the auditor should obtain an understanding of the "industry,
regulatory, and other external factors, including the applicable financial reporting framework," relevant to the entity. This alert assists the auditor with this
aspect of the risk assessment procedures and further expands the auditor's understanding of other important considerations relevant to the audit.

Economic and Industry Developments
The Current Economy
.04 When planning an audit or review engagement, auditors need to understand the economic conditions facing the industry and marketplace in which
an entity operates, as well as the effects of these conditions on the entity itself.
These external factors, such as interest rates, availability of credit, consumer
©2018, Association of International Certified Professional Accountants

ARA-GEN .04


2

Audit Risk Alert

confidence, overall economic expansion or contraction, inflation, and labor market conditions, are likely to have an effect on an entity's business and, therefore,
its financial statements. Considering the effects of external forces on an entity
is part of obtaining an understanding of the entity and its environment. Recognizing that economic conditions and other external factors relevant to an entity and its environment constantly change, auditors should evaluate whether
changes have occurred since the previous audit that may affect their reliance
on any information obtained from their previous experience with the entity.
These changes may affect the risks and risk assessment procedures applicable
to the current year's engagement.
.05 During 2017 and into 2018, the U.S. economy continued to recover. The
S&P 500 and the Dow Jones Industrial Average both reached all-time highs
during 2018. The Chicago Board Options Exchange Volatility Index (VIX) is a
key measure of market expectations of near-term volatility conveyed by S&P

500 stock option prices and is considered by many to be a reliable indicator
of investor sentiment and market volatility and the best gauge of fear in the
market. The VIX was not steady during 2017 and into 2018. During that time,
prices ranged from 19.85 to 9.51. The volatility shows that there is still some
uncertainty; however, the smaller range of change in the index shows that investors believe the economy and market are stable.

Key Economic Indicators
.06 The following key economic indicators reaffirm the recovery of the
economy during 2017 and into 2018: gross domestic product (GDP), unemployment, and the federal fund rate. The GDP measures output of goods and services by labor and property within the United States. GDP increases as the
economy grows and decreases as it slows. According to the Bureau of Economic
Analysis, real GDP increased at an annual rate of 1.8 percent in the second
quarter of 2018, based on the advance estimate (first estimate). The increase
in real GDP in the second quarter has been attributed to positive contributions
from personal consumption expenditures, exports, federal government spending, and state and local government spending.
.07 According to the Bureau of Labor Statistics (BLS), from August 2017
to August 2018, the unemployment rate fluctuated between 4.4 percent and 3.9
percent. During that same time period, the number of long-term unemployed
(those jobless for 27 weeks or more) was steady. According to the BLS, the number of people employed part-time for economic reasons decreased to 4.4 million
during 2018. Together, these statistics illustrate the continued improvement in
the economy.
.08 The Board of Governors of the Federal Reserve System (Federal Reserve) increased the target for the federal funds rate in June 2017 to 1.0 percent. This was the second raise of the rate in 2017 after keeping the rate at 0.5
percent for over a year.

Legislative and Regulatory Developments
Tax Cuts & Jobs Act
.09 On December 22, 2017, President Donald Trump signed into law H.R.
1, known as the Tax Cuts and Jobs Act (TCJA), which makes widespread
changes to the IRC. Almost all its provisions, including a lower corporate tax

ARA-GEN .05

©2018, Association of International Certified Professional Accountants


General Accounting and Auditing Developments — 2018/19

3

rate of 21 percent and lower individual income tax rates, go into effect January
1, 2018.
.10 Among the many changes to current tax law is one that permanently
lowers the corporate income tax rate from 35 percent to 21 percent, effective for
2018. The Senate version lowered the rate to 20 percent but delayed its effective
date until 2019, whereas the House bill originally had a 20 percent rate that
would have been effective in 2018.
.11 The bill also lowers the individual income tax rates through 2025. The
new top rate will be 37 percent, lowered from 39.6 percent. The law keeps the
same number of brackets as under current law. It also keeps the individual
alternative minimum tax (AMT), with a higher exemption than under current
law, but eliminates the corporate AMT.

Inspections of Broker-Dealer
.12 Although engagements of broker-dealers are inspected by the PCAOB,
the findings are similar to those of peer review inspections. Auditors may use
these findings to help ensure that they are following all the applicable guidance
when performing audit and attest engagements.
.13 On August 20, 2018, the PCAOB released its annual inspection report,
Annual Report on the Interim Inspection Program Related to Audits of Brokers
and Dealers. During 2016, the PCAOB inspected 75 firms covering portions of
116 audit-related attestation engagements. The attestation engagements comprised 27 related to compliance reports and 87 related to exemption reports.

This was the second annual cycle in which all audits and related attestation
engagements were required to be performed in accordance with PCAOB standards and amended SEC Rule 17a-5 and the second annual cycle in which the
new attestation engagements were included in the inspections.
.14 The report notes that independence findings were identified in four
audits representing eight percent of the audits covered by the inspections in
2017 compared to 10 percent of the audits covered by the inspections in this
area in 2016. Three of the four audits with independence findings in 2017 were
conducted by firms that did not audit issuers.
.15 To give some context to the numbers, note that 3,829 broker-dealers
filed audited annual financial statements with the SEC for fiscal years ended
during the period from July 1, 2016 through June 30, 2017, and 475 registered
public accounting firms audited broker-dealer filings for these periods. Of those,
189 of the firms auditing broker-dealers also audited issuers, and 286 firms
performed audits of broker-dealers and are registered with the PCAOB only
because they audit nonissuer broker-dealers.
.16 A summary of the deficiencies follows. For detailed report findings,
see PCAOB Release No. 2018-003, Annual Report on the Interim Inspection
Program Related to Audits of Brokers and Dealers, available at https://pcaobus
.org/inspections/documents/broker-dealer-auditor-inspection-annual-report2018.pdf.
.17 Findings related to failures to satisfy independence requirements were
as follows:
©2018, Association of International Certified Professional Accountants

ARA-GEN .17


4

r

Audit Risk Alert

Failure to Satisfy Auditor Independence Requirements
The PCAOB identified independence findings in 4 of the 48 audits
selected for inspection. The following further describes the identified findings:
—

These firms performed bookkeeping or other services related to the broker-dealer's accounting records or have
prepared or assisted in the preparation of the brokerdealer's financial statements, supplemental information,
or exemption reports.

—

In another audit, the firm's independence was impaired
because of an indemnification clause in the firm's engagement letter that stated that the broker-dealer would
indemnify the firm from any and all claims of the brokerdealer and third parties when there was knowing misrepresentation or concealment of information by the brokerdealer's management, regardless of the nature of the
claim, including the negligence of any party.

.18 Deficiencies found related to the financial statement audit were as
follows:

r

Deficiencies Related to Auditing Revenue
The PCAOB identified 1 or more deficiencies in 73 of the 112 audits selected for inspection. The following further describes the
identified deficiencies:

ARA-GEN .18

—

In 26 of the audits inspected, firms did not perform, or
sufficiently perform, risk assessment procedures for revenue, which contributed to deficiencies in these firms'
revenue-testing procedures.

—

In 38 of the audits inspected, the extent of testing was
insufficient for material classes of revenue transactions.

—

In 10 of the audits inspected, firms performed substantive analytical procedures that did not provide the necessary level of assurance because the firms did not (a)
develop any expectation when performing analytical procedures intended to be substantive in nature, (b) develop
expectations that were sufficiently precise to identify
misstatements, (c) establish that there was a plausible
and predictable relationship between the current year
and prior year revenue balances, (d) evaluate the reliability of the data from which the auditors' expectations were
developed, (e) determine an amount of difference from
the expectation that could be accepted without further
investigation, (f) obtain corroboration of management's
explanations for significant unexpected differences, or (g)
sufficiently test controls, when the necessary level of assurance from the analytical procedures was determined
based on reliance on controls.

©2018, Association of International Certified Professional Accountants


General Accounting and Auditing Developments — 2018/19

5

— In 10 of the audits inspected, firms did not perform sufficient procedures on information produced by service organizations used in the performance of audit procedures.

r

r

In 4 of the 10 audits, firms obtained a service auditor's report but did not sufficiently evaluate the
service auditor's report or consider whether the
service auditor's report provided evidence about
the design and operating effectiveness of the controls being relied upon.
In 6 of the 10 audits, when firms used as audit evidence statements or other information that
the broker-dealers obtained from their service organizations, the firms did not obtain and evaluate the service auditor's report or perform procedures to test the accuracy and completeness of
the information the firms used in their audits.

— In 15 of the audits inspected, when auditing revenue,
firms did not test the accuracy and completeness of the
information produced by the broker-dealer that was used
as audit evidence.
— In 60 of the audits inspected, firms did not perform sufficient procedures to test the relevant assertions for revenue. For example, firms did not (a) evaluate whether
the terms of the underlying contractual arrangements
were appropriately considered in revenue recognition, (b)
evaluate whether the revenue recognition criteria under FASB Accounting Standards Codification (ASC) 605,
Revenue Recognition, were satisfied, (c) test the accuracy and completeness of inputs used in the calculation
of revenue, (d) perform procedures to test the completeness of revenue, or (e) evaluate the effect on the financial statements of recognizing commission revenue based
on settlement date rather than trade date, as required
under FASB ASC 940, Financial Services—Brokers and
Dealers.

r

Deficiencies Related to Auditing Risks of Material Misstatement
Due to Fraud
The PCAOB identified 1 or more deficiencies in 16 of 25 audits selected for inspection. The following further describes the identified
deficiencies:
— In 4 of 6 audits, firms did not identify improper revenue
recognition as a fraud risk, and there was no documentation or other persuasive evidence indicating how the
firms overcame the presumption that improper revenue
recognition is a fraud risk. In 1 audit, the firm performed
inquiries of the CEO only and did not perform inquiries
with others within the broker-dealer who were reasonably expected to be knowledgeable about potential fraud
risks.

©2018, Association of International Certified Professional Accountants

ARA-GEN .18


6

Audit Risk Alert

r

—

In 6 of the audits inspected, firms did not perform sufficient procedures to test journal entries recorded in the
general ledger and other adjustments made in the preparation of the financial statements because the firms did
not perform 1 or more of the required procedures.

—

In 7 of the audits inspected, firms did not perform sufficient audit procedures to specifically address assessed
fraud risks related to improper revenue recognition.

Deficiencies Related to Auditing Financial Statement Presentation
and Disclosures
The PCAOB identified 1 or more deficiencies in 38 of the 116 audits selected for inspection. The following further describes the
identified deficiencies:
—

In 26 of the audits inspected, firms did not perform sufficient procedures required by AS 2810, Evaluating Audit
Results, to identify and evaluate disclosures in the financial statements that were omitted, or appeared incomplete or inaccurate, in order to determine whether the
broker-dealer's financial statements contained the information essential for fair presentation.

r

r

r

ARA-GEN .18

In 16 of the 26 audits, firms did not identify and
evaluate instances pertaining to related party
relationships and transactions that were necessary to understand related party relationships
and the effects of related party transactions on
the financial statements.
In 9 of the 26 audits, firms did not identify and evaluate the apparent omission from

the broker-dealer's financial statements of the
broker-dealer's revenue recognition policy for
material classes of revenue transactions in consideration of the requirements of FASB ASC 235,
Notes to Financial Statements.
In 2 of the 26 audits, inspections staff observed
that firms did not identify and evaluate disclosures that contained potential factual errors.
In both situations, the broker-dealers' financial
statement disclosures asserted regulatory exemptions for which the firms had obtained contrary information, but the firms did not perform
procedures to address whether the disclosures
were inaccurate and, if so, the effect on the financial statements.

—

In 4 of the audits inspected, firms did not evaluate, or sufficiently evaluate, whether the broker-dealer's fair value
disclosures were in accordance with FASB ASC 820, Fair
Value Measurement.

—

In 6 of the audits inspected, firms did not perform
sufficient procedures related to the adequacy of a

©2018, Association of International Certified Professional Accountants


General Accounting and Auditing Developments — 2018/19

7

broker-dealer's disclosures concerning its ability to continue as a going concern for a reasonable period of time

required.

r

— In 16 of the audits inspected, firms did not perform sufficient procedures regarding whether the broker-dealer's
financial statements were presented fairly in conformity
with generally accepted accounting principles (GAAP).
Deficiencies Related to Auditing Related Party Relationships and
Transactions
The PCAOB identified deficiencies in 21 of the 66 audits in which
the auditor's procedures to test related parties and related party
transactions were selected for inspection. The following further
describes the identified deficiencies:
— In 3 of the audits inspected, firms failed to perform sufficient risk assessment procedures.
— In 19 of the audits inspected, firms did not perform procedures, or did not design and perform procedures, in a
manner that addressed the risks of material misstatement. In 11 of the 19 audits, firms had deficiencies in
the procedures performed over related party revenues
and expenses that were based on allocations between the
broker-dealer and its parent or affiliates.

r

— In 4 of the audits inspected, there was a deficiency identified in evaluating the broker-dealer's identification of
related party relationships and transactions.
Deficiencies Related to Auditing Fair Value Measurements
The PCAOB identified 1 or more deficiencies in 7 of the 25 audits
selected for inspection. The following further describes the identified deficiencies:
— In 2 of the audits inspected, firms did not obtain, or sufficiently obtain, an understanding of the broker-dealer's
process for determining fair value of securities based on
inputs, other than those from quoted prices in active markets, to develop an audit approach. Specifically, the firms

did not obtain an understanding of the methods and assumptions used by the broker-dealer's external pricing
sources to determine the fair value of securities.
— In 7 of the audits inspected, firms did not perform, or sufficiently perform, procedures to test the fair value of securities. In one audit, the firm did not sufficiently evaluate
the reasonableness of significant assumptions used by
the broker-dealer to value its securities that were based
on unobservable inputs. In another audit, the firm used
a specialist to develop independent fair value estimates
to corroborate the fair value of the broker-dealer's securities but did not determine whether the prices obtained
were independent of the external pricing source used by
the broker-dealer to value its securities.

©2018, Association of International Certified Professional Accountants

ARA-GEN .18


8

r

Audit Risk Alert

Deficiencies Related to Auditing Receivables and Payables
The PCAOB identified 1 or more deficiencies in 11 of the 35 audits
selected for inspection. The following further describes the identified deficiencies:
—

In 5 of the audits inspected, firms did not perform, or sufficiently perform, risk assessment procedures for receivables and payables.

—

In 7 of the audits inspected, the extent or timing of testing
was insufficient for a receivable or payable account balance, including receivables from customers or payables to
customers.

—

In 3 of the audits inspected, firms did not perform sufficient confirmation procedures required. In one audit,
the firm did not perform sufficient procedures to design the confirmation request because it did not consider
whether the individuals to whom the confirmations were
directed were knowledgeable about the information to
be confirmed. Further, this firm did not maintain control
over the confirmation process because it relied on brokerdealer personnel to insert customer statements into firm
envelopes containing the confirmation request and place
the envelopes in the mail.

—

In 2 of the audits inspected, deficiencies were identified
related to the testing of payables to customers because
the firms did not test the accuracy and completeness of
the information produced by the broker-dealer that was
used as audit evidence.

—

In 3 of the audits inspected, other deficiencies were identified related to the testing of receivables and payables.

r

r

For example, in 2 audits, the firm did not perform sufficient procedures because it did not test
the accuracy and completeness of information
underlying the calculation of the receivables or
payables balance, such as assets under management and commission rates.
In another audit, the firm limited its procedures
to comparing customer trade information between 2 reports produced by the broker-dealer
and did not perform any testing of the information that generated the payable balance.

.19 Deficiencies found related to the supporting schedules were as follows:

r

Deficiencies Related to the Net Capital Rule
The PCAOB identified 1 or more deficiencies in 28 of the 78 audits
selected for inspection. The following further describes the identified deficiencies:
—

ARA-GEN .19

In 4 of the audits inspected, firms did not test whether
the broker-dealer's required minimum net capital reported in the supporting schedule was determined by the

©2018, Association of International Certified Professional Accountants


General Accounting and Auditing Developments — 2018/19

9

broker-dealer in accordance with SEC Rule 15c3-1(a)(2).
In another audit, inspections staff observed that the firm
did not evaluate whether securities purchased qualified
for exclusion from aggregate indebtedness and, therefore,
did not sufficiently evaluate whether the calculated minimum net capital reported in the supporting schedule was
in accordance with Rule 15c3-1(a)(1).
— In 5 of the audits inspected, firms did not evaluate, or sufficiently evaluate, the completeness and accuracy of the
adjustments to net worth that the broker-dealer reported
in the supporting schedule.
— In 14 of the audits inspected, firms did not perform sufficient procedures to test the broker-dealer's classification
of allowable and non-allowable assets as reported in its
supporting schedule.
— In 2 of the audits inspected, firms did not perform sufficient procedures to evaluate whether the appropriate
haircuts were applied by the broker-dealer to reported
securities, including evaluating the relevant characteristics of the securities in accordance with SEC Rule 15c3-1.
— In 11 of the audits inspected, firms did not test, or
sufficiently test, the completeness and accuracy of the
amounts of operational charges and other deductions reported by the broker-dealer on its supporting schedule.
— In 4 of the audits inspected, other deficiencies related to
net capital were observed:

r
r

r

In 2 of the 4 audits, firms did not obtain written
representations from management.
In 1 of the 4 audits, the firm did not evaluate the

marketability of certain securities to determine
whether the securities reported as marketable
securities in the net capital computation met the
requirements of SEC Rule 15c3-1.

Deficiencies Related to the Customer Protection Rule
The PCAOB identified 1 or more deficiencies in 14 of the 29 audits
selected for inspection. The following further describes the identified deficiencies:
— In 12 of the audits inspected, firms did not test, or sufficiently test, the completeness and accuracy of debits or
credits included in the customer and PAB account reserve
computations reported on the supporting schedules.
— In 7 of the audits inspected, firms did not perform sufficient procedures to test the information related to the
broker-dealer's possession or control requirements as reported on the supporting schedule.
— In 2 of the audits inspected, deficiencies were identified
regarding other procedures performed on the supporting
schedules related to compliance with SEC Rule 15c3-3:

©2018, Association of International Certified Professional Accountants

ARA-GEN .19


10

r

r

Audit Risk Alert

In 1 of these 2 audits, the firm obtained a bank
confirmation for a cash balance held in deposit in
a special reserve bank account as of an interim
date and did not perform procedures to test the
amount held on deposit reported on the supporting schedule as of the balance sheet date.
In another audit, the firm failed to obtain written
representations from management.

.20 Other deficiencies found related to the audit were as follows:

r

Deficiencies Related to Auditor's Reporting on the Financial Statements and Supporting Schedules
The PCAOB identified 1 or more deficiencies in 12 of the 116 audits selected for inspection. The following further describes the
identified deficiencies:

r

—

In 9 of the audits inspected, it was observed that the auditor's report on the supplemental information did not
include, or include properly, 1 or more of the elements
required by AS 2701, Auditing Supplemental Information Accompanying Audited Financial Statements. For
example, firms (a) did not identify supplemental information either by a descriptive title or by reference to the
page number and document where the supplemental information was located, (b) did not include a statement
that the supplemental information was the responsibility of management, (c) did not include a statement that
the supplemental information was subjected to audit procedures performed in conjunction with the audit of the
broker-dealer's financial statements, (d) did not include a
statement that the audit procedures performed included
determining whether the supplemental information reconciled to the financial statements or the underlying accounting and other records, as applicable, and performing

procedures to test the completeness and accuracy of the
information presented in the supplemental information,
(e) did not include a statement that in forming its opinion, the firm evaluated whether the supplemental information, including its form and content, complied, in all
material respects, with the specified regulatory requirements, or (f) referenced the incorrect regulatory requirement with which the supplemental information was to
comply.

—

In 3 of the audits inspected, the auditor's report was
dated prior to the date on which the auditor concluded
that it had obtained sufficient, appropriate evidence.

Deficiencies Related to Audit Documentation
The PCAOB identified 1 or more deficiencies in 15 of the 116 audits selected for inspection. The following further describes the
identified deficiencies:

ARA-GEN .20

©2018, Association of International Certified Professional Accountants


General Accounting and Auditing Developments — 2018/19

11

— In 4 of the audits inspected, firms did not complete an engagement completion document. In 3 of the 4 audits, the
firms also did not complete an engagement completion
document in the related review engagements.
— In 8 of the audits inspected, firms prepared an engagement completion document but did not include 1 or more
relevant required items, such as significant findings or

issues, including the results of auditing procedures performed in response to significant risks or the identification of significant deficiencies in internal control over financial reporting.
— In 6 of the audits inspected, deficiencies related to other
audit documentation matters are as follows:

r

r

r

In 4 of the 6 audits, firms did not assemble a complete and final set of audit documentation within
45 days after the release date, which is the date
the auditor grants permission for the use of the
auditor's report in connection with the issuance
of a broker-dealer's financial statements.
In 3 of the 6 audits, firms added documentation to the audit file after the report release date
but did not document the date the information
was added, the name of the person who prepared
the additional documentation, or the reasons for
adding it.

Deficiencies Related to Engagement Quality Review
The PCAOB identified 1 or more deficiencies in 55 of the 93 audits
selected for inspection. The following further describes the identified deficiencies:
— In 5 of the audits inspected, firms did not have an engagement quality review performed for the audit prior
to issuance of the engagement report, which compares
8 audits identified in 2016. In 4 of the 5 engagements,
firms also did not have an engagement quality review
performed for the related review attestation engagement.
— In 50 of the audits inspected, the engagement quality review performed was not sufficient. For example, through

inspection of the documentation relating to the engagement quality review performed, the engagement quality reviewer did not, or did not sufficiently (a) evaluate
the engagement team's judgments made about materiality and the effect of those judgments on the engagement
strategy, (b) evaluate the engagement team's assessment
of and audit responses to significant risks identified by
the engagement team, including fraud risks, or identify
deficiencies when reviewing the engagement team's procedures intended to address significant and fraud risks,
(c) evaluate the engagement team's judgments made
about the severity and disposition of identified control deficiencies, (d) review the engagement team's evaluation

©2018, Association of International Certified Professional Accountants

ARA-GEN .20


12

Audit Risk Alert

of the firm's independence in relation to the engagement,
(e) review the engagement completion document or identify that the engagement completion document did not
include the results of auditing procedures intended to
address an identified fraud risk, (f) review the financial
statements and the related engagement report, or (g)
evaluate the engagement team's conclusions related to
difficult and contentious matters.
—

r

In 1 of the audits inspected, the engagement quality reviewer did not meet the required qualifications.

Deficiencies Related to Evaluation of Control Deficiencies
The PCAOB identified 1 or more deficiencies in 8 of the 116 audits
selected for inspection. The following further describes the identified deficiencies:
—

In 3 of the 8 audits, the firm identified control deficiencies affecting IT controls on which the firm intended to
rely but failed to evaluate the effect of the deficiencies
on control risk and, where appropriate, revise the control risk assessment and modify the planned substantive
procedures. In 5 of the 8 audits, the firm did not perform,
or sufficiently perform, procedures to evaluate the severity of identified control deficiencies in the broker-dealer's
internal control over financial reporting and determine
whether the deficiencies, either individually or in combination with other deficiencies, were significant deficiencies or material weaknesses, for purposes of communication to management and the audit committee.

—

In 2 of the 8 audits, the firm failed to evaluate whether a
misstatement identified during the audit that exceeded
the firm's established materiality levels was indicative
of a significant deficiency or material weakness in the
broker-dealer's internal control over financial reporting,
for purposes of communication to management and the
audit committee

.21 Deficiencies found related to independence communications to the audit committee were as follows:

r

Deficiencies Related to Independence Communications to the Audit Committee
The PCAOB identified 1 or more deficiencies in 14 of the 48 audits

selected for inspection. The following further describes the identified deficiencies:

ARA-GEN .21

—

In 7 of the 48 audits, the firms failed to make the required
annual communications.

—

In 2 of the 48 audits, the firm failed to make the required communications concerning independence prior
to accepting an initial engagement, and in 2 audits, the
firms made the required annual communications but

©2018, Association of International Certified Professional Accountants


General Accounting and Auditing Developments — 2018/19

13

incorrectly referenced other regulatory requirements,
rather than PCAOB Rule 3520, Auditor Independence.
— In 3 of the 48 audits, the firms' independence was impaired because they provided prohibited non-audit services to the broker-dealer or had an indemnification
clause in the engagement letter.
.22 Deficiencies found related to attestation engagements were as follows:

r

Deficiencies Related to Examination Procedures
The PCAOB identified 1 or more deficiencies in 19 of the 27 attestation engagements selected for inspection related to examination
procedures. The following further describes the identified deficiencies:
— In 8 of the examinations inspected, firms observed that
firms did not plan, or sufficiently plan, the examination
engagement. For example, firms did not (a) obtain a sufficient understanding of certain of the financial responsibility rules or the broker-dealer's processes, including relevant controls, regarding compliance with the financial
responsibility rules, (b) assess the risk of fraud, including
the risk of misappropriation of customer assets, relevant
to compliance with the Net Capital Rule and the Reserve
Requirements Rule and the effectiveness of the brokerdealer's internal control over compliance (ICOC), or (c)
obtain a sufficient understanding of the nature and frequency of customer complaints that were relevant to compliance with the financial responsibility rules because the
firm's procedures did not provide an understanding of
all types of customer complaints received by the brokerdealer.
— In 18 of the examinations inspected, firms did not test, or
sufficiently test, important ICOC with the financial responsibility rules:

r

r
r

In 7 of the 18 examinations, firms did not obtain a
sufficient understanding of the nature and extent
of management's review, including understanding and evaluating the expectation and criteria
used by management to identify matters for investigation, and the nature and resolution of the
investigation procedures performed when testing
management's review controls.
In 6 of the 18 examinations, deficiencies were
found in the timing and extent of the firms' testing of ICOC during the year and as of year-end.
In 9 of the 18 examinations, firms did not test, or

sufficiently test, the accuracy and completeness
of information produced by either the brokerdealer or the broker-dealer's service organizations, upon which the design and operating effectiveness of ICOC depended.

©2018, Association of International Certified Professional Accountants

ARA-GEN .22


14

r
r

r

r

Audit Risk Alert

In 9 of the 18 examinations, firms did not test, or
sufficiently test, controls related to possession or
control.
In 12 of the 18 examinations, firms did not test, or
sufficiently test, controls over customer account
statements. Specifically, these firms did not test,
or sufficiently test, controls over all customers receiving account statements either electronically
or by mail or controls over the account statements, including complete and accurate information.
In 7 of the 18 examinations, firms did not test,
or sufficiently test, controls related to a brokerdealer's compliance with Rule 17a-13.

—

In 13 of the examinations inspected, deficiencies in the
firms' performance of compliance tests to support their
conclusions regarding whether the broker-dealer was
compliant with the Net Capital Rule or the Reserve Requirements Rule as of the end of its fiscal year were
noted.

—

In 3 of the examinations inspected, firms identified deficiencies in ICOC and did not evaluate, or sufficiently
evaluate, whether individually or in combination with
other deficiencies, there was a material weakness in
ICOC. For example, in one examination, the brokerdealer reported a material weakness in ICOC with its
possession or control requirements because it did not
maintain no lien acknowledgement letters for certain
funds. The firm failed to obtain sufficient audit evidence
to support that the reported material weakness was limited to those certain funds because the firm did not test
controls that addressed whether other locations met the
requirements of Rule 15c3-3(c) to be considered good control locations.

—

In 2 of the examinations inspected, the firm did not obtain
written representations from management of the brokerdealer.

Deficiencies Related to Review Procedures
The PCAOB identified 1 or more deficiencies in 28 of the 87 attestation engagements selected for inspection related to review
procedures. The following further describes the identified deficiencies:

ARA-GEN .22

—

In 2 of the reviews inspected, firms did not gain an understanding of the broker-dealer's exemption conditions
and other rules and regulations that were relevant to
the broker-dealer's exemption asserted in the exemption
report.

—

In 25 of the reviews inspected, firms' inquiries and other
review procedures were insufficient:

©2018, Association of International Certified Professional Accountants


General Accounting and Auditing Developments — 2018/19

r
r

r

15

In 19 of these reviews, firms did not perform
all required inquiries, including those that involve obtaining an understanding of management's controls and monitoring activities in place
to comply with the claimed exemption provisions.
In 5 of these reviews, firms did not evaluate, or

sufficiently evaluate, whether the evidence obtained and the results of the procedures performed in the audit of the financial statements
and the audit procedures performed on supplemental information corroborated or contradicted
the broker-dealer's assertions regarding compliance with the exemption provisions.
In 3 of these reviews, firms did not perform other
procedures necessary to assess whether a material modification was necessary for the brokerdealer's assertions to be fairly stated, in all material respects.

— In 5 of the reviews inspected, the auditor's evaluation of
the results of its review procedures was insufficient.
— In 1 of the reviews inspected, firms did not obtain written
representations from management of the broker-dealer
required by PCAOB Attestation Standard No. 2, Review
Engagements Regarding Exemption Reports of Brokers
and Dealers.
.23 Other deficiencies found related to examination engagements were as
follows:

r

Deficiencies Related to Examination Report
The PCAOB identified deficiencies in 2 of the 27 examinations selected for inspection. The following further describes the identified
deficiencies:
— In 1 of the examinations inspected, the firm's examination report inaccurately described the broker-dealer's
responsibility to send customer account statements as
being pursuant to Rule 17a-13.

r

— In 1 of the examinations inspected, the firm's examination report omitted the word independent from the report
title.
Deficiencies Related to Examination Documentation

The PCAOB identified deficiencies in 2 of the 27 examinations selected for inspection. The following further describes the identified
deficiencies:
— In these 2 examinations inspected, the firm did not complete an engagement completion document for the examination or include required documentation related to
the examination in an engagement completion document
prepared in connection with the corresponding audit.

©2018, Association of International Certified Professional Accountants

ARA-GEN .23


16

r

Audit Risk Alert

Deficiencies Related to Engagement Quality Review in an Examination Engagement
The PCAOB identified 1 or more deficiencies in 4 of the 20 examinations selected for inspection. The following further describes
the identified deficiencies:
—

In 4 of the examinations inspected, the engagement quality reviewer failed to identify that the engagement team
did not perform examination procedures necessary in the
circumstances of the examination engagement.

.24 Other deficiencies found related to review engagements were as
follows:

r

Deficiencies Related to the Review Report
The PCAOB identified 1 or more deficiencies in 11 of the 87 attestation engagements selected for inspection related to review
procedures. The following further describes the identified deficiencies:
—

r

In 13 of the reviews inspected, the auditor's review report
did not comply with the requirements of PCAOB Attestation Standard No. 2. For example, these review reports
either (a) inaccurately stated that the broker-dealer's exemption report asserted that it met the identified exemption provision without exception when the brokerdealer's exemption report contained no such statement,
(b) were dated prior to the date on which the firm had
completed the review procedures, (c) identified a different exemption(s) than the exemption(s) the broker-dealer
operated under and specified in its exemption report, or
(d) incorrectly made reference to the broker-dealer's assertions included within the FOCUS report, which was
not an exemption report.

Deficiencies Related to the Review Documentation
The PCAOB identified 1 or more deficiencies in 5 of the 87 attestation engagements selected for inspection related to review procedures. The following further describes the identified deficiencies:

r

—

In 3 of the reviews inspected, firms did not complete an
engagement completion document for the review or include required documentation related to the review in
an engagement completion document prepared in connection with the corresponding audit.

—

In 1 of the reviews inspected, the firm did not assemble a
complete and final set of audit documentation within 45
days after the report release date.

Deficiencies Related to Engagement Quality Review in a Review
Engagement
The PCAOB identified 1 or more deficiencies in 14 of the 54 attestation engagements selected for inspection related to review

ARA-GEN .24

©2018, Association of International Certified Professional Accountants


General Accounting and Auditing Developments — 2018/19

17

procedures. The following further describes the identified deficiencies:
— In 4 of the reviews inspected, firms did not have an engagement quality review performed for the review engagement.
— In 10 of the reviews inspected, the engagement quality reviewer did not perform a sufficient review. This includes
instances in which the engagement quality reviewer did
not review the engagement report, failed to detect 1 or
more errors in the engagement report, failed to identify
the absence of an engagement completion document, or
failed to review the engagement team's evaluation of the
firm's independence. Engagement quality reviewers also
did not sufficiently perform a review, including instances
in which the engagement quality reviewer failed to detect one or more errors in the engagement report or failed
to identify the absence of an engagement completion
document.

.25 The interim inspection program was designed to cover a cross-section
of audits of SEC-registered broker-dealers. The inspection program will continue until new rules for a permanent program are adopted and become effective. In accordance with the temporary rule regarding the interim inspection
program, a report containing results of the inspections performed must be issued annually. As directed by the rule, the report does not name audit firms
inspected, unlike the individual inspection reports of public company auditors.
However, during an inspection, deficiencies were discussed with the firm. Any
deficiencies that were considered to be significant were communicated to the
firm in writing.

Audit and Attestation Issues and Developments
The AICPA Enhancing Audit Quality Initiative
.26 The AICPA supports audit quality by attracting highly qualified individuals to enter the profession; developing a comprehensive examination for
licensure; establishing auditing standards for nonpublic entities; supporting
firms with educational guidance, tools, resources, and implementation materials; monitoring the quality of performance while requiring appropriate remedial action where needed; and establishing and enforcing the AICPA Code of
Professional Conduct (AICPA code).
.27 In light of the increasingly complex business environment, the AICPA
initiated a comprehensive effort in 2014 to consider auditing of private entities
through multiple touch points, particularly when quality issues have emerged.
The goal was to align the objectives of all AICPA audit-related efforts to enhance audit performance.
.28 In 2015, the AICPA issued Enhancing Audit Quality — A 6-Point
Plan to Improve Audits ( />state/downloadabledocuments/eaq-6-point-plan-to-improve-audits.pdf). This
six-point plan is a road map of current and future activities designed to
enhance audit quality profession-wide at every step by doing the following:
©2018, Association of International Certified Professional Accountants

ARA-GEN .28


18

r

r
r
r
r
r

Audit Risk Alert

Attracting the best and brightest to the profession and preparing
them for a career in auditing
Developing and maintaining a robust CPA exam that reflects the
realities of real-world practice and assesses the knowledge and
skills that newly licensed CPAs need
Developing, updating, and communicating comprehensive standards to support quality performance
Providing guidance and training to support competency
Evolving the Peer Review Program to more effectively monitor
practice, including detecting deficiencies and remediating firms,
when necessary
Conducting an enforcement program that is robust and meaningful when quality issues persist

.29 Following are some of the key accomplishments under each component
of the six-point plan.
.30 Point 1: Pre-licensure. Enhancing audit quality starts not when an
auditor accepts an engagement, but at the beginning of the auditor's career —
with relevant, forward-looking education and a Uniform CPA examination that
evaluates candidates based on the skills and competencies that auditors truly
need. As the audit continues to evolve, the AICPA is committed to preparing
the next generation of the profession for the services auditors will perform in
the future.
.31 Core content knowledge remains fundamental to the CPA profession,

but with changing market forces and technological advances, newly licensed
CPAs are performing more value-added services than ever before. These services require certain essential skills to be used in tandem with core knowledge
to be an effective CPA. The updated examination, released April 1, 2017, is significantly different from previous versions due to its greater focus on higherorder skills.
.32 To maintain the examination's alignment with professional practice,
the AICPA continually engages with firms, educators, state boards, and other
stakeholders, all critical resources when evaluating potential changes or enhancements.
.33 Point 2: Standards and Ethics. The most common quality issue encountered in enhanced oversights was inadequate or no audit documentation,
indicating auditing procedures were either not performed or were performed
but not documented in accordance with standards.
.34 The AICPA Auditing Standards Board (ASB) representatives evaluated whether the Audit Documentation standard was clear and concluded
that although the standard's requirements were clear, a few common misconceptions were inhibiting compliance. In response, the AICPA developed
an awareness campaign that includes a free documentation toolkit found at
aicpa.org/documentation. The toolkit contains resources for auditors such as
the following:

r
r
r

ARA-GEN .29

Sample working papers
A tool for SOC 1® consideration
A dual-purpose testing practice aid
©2018, Association of International Certified Professional Accountants


r
r
r

General Accounting and Auditing Developments — 2018/19

19

An internal inspection aid
A PowerPoint presentation that firms can present to their staff
A nano-learning segment

.35 Point 3: CPA Learning and Support. Understanding how new and
emerging technologies can be used throughout the audit process is an important step in advancing the profession and enhancing audit quality. In 2017, the
AICPA released the Guide to Audit Data Analytics, which discusses the issue
at a foundational level while also describing how these techniques can be integrated into the audit process to improve effectiveness and bring additional
insights. The AICPA will launch learning resources associated with the guide
and plans to release advanced guidance in 2018.
.36 Point 4: Peer Review. The AICPA has instituted reforms directed at
enhancing the accountability of enrolled firms and their peer reviewers.
.37 Throughout 2017, the Peer Review Board (PRB) continued to implement a variety of reforms that require reviewers to meet additional, more stringent qualifications. The PRB reforms also expedited the process for remediating
and removing poor performers. This has led to better reviewer performance,
improved detection of non-conformity with professional standards, and firms
obtaining appropriate remediation, all of which the AICPA believes will ultimately result in improved audit quality.
.38 Although these reforms were necessary, the PRB recognizes that balance is key. To support peer reviewers throughout these changes and encourage
feedback, in ongoing efforts to "get it right," the AICPA conducted a member
"listening tour" in 23 states, ran a peer review staff training on leading change
in the program, conducted a "Peer Reviewer Q&A" webcast, held a focus group
at the Peer Review Conference, and undertook personal outreach to the highest
volume.
.39 Point 5: Practice Monitoring of the Future. Response to the purposely
provocative concept paper on transforming peer review into a near real-time
practice monitoring process was robust, with more than 70 responses received

before the end of the comment period. Responses indicated recognition that
peer review needs to evolve while expressing concern about what that evolution
may entail. Those responses, together with the pilot of a self-monitoring tool for
firms' internal use, will help form the next steps for the initiative.
.40 Point 6: Enforcement. State boards of accountancy have important
roles in facilitating audit quality. To promote high professional standards of
practice, the Peer Review Program attempts to remediate firms when deficiencies are identified. In cases of non-cooperation or when remediation is inadequate, enrollment in the program may be terminated, in which case, the applicable state board of accountancy is notified.
.41 Independent of peer review, the Professional Ethics Division and participating state CPA societies attempt to remediate members when deficiencies
are identified. When violations are egregious, the AICPA takes additional action, such as admonishment, suspension, or expulsion, in which case, the applicable state board of accountancy is notified.
.42 The AICPA relies on state boards to take appropriate action with respect to firm and individual licenses. Actions that state boards take are essential to resolving these egregious issues and continuing to support audit quality.
©2018, Association of International Certified Professional Accountants

ARA-GEN .42


20

Audit Risk Alert

.43 You can find more information and additional resources at www.aicpa
.org/interestareas/peerreview/pages/eaq.aspx.

Compliance With the Risk Assessment Standards
.44 Analysis of recent peer review data suggests that more than 1 in 10
firms are not properly assessing risk or linking their assessments to their audit
procedures. Firms should be aware of the following areas of common noncompliance with the Risk Assessment standards (AU-C section 315 and AU-C section
330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained).

Failure to Gain an Understanding of Internal Control When Identifying
Client’s Risks

.45 Auditors are expected to perform the following steps when gaining an
understanding of internal control. An audit omitting one or more of these steps
results in noncompliance:

r
r
r

Consider what could go wrong as the client prepares its financial
statements
Identify the controls intended to mitigate those financial reporting
risks
Evaluate the likelihood that the controls are capable of effectively
preventing, or detecting and correcting, material misstatements

.46 Some auditors may indicate that the requirements of paragraph .14
of AU-C section 315 do not apply to their client because their client has no
controls. This is a false.
.47 Auditors may default to control risk at the maximum level without
gaining an understanding of the client's internal control. This is not permitted
under the current Risk Assessment standards even when not intending to rely
on tests of controls.
.48 Auditors may not reduce control risk to less than high without appropriately testing relevant controls.

Insufficient Risk Assessment
.49 Regardless of the nature and extent of substantive procedures, performing the audit in accordance with GAAS includes the following steps for
each engagement. Omitting one or more of these steps results in noncompliance:

r
r

r

Identify the client's risks of material misstatement (RMM) by
gaining an understanding of the client and its internal control
(Identify RMM)
Assess the risks (Assess RMM)
Design or select procedures that respond to those risks (Respond
to RMM)

.50 Failure to identify at least one significant risk almost always represents a failure to comply with paragraph .28 of AU-C section 315.
.51 Failure to assess risk of material misstatement at both the financial
statement and relevant assertion level for significant classes of transactions,

ARA-GEN .43

©2018, Association of International Certified Professional Accountants