In July, the Public Company Accounting Oversight Board (PCAOB) published a report highlighting opportunities for improvement when it comes to audits for public companies.
As private companies experience challenges similar to those of public companies when reporting their financial outcomes, this report may also be useful for internal accounting personnel and external auditors in pinpointing high-risk reporting areas that require extra scrutiny.
Previous data
The PCAOB examined sections of public companies’ financial statement audits and published those findings in the recent PCAOB Spotlight report, Staff Update and Preview of 2022 Inspection Observations. Several of the discrepancies for 2022 stem from intrinsically complex areas with higher risks of material misstatement.
The seven most noteworthy statement deficiency areas were:
- Revenue and related accounts
- Inventory
- Information technology
- Business combinations
- Long-lived assets
- Goodwill and intangible assets
- Allowances for loan and lease losses
Auditors should take advantage of this information to outline and perform more effective audits.
Meanwhile, in-house accounting personnel and managers can leverage these findings to increase the accuracy of financial reporting, reduce the necessity of audit adjustments, and streamline engagement with external auditors.
Concerns over crypto transactions
Cryptocurrency transactions stand out as an area of particular concern in the PCAOB report.
These transactions may involve:
- Investing in cryptocurrency
- Selling or purchasing cryptocurrency in exchange for U.S. dollars
- Mining crypto in exchange for a “reward” or other payment
- Trading cryptocurrency assets
- Selling goods or services for cryptocurrency
- Purchasing services and goods with cryptocurrency
Material digital asset holdings and engaging in significant activity related to digital assets create unique audit risks for companies, as demonstrated by the collapse of FTX.
These risks may be attributed to a lack of transparency regarding the parties engaging in the transactions, as well as the purpose of them. High levels of volatility, fraud, theft, market manipulation, and legal uncertainties also play a role.
To mitigate these risks as much as possible, the PCAOB encourages using specialists and technology-based auditing tools in certain scenarios.
Key takeaways
Both private and public companies are encouraged to take proactive measures to keep financial reports transparent and accurate, such as:
- Ramping up internal audit procedures in the high-risk areas identified by the report
- Increasing management review and staff supervision
- Providing accounting personnel with additional training
Companies should anticipate that external auditors will want to hone in on these areas and prepare for this by providing extra documentation to back up account balances, reporting procedures, and accounting estimates for high-risk items.
Have Questions? Smolin can help.
If you need help navigating high-risk audit items or determining how the PCAOB findings may affect your company’s audit process, we’re here for you. Contact the team at Smolin to learn more.
