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Homework # 2 – PCAOB Reports

Group # 4
Group members Ashley, Michelle, Trang

This homework assignment is best completed when each team member completes each part of
the assignment…. and then the team reviews, discusses, and revises their responses to compile
the optimum submission. In the past, when teams decided to divide the assignment into pieces,
the submissions appeared to be disjointed, and the grade reflected this lack of cohesion.

Make sure you thoroughly answer the questions in Part I, Part II, and Part III.

Part I
Review the attached summary entitled “Guide to PCAOB Inspections”.
Thoroughly answer the following questions about this summary.

How often does the PCAOB inspect audit firms of various sizes?

In general, PCAOB inspect each registered firm either annually (if the firm provide audit reports
for more than 100 issuers) or once every three years (if the firm provide audit report less than
100 issuers). The PCAOB also can inspect a registered firm that does not issue audit reports, but
that plays a substantial role in public company audits by performing work used by another firm
in an audit.

Describe the inspection process, including how the PCAOB chooses what to inspect and
how deficiencies are handled. Comment on the PCAOB’s review of the audit firm’s quality
controls including what type quality control issues concern the PCAOB.

PCAOB inspection staffs’ plan’s each year inspection by selecting firms, and the staffs will
notify the accounting firm when it plans to conduct the investigation. They’re also requests
information about the firm’s public company engagements, the personnel performing those
audits, and the firm’s quality control program. PCAOB inspections are designed to identify and
address weaknesses and deficiencies related to how a firm conducts audits. To achieve that goal,
Board inspections including reviews of certain aspects of selected audits performed by the firm.
It is not the purpose of an inspection, however, to review all a firm's audits or to identify every
respect in which a reviewed audit is deficient. As described in more detail in the appendix, audit
work is selected for inspection largely based on an analysis of factors that, in the PCAOB
inspection staff's view, heighten the possibility that auditing deficiencies are present, rather than
through a process intended to identify a representative sample of the audit firm's work.
Board inspection reports address quality control and the firm's management structure and
processes, including the tone on the top, review partner management, reviews engagement
acceptance and retention, reviews the use of audit work performed by foreign affiliates, and
reviews the firm’s processes for monitoring audit performance.

Describe what is included in Part I of the PCAOB inspection reports.

Part I of the inspection report are the public portion. Part I of the PCAOB inspection report
describes audit deficiencies where the audit staff failed to gather sufficient audit evidence to
support an audit opinion. This may relate to the opinion that the financial statements are fairly
stated or the opinion that the company's internal control is effective. However, deficiencies in
Part I doesn’t mean that the financial statements were misstated. If there are no significant audit
deficiencies were found, Part I so states that because “inspection reports are not intended as
balanced report cards or overall rating tools.” Also, include in part I, it states that all inspection
reports state that descriptions of financial statement misstatements or failures to comply with
SEC disclosure requirements (including GAAP) should not be understood to indicate that the
SEC has considered the issue. Finally, the public portion of an inspection report includes any
written response from the inspected firm to the draft inspection report.

Describe what is included in Part II of the PCAOB inspection reports.

Part II typically describes deficiencies in the firm's overall system of quality control such that the
Board has doubts that the system provides reasonable assurance that professional standards are
met. Part II is not made public unless the firm fails to remediate these findings to the Board's
satisfaction within twelve months of issuance of the inspection report. The audit firms
themselves have copies of this part of the report and are not prohibited by law from releasing this
information at any time, though there may be other reasons they decline to do so. Part II also
may include additional detail about Part I audit deficiencies.

What are “Quality Control Criticisms”. What is “remediation” of the QC criticisms and
what are the implications of failing to remediate?

Quality control criticisms are based on inspectors' observations of deficiencies in the

performance of audit procedures. A firm's system of quality control should provide reasonable
assurance that the firm's audit work will meet professional standards. The types of “remediation
steps” depend on the type of issue they have. In considering how a firm's system measures up to
that standard, PCAOB inspections considered not only deficiencies described in the public
portion of the report, but also other auditing deficiencies that do not cross the same significance
threshold as the publicly reported deficiencies. Some deficiencies may indicate a potentially
significant defect in a firm's quality control system even if the deficiency has not resulted in an
insufficiently supported audit opinion. A firm has 12 months to “remediate” criticism described
in Part II inspection report. Failure to do so results in public disclosure of Part II.
Part II

Locate the PCAOB firm inspection reports using Google.

Choose an inspection report for a firm that failed to address the quality control defects to the
PCAOB’s satisfaction. Such firms have “QC criticisms now public” in the far right column.
Make sure that you choose a firm that is interesting… that the firm’s inspection report provides
interesting answers to the questions below. You might have to review several reports to find the
best one for this assignment. Provide thorough answers to the following.

What firm did you choose?

Ernst & Young, S.A.S.

Paste a link to the inspection report for the firm below:

Describe the size and location of the firm you selected:

Offices 4 (Barranquilla, Bogota, Cali, and Medellin, Republic of Colombia)

Ownership structure Simplified joint stock company
Partners / professional staff 17 / 550
Issuer audit clients 1
Other issuer audits in which the Firm plays a role 14
Lead partners on issuer audit work 8

Summarize the areas for which the PCAOB criticized this firm (What did the firm do

Ernst & Young audit deficiencies include a firm's failure to identify financial misstatements,
including failures to comply with disclosure requirements, as well as a firm's failure to perform
sufficiently certain necessary audit procedures. Board inspection report should not be understood
to provide any assurance that a firm's audit work is free of any deficiencies not specifically
described in an inspection report. In reaching for an appropriate conclusion, the inspection team
has carefully considered any contention by the firm that it did so but just did not document its
work, and the inspection team has concluded that the available evidence does not support the
contention that the firm sufficiently performed the necessary work.
For instance, I chose KR Margetson. Their link can be found at:
Part III:
Look at another inspection report. This time choose a firm that did not have any uncorrected QC
defects. Make sure that you choose a firm that is interesting… that the firm’s inspection report
provides interesting answers to the questions below. You might have to review several reports to
find the best one for this assignment. Provide thorough answers to the following.

What firm did you choose?

Ernst & Young, LLP

Paste a link to the inspection report for the firm below:

What is interesting about this report? Summarize what happened in the inspection.

The interesting thing about this report is how the inspection team identified the issues that would
be deficiencies in the performance of the work it reviewed. Certain of the deficiencies identified
were appeared to the inspection team at the time the firm issued their audit report. The firm had
not obtained sufficient appropriate audit evidence to support its opinion that the financial
statements were presented fairly in accordance with the applicable financial reporting framework
about whether the issuer had maintained effective internal control over financial reporting or
“IRFC.” In other words, the auditor issued an opinion without satisfying its fundamental
obligation to obtain reasonable assurance about whether the financial statements were free of
material misstatement and/or the issuer maintained effective ICFR. Out of the 16 issuer audits
that appear in Part I.A, 14 were found deficiencies of audits work relate to testing controls for
purposes of the ICFR opinion, and deficiencies in 14 audits relate to the substantive testing
performed for purposes of the opinion

Tell me what you learned about PCAOB inspections from this exercise.

I learned that PCAOB very strict, organized over the inspection report. They’re established set of
standards for all the registered firms to follow. Even though if those standards are not follow,
they’re giving the firms certain time to responding to the Board and correct the issued.
Indicate what the contribution of each group member was in the assignment. Explain how you
accomplished the task and what each group member did in completing the task. Note any
members who did not make a meaningful contribution to the assignment.