PCAOB reinforces auditors' fraud responsibilities

Internal Auditor, April, 2007 by J. Whitley

A RECENT U.S. PUBLIC COMPANY Accounting Oversight Board (PCAOB) report recommends that external auditors improve their fraud assessment techniques. Observations on Auditors' Implementation of PCAOB Standards Relating to Auditors' Responsibilities With Respect to Fraud draws on recurring observations made during the PCAOB's inspection of audit work performed by registered public accounting firms. In a statement, PCAOB Chairman Mark Olson said, "Careful attention to [PCAOB requirements] is important to best position auditors to detect material misstatements caused by fraud."

In the report, the PCAOB's inspection teams indicated that some auditors appeared to mechanically check off items on standard audit programs and checklists without including additional documentation as evidence of the actual performance of procedures outlined in those programs and checklists. Inspectors found that auditors' planning did not always include brainstorming sessions to consider how the issuer's financial statements might be susceptible to material misstatement due to fraud.

Auditors also did not brainstorm about ways that management could perpetrate and conceal fraudulent financial reporting. Also, inspectors reported that auditors provided insufficient documentation that they had made required inquiries of the audit committee, management, or others about their knowledge of fraud and fraud risks. In addition, some auditors did not fulfill their responsibility to investigate whether identified departures from U.S. Generally Accepted Accounting Principles were indicative of fraud.

The PCAOB's fraud report is available from its Web site, www.pcaob.org.