PCAOB annual report on the interim inspection program related to audits of brokers and dealers

The PCAOB conducted inspections of 67 firms during 2018 and published the “Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers in August 2019” (PCAOB Release No. 2019-002) to summarize the inspection results. The objective of the inspections was to assess the firms’ compliance with applicable laws, rules, and professional standards when performing audit and attestation engagements for broker-dealers. The report describes deficiencies identified and includes the PCAOB’s insights into the standards, as summarized below. The following is a summary of those items that were considered the most impactful.

System of Quality Control Observations – Engagement Performance

• Audit methodology: Firms’ audit methodology either did not require appropriate consideration of all relevant factors resulting in high materiality levels or did not require evaluation of whether a lower materiality level was appropriate for certain accounts. Further, firms’ audit methodology allowed the determination of sample sizes for substantive tests of details that did not take into consideration the allowable risk of incorrect acceptance and tolerable misstatement resulting in insufficient sample sizes.
• Engagement quality review (AS 1220): Evaluation of the engagement team’s significant judgments and related conclusions reached were not included in the reviews. Reviews were either not performed or reviewers had served as engagement partner for the financial statement audit for one or more of the previous two years, therefore not meeting objectivity qualifications required of an engagement quality reviewer.
• Auditor’s Report (AS 3101): Auditor’s reports were not prepared under applicable auditing standards and did not accurately describe the financial reporting framework under which the financial statements were prepared.
• Audit Documentation (AS 1215): A complete and final set of audit documentation was not assembled for retention as of the documentation completion date. Documentation added to audit work papers subsequent to the report release date did not indicate the reason for adding documentation, name of the person who prepared the additional documentation, and the date of the addition.