Effective Date | This standard currently is effective. |
Applicability | All audit planning. |
Public Company Accounting Oversight Board (PCAOB) Auditing Standard 14 sets the objective of evaluating the results of the audit to determine whether the evidence obtained is sufficient and appropriate to support the opinion to be expressed in the auditor’s report.
When forming an opinion about whether financial statements are presented fairly in all material respects, the auditor should consider all relevant audit evidence, whether or not it appears to corroborate or contradict the assertions in the financial statements. This evaluation should include:
The auditor should read the financial statements and disclosures as part of an overall review and perform analytical procedures to evaluate his or her conclusions regarding significant accounts and disclosures, as well as to assist in forming an opinion on whether the financial statements are free of material misstatement. As part of this overall review, the auditor should evaluate the following:
The nature and extent of these analytical procedures performed during the overall review may be comparable to those procedures performed as risk assessment procedures.
The auditor should perform analytical procedures related to revenue through the end of the reporting period.
The auditor should obtain corroboration of any management explanations about significant unusual or unexpected items; if management responses appear either implausible, inconsistent with other audit evidence, imprecise, or not at a level of detail to be useful, the auditor should initiate procedures to address the issue.
The auditor should accumulate misstatements identified during the audit, other than trivial items. The auditor can designate an amount below which misstatements are clearly trivial and so do not need to be accumulated. This amount should be set so that any misstatements below it would not be material to the financial statements, either individually or in combination with other misstatements.
This accumulation of misstatements should include a best estimate of the total misstatement in the accounts and disclosures that the auditor has tested, not just the amount of misstatements that have been specifically identified.
If the auditor concludes that the amount of an accounting estimate included in the financial statements is either unreasonable or not determined to be in conformity with the relevant requirements of an applicable financial framework, he or she should treat the difference between that estimate and a reasonable estimate as a misstatement.
The auditor should determine whether the overall audit strategy and audit plan should be modified under either of these circumstances:
The auditor should communicate the amount of accumulated misstatements to management to provide them with an opportunity to correct the misstatements. If management has examined a misstatement and has made corrections, the auditor should evaluate management’s work to determine whether the corrections were recorded properly.
The auditor should ascertain whether uncorrected misstatements are material. In making this evaluation, he or she should evaluate the misstatements in relation to the specific accounts and disclosures involved and to the financial statements as a whole, considering both qualitative and quantitative factors.
The auditor’s evaluation of uncorrected misstatements should include an evaluation of the effects of uncorrected misstatements detected in prior years, as well as misstatements detected in the current year that relate to prior years.
The auditor cannot assume that a case of error or fraud is an isolated event. Thus, he or she should evaluate the nature and effects of the individual misstatements that accumulated during the audit on the assessed risks of material misstatement. This evaluation is useful for determining whether risk assessments remain appropriate.
The auditor should evaluate whether identified misstatements are indicative of fraud, and how they affect his or her evaluation of materiality and related audit responses. If the auditor believes that a misstatement might be intentional, and the effect on the statements could be material (or cannot be determined), then the auditor should perform procedures to obtain additional audit evidence regarding whether fraud has occurred or is likely to have occurred, as well as the impact on the financial statements and the auditor’s report.
When the auditor believes that a misstatement may be intentional, he or she should evaluate the implications on the integrity of management or employees, and the possible impact on other aspects of the audit. If the misstatement involved senior management, it may indicate a more pervasive problem, even if the amount of the misstatement is small. In this case, the auditor should reevaluate the assessment of fraud risk, as well as the effect of that assessment on the nature, timing, and extent of tests, as well as the assessment of the effectiveness of controls. The auditor should evaluate whether the situation indicates possible collusion involving employees, management, or external parties, and the effect of the collusion on the reliability of audit evidence obtained.
If the auditor becomes aware of an indication of fraud or another illegal act, the auditor should determine his or her responsibilities under AU Sections 316.79 to 316.82A, AU Section 317, and Section 10A of the Securities Exchange Act.
When reviewing whether a company’s financial statements are free of material misstatement, the auditor should evaluate the qualitative aspects of the company’s accounting practices, including any potential bias in management’s judgments about the amounts and disclosures in the financial statements. The following are examples of management bias:
If the auditor identifies that there is bias in management’s judgments concerning the amounts and disclosures in the financial statements, he or she should evaluate whether the effect of that bias, when combined with the effect of uncorrected misstatements, could result in the material misstatement of the financial statements. This evaluation should also include whether the auditor’s risk assessments (and especially the assessment of fraud risks) and the related audit responses are still appropriate.
The auditor should determine whether the difference between the estimates supported by audit evidence and those included in the financial statements indicate a possible bias by company management. If each of these estimates was individually reasonable, but the total effect in comparison to the estimates supported by audit evidence has the effect of altering the reported amount of profits, then the auditor should evaluate whether the circumstances indicate a potential bias by management in the estimates.
Bias can also arise from the cumulative effect of changes in multiple accounting estimates; if these estimates are grouped at one end of a range of reasonable estimates in the prior year and are grouped at the opposite end of the range in the current year, there should be an evaluation of whether management is using estimate alterations to achieve a desired outcome.
When the auditor evaluates the results of the audit, he or she should evaluate whether the accumulated results of the auditing procedures and other observations affect the assessment of fraud risks made throughout the term of the audit, and whether procedures should be modified to respond to those risks. As part of this evaluation, the engagement partner should ascertain whether there has been appropriate communication with the team members throughout the audit concerning information about fraud risks.
The auditor must determine whether the financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework. As part of this determination, the auditor should evaluate whether the financial statements contain the information that is essential for a fair presentation of the financial statements in conformity with the applicable financial reporting framework. This evaluation includes consideration of the form, arrangement, and content of the financial statements, including terminology, the amount of detail included, the classification of items, and the stated bases of amounts. If this is not the case, the auditor should express a qualified or adverse opinion.
As part of the process of evaluating the results of an audit, the auditor must determine whether sufficient appropriate audit evidence was obtained to support his or her opinion on the financial statements. Factors relevant to this conclusion include:
The auditor should perform additional procedures to obtain further audit evidence if he or she has not obtained sufficient appropriate audit evidence about an assertion or has substantial doubt about an assertion. If the auditor is unable to do so, then the auditor should express a qualified opinion or a disclaimer of opinion.
As part of this evaluation, the auditor should consider whether the assessments of the risks of material misstatement at the assertion level remain appropriate, and whether the audit procedures need to be modified or additional procedures performed due to any changes in the risk assessments.
The auditor should form an opinion regarding the effectiveness of internal control over financial reporting by evaluating evidence obtained from all sources, including the auditor’s controls tests, misstatements found during the financial statement audit, and any control deficiencies found.
1 Practitioners should reference the additional guidance listed in the section “Other PCAOB Guidance” in this volume’s chapter PCAOB 1.
3.15.2.78