backOn September 9, 2024, the PCAOB Division of Registration and Inspections Staff issued a Spotlight entitled “Bank Financial Reporting Audits,” describing the PCAOB’s inspection response to the banking events in early 2023 and providing observations along with a description of good practices from the Staff’s enhanced inspection activities.
With respect to the PCAOB’s inspection response, during 2023, the Staff revised its inspection plan in response to the vulnerabilities in the banking sector by incorporating additional procedures into the inspection strategy. First, the Staff implemented a new approach to gathering information to inform inspection planning activities by sending a questionnaire to survey 40 U.S. firms that audit at least one bank asking about their audit response to the banking events. The survey included various topics, including, among others, risk assessment and fraud, ICFR, HTM Investments, AFS transfers, FHLB advances, going concern, use of specialists, critical audit matters, adjustments, and subsequent events. In response to the survey, firms reported newly issued guidance and/or implementation of formal consultation requirements because of the banking events, and a few of the firms reported making changes to their QC systems, such as modifications to their policies and procedures related to client acceptance and continuance. Second, after reviewing the responses, the Staff adjusted the inspection plan to have a target team perform procedures on interim reviews of bank financial statements and selected additional bank audits for year-end inspection to ensure emerging banking and economic trends, and banking issues or common deficiencies, were appropriately considered.
With respect to the results of the PCAOB’s enhanced inspection of interim reviews, the Staff observed, among other things, increased communication with bank management and those charged with governance, informal consultations with a firm’s professional practice or banking industry groups on various matters, additional risk assessment procedures to identify and evaluate whether risks that led to the banking events were present at the audited bank, and that engagement teams did not make significant changes to the nature, timing, or extent of planned interim 2023 ICFR and substantive audit procedures. The staff also observed that some engagement teams did not obtain evidence that the interim financial information reported in Form 10-Q agrees or reconciles with the accounting records.
Finally, with respect to the PCAOB’s enhanced inspection of year-end 2023 bank audits, the Staff noted several areas where they observed deficiencies and then provided the Staff’s observations on good practices. The Staff provided examples of observed deficiencies related to investment securities, allowance for credit losses, deposit liabilities, and loans and related accounts. The common deficiencies observed by the staff in these audit areas included, among others, inadequate risk assessment, inadequate sampling, and not evaluating the accuracy and completeness of the underlying data used in a control or substantive test. The Staff also provided examples of good practices that they observed for each of the audit areas where they observed deficiencies. With respect to allowance for credit losses, the Staff provided several good practices concerning risk assessment, problem loan identification, and models and assumptions. The staff said that observed good practices for allowance for credit losses are equally applicable to audits of a bank’s investment securities.
A copy of the PCAOB Spotlight can be found here.