PCAOB Issues Staff Audit Alert on Auditing Revenue Because Auditors Suck at Auditing Revenue

The PCAOB would like to see auditors get better at a lot of things; showing their work, testing controls, auditing in general. In particular, they would like to see auditors get better at auditing revenue because revenue is so dang important to the big picture here, people.

"Revenue is one of the largest accounts in the financial statements and an important driver of a company's operating results," said PCAOB Chairman James R. Doty. "Given the significant risks involved when auditing revenue, auditors should take note of the matters discussed in this practice alert in planning and performing audit procedures over revenue."

Why does the PCAOB need to send out a practice alert on auditing revenue like they just did today? Because auditors aren't very good at it, per the release:

The Public Company Accounting Oversight Board today issued a Staff Audit Practice Alert to highlight for auditors the requirements for auditing revenue under PCAOB standards, in light of significant audit deficiencies in this area that have been frequently observed during PCAOB inspections.

PCAOB inspection reports have consistently identified revenue as one of the most common areas for audit deficiencies.

According to the PCAOB, it may be time for everyone to have a nice sit down and make sure they are satisfying the requirements of their regulatory overlords while wading through the audit jungle:

Auditors should take note of the matters discussed in this practice alert in planning and performing audit procedures over revenue. Audit firms should also revisit their audit methodologies, and their implementation of those methodologies, to assure that PCAOB auditing standards are followed in the area of auditing revenue. In addition, audit firms should consider whether additional training of their auditing personnel or other steps are needed to assure that PCAOB standards are followed. Because of the nature and importance of the matters covered in this practice alert, it is particularly important for the engagement partner and senior engagement team members to take action to ensure that engagement teams appropriately implement the auditing standards in these areas throughout the audit and for engagement quality reviewers to focus on these matters when conducting their engagement quality reviews.

Due to the significance of revenue to many companies' financial and operating results, auditing revenue also raises matters of potential interest to audit committees. Audit committees might wish to discuss with their auditors their approach to auditing revenue, including the matters addressed in this alert.

TL;DR: all of you suck at this.

The PCAOB says its inspection team has found auditors doing a half-assed job in the following areas:

  • The failure to perform sufficient procedures to test whether revenue was recognized in conformity with the applicable financial reporting framework, including whether revenue was recognized in the correct period
  • The failure to evaluate, or evaluate sufficiently, whether revenue was appropriately disclosed in the financial statements
  • The failure to address fraud risks regarding revenue
  • Unsupported reliance on controls over revenue because either controls were not tested sufficiently or identified control deficiencies were not evaluated sufficiently
  • Unsupported reliance on company-generated data and reports used to audit revenue because the data and reports were not tested or not tested sufficiently
  • In sufficient testing of revenue transactions, including failure to appropriately apply audit sampling
  • The failure to perform sufficient substantive analytical procedures
  • The failure to sufficiently test revenue in companies with multiple locations or business units

So, basically everything. You're bad at everything and you should feel bad.

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