If you are an auditor and that is a diagram of new audit rules, then you need to completely understand the graph. Image courtesy of Adobe Stock.
Here are some fun or interesting or useful tidbits from the October 2018 A&A and the June 2019 Not-for-profit conferences presented by California Society of CPAs.
Here are some fun or interesting or useful tidbits from the October 2018 A&A and the June 2019 Not-for-profit conferences presented by California Society of CPAs.
One speaker said there are several common issues for weaknesses in risk assessment:
Limited assessment
No linkage (relating the assessment of risks to further audit procedures)
Poor use of third-party practice tools
No assessment of IT risks
Not doing any risk assessment is now a major problem for you in a peer review if you missed the boat on the risk suite of standards.
For Yellow Book audit, the workpapers must document SKE (skills, knowledge, experience) of staff overseeing non-attest services. Although the professional standards do not exactly require documentation of SKE for non-attest service on a non-yellow book audit, the speaker said (if I heard correctly) that the California Peer Review Committee has a considered opinion that such documentation is required.
So, if you have non-attest services on a non-yellow book audit, …
To get ready for a writing project this summer, I’ve been going over my notes from some CPE conferences and classes.
Thought I’d share some of the fun or interesting or useful tidbits from the October 2018 A&A and the June 2019 Not-for-profit conferences presented by California Society of CPAs.
For more discussion on the dual fiascos of the now-former-senior KPMG partners getting the PCAOB inspection list and altering workpapers along with cheating on continuing education classes, check out these two articles:
Article provides a good summary of the settlement.
Try this on for a word picture, which I’m expanding from Francine’s description in the article:
Getting a $50M fine from stealing the inspection list (and then altering workpapers) is the powerful right punch that everyone was expecting. The test cheating part is a staggering left hook that nobody saw coming.
The Update #88 newsletter from California Board of Accountancy for Winter 2019 lists 22 disciplinary actions, by my count. These are the actions taken with effective dates through the end of 2018.
Here is a tally of license revocations, surrendered licenses, and revocations with stay categorized by the underlying issue as I aggregate them:
Oh, remember that post about the SEC considering a $50M fine against KPMG? Initial report suggested it was for gaining access to the list of engagements which were going to be inspected by PCAOB.
It is much worse.
The firm is fined for altering workpapers based on the inspection list. In addition, there was a lot of cheating on the tests for CPE courses, including a class required by the SEC.
The SEC says KPMG has agreed to settle and pay $50M.
If you want to read the gory details for yourself, you can do so:
By the time you finish reading this post or other reports on the SEC’s action, you may be wondering whether there needs to be an assertion the source of information for this post was neither The Onion nor Babylon Bee.
Reports of setting your own passing score for an ethics test could make you wonder if it is very early April. “Cooperate and graduate” exchanges of test answers with the engagement partner and your audit team makes one wonder whether we have entered some sort of alternate reality.
You may want to glance at the linked documents and verify for yourself they are for real.
I assure you the above documents are from the SEC.gov website.
SEC action
In part II of the administrative action/cease & desist order, KPMG admits the facts described in part III.
Here are some highlights of part III.
First cause of action
The first cause of action by the SEC is the firm obtained the list of engagements which were going to be inspected by PCAOB and then altered workpapers which had not yet hit the lock-down date.
It will take a bigger stack of currency than shown above if the SEC follows through with what they are considering. Image courtesy of Adobe Stock.
The Wall Street Journal reported on June 13, 2019 that the SEC is considering a fine of $50,000,000 against the Big 4 firm KPMG for it gaining access to the highly confidential list of audits scheduled for inspection by PCAOB.
Back in March a jury returned convictions for two of the players in the effort to get a list of the audits which were scheduled to be inspected by PCAOB.
(Yeah, yeah, conviction was in March and I’m mentioning it now in June. I’m just a tad bit late to the story but still want to discuss it.)
A senior level former-partner, David Middendorf, was found guilty on 4 of 5 counts. He was the National Managing Partner for Audit Quality and Professional Practice Group, in the firm’s Department of Professional Practice. That means he was the top technician in the national office of top technicians.
What is the fair value of donated medicine restricted for use outside the U.S.? Image courtesy of Adobe Stock.
The California Assembly has passed and sent to the Senate a bill which would require specific accounting for charities who receive gifts-in-kind which are restricted by the donor for distribution outside the U.S.
For that very specific type of GIK, the bill would require the donation to be recorded at the fair value in the country where the items will be used.
This will particularly affect donated pharmaceuticals, which often have a severely different value in the U.S. compared to values internationally.
The Auditing Standards Board has issued exposure drafts to subtly change the definition of materiality in the SAS and SSAE literature. Both exposure drafts are titled Amendments to the description of the concept of materility and can be found here.
The exposure draft gives a four page history of how the definition of materiality has evolved over the last several decades.
What the proposed changes would do is shift the definition of materiality in the audit and attestsation literate to match what is used by the US courts, PCAOB, SEC, and FASB. Currently the definition is aligned with IASB and IAASB.
I will quote portions of one paragraph in the exposure draft and make some comments.
The California AG negotiated a settlement with a charity for their alleged overvaluation of medical GIK. I say alleged because the charity, three present or former board members, the charity’s insurance company, and the external auditor all deny in the settlement they did anything wrong.
The alleged scheme, according to the AG, was the charity used two other charities, which it formed, to buy medicine in the Netherlands and then donate it back to the ‘parent’, which then recognized GIK at US prices.
The AG asserts that over the course of 25 or more transactions, the purchase of about $225,000 of medicine by the two controlled charities generated gift-in-kind revenue of about $34,900,000 in the sanctioned charity.
Of note for readers of this blog is that the CPA providing an external audit was sanctioned as part of the negotiated settlement. She audited the charity and signed its 990s. She also audited one of the controlled charities and signed their 990s.
SAS 135 is only 36 pages long, but SAS 134 at 261 pages in length is a bruiser.
Essentially, 134 will replace the audit literature that discusses the auditor’s report (AU-C 700), modification of the audit report (AU-C 705), and emphasis-of-matter sections (AU-C 706). Wording and format of audit reports and entire range of modifications will all be changing.
Effective date is years ending on or after December 15, 2020. That means these will first apply for 12/31/20 audits performed in late winter/spring of 2021.
Seems like a long time in the future, but might be worth setting some time aside to start sorting through the changes.
One former partner at KPMG and a former PCAOB staffer get their day in court today, February 11, 2019. Actually, it will be about four weeks in court, according to Michael Rapoport of the Wall Street Journal: KPMG Ex-Partner Goes on Trial in ‘Steal the Exam’ Scandal.
David Middendorf was a KPMG partner until April 2017. He was National Managing Partner for Audit Quality and Professional Practice Group, in the Department of Professional Practice (DPP). He reported to the Vice Chair of Audit.
Jeffrey Wada was a PCAOB Inspections Leader from February 2012 through February 2017.
Both are in court today defending themselves against charges they received and leaked, respectively, the list of KPMG audits which were scheduled for inspection by PCAOB.
….what might need improving at KPMG based on PCAOB reports. Image courtesy of Adobe Stock
The PCAOB released results of the inspections during the 2017 cycle. The results are not pretty. In addition, PCAOB released previously confidential comments from the 2015 report.
In a painful phrase, the article quotes prosecutors as labeling this as a
“steal the exam” scheme.
In the 2016 audit cycle, PCAOB replaced 11 engagements that had already been reviewed with 10 others. Of the 11 replaced, 3 had significant deficiencies. Of the 10 replacements, 9 had deficiencies.
