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Home › Best Practices ›  Banking and Financial Services

PCAOB Advises Auditors on Handling Significant Unusual Transactions

  • By: Staff Editor
  • Date: November 17, 2011
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In April 2010, the Public Company Accounting Oversight Board (PCAOB) issued Staff Practice Audit Alert No. 5, aimed at advising auditors on how they should handle significant unusual transactions while auditing a company.

The PCAOB describes a Staff Audit Practice Alert as a document that highlights new, emerging, or otherwise noteworthy circumstances that may affect how auditors conduct audits under the existing requirements of PCAOB standards and relevant laws.
 
This alert is meant to complement the earlier PCAOB Staff Audit Practice Alert No. 3, Audit Considerations in the Current Economic Environment, which was issued in December 2008 and intended to “to assist auditors in identifying matters related to the current economic environment that might affect audit risk and require additional emphasis.”
 
What is a Significant Unusual Transaction?
 
According to the PCAOB, auditors while auditing a company may come across significant transactions that are outside the normal course of business for the company or that otherwise appear to be unusual given the auditor's understanding of the company and its environment. These are known as Significant Unusual Transactions.
 
Significant unusual transactions, especially those that are conducted close to a period end raising doubts about their substance over form, can provide opportunities for companies to engage in fraudulent financial reporting.
 
An auditor’s evaluation of whether a company’s financial statements are being presently fairly and in compliance with regulations should include disclosures of significant unusual transactions.
 
     
 
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Auditor Responsibilities Regarding Significant Unusual Transactions

 
The PCAOB alert groups auditor responsibilities and tasks regarding significant unusual as follows:
 
 
Requirement/ Responsibility
Auditor Tasks
Identifying and assessing risks of material misstatement
 
  • Identify significant unusual transactions through audit procedures and applying knowledge of company’s business and industry
  • Consider identified fraud risk factors
  • Take into account results of fraud risk assessment when auditing internal controls over financial reporting
  • Evaluate whether company controls address risks of material misstatement due to fraud
Responding to risks of material misstatement
 
  • Consider and analyze management's selection and application of significant accounting principles, including those related to significant unusual transactions
  • Consider confirming terms and amounts of significant unusual transactions with the other parties
  • Must identify all significant findings or issues (including significant unusual transactions) in an engagement completion document
  • Must document actions taken to address significant unusual transactions (including additional evidence obtained), and the basis for the conclusions reached
Consulting others
 
  • Consult with individuals within or outside firm regarding significant unusual transaction who have appropriate levels of knowledge, competence, judgment, and authority
Evaluating financial statement presentation and disclosure
 
The auditor's opinion that the financial statements are fair and compliant should be based on whether:
  • Accounting principles selected and applied have general acceptance
  • Accounting principles are appropriate in the circumstances
  • Financial statements, including the related notes, are informative of matters that may affect their use, understanding, and interpretation;
  • Information is in a reasonable manner
  • Financial statements reflect the underlying transactions and events in a manner that presents the financial position, results of operations, and cash flows
Communicating with audit committees
 
  • Determine that the company's audit committee is informed about the methods used to account for significant unusual transactions.
  • Discuss with the audit committee the auditor's judgments about the quality, not just the acceptability, of the company's accounting principles as applied in its financial reporting.
Reviewing interim financial information
 
  • Make inquiries of members of management who have responsibility for financial and accounting matters, specifically regarding:
    • Significant unusual transactions that may have an effect on the interim financial information
    • Significant unusual transactions occurring or recognized in the last several days of the interim period
  • When doing the review, auditor should determine whether significant unusual transactions have been identified and communicate this to audit committees
 
Additional Resources
 
Read the PCAOB Alert, Auditor Considerations Regarding Significant Unusual Transactions,  in full

 

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