PCAOB Advises Auditors on Handling Significant Unusual Transactions
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:
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Requirement/ Responsibility
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Auditor Tasks
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Identifying and assessing risks of material misstatement
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Responding to risks of material misstatement
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Consulting others
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Evaluating financial statement presentation and disclosure
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The auditor's opinion that the financial statements are fair and compliant should be based on whether:
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Communicating with audit committees
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Reviewing interim financial information
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