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Peer Review Guide > Common Engagement Deficiencies >  Significant

Definition: Significant deficiencies include matters that are normally 1)material to understanding the financial statements or accompanying auditor's or accountant's report or 2) represent a critical auditing or SSARS procedure. Materiality is considered from the point of view of an average, potential, general purpose user of the financial statements or accountant's report. (By definition, financial statements prepared in accordance with generally accepted accounting principles are presumed to be general purpose financial statements.) While an engagement with a significant deficiency is normally considered substandard, careful judgment is required when forming this conclusion.

This list is not all-inclusive, but it does contain the most common, significant deficiencies that have been observed in peer reviews.

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Accountant and Auditor Reports
(Significant Deficiencies):

• Scope limitation: Failure to appropriately qualify an auditor's report for a scope limitation or departure from the basis of accounting used for the financial statements.
• Missing report elements: Omissions of required critical elements of applicable standards.
• Lack of independence: Issuance of an audit or review report when the accountant is not independent.
• Independence not disclosed: Failure to disclose lack of independence in a compilation report.
• Missing Yellow Book reports: Failure to issue reports on compliance or internal control for audits subject to Government Auditing Standards.
• Omitted disclosures: Failure to disclose the omission of substantially all disclosures (in a compilation without disclosures).
• Omitted statement of cash flows: Failure to disclose the omission of the statement of cash flows in financial statements prepared in accordance with GAAP.
• Omitted OCBOA: Failure to disclose an "other comprehensive basis of accounting" (OCBOA) for financial statements compiled without disclosure, where the basis of accounting is not readily determinable from reading the report or the financial statements.
• Departures from GAAP: Failure to disclose, in the accountant’s or auditor’s report, a material departure from professional standards (a few examples include: non-consolidation of appropriate subsidiaries with a parent company's financial statements; omission of significant income tax provision on interim financial statements; omission of significant disclosures related to material defined employee benefit plans; non-recognition of significant deferred income taxes; or omission of required supplemental information for a common interest realty association).

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Financial Statement Recognition/Measurement, Presentation and Disclosure
(Significant Deficiencies):

• Recognition/Measurement: Inclusion of material balances that are not appropriate for the basis of accounting used.
• Recognition/Measurement: Failure to include a material amount or balance necessary for the basis of accounting used (examples include omission of material accruals, failure to amortize a significant intangible asset, the failure to provide for material losses or doubtful accounts, or failure to provide for material deferred income taxes).
• Recognition/Measurement: Improper accounting of a material transaction (for example, recording a capital lease as an operating lease).
• Presentation: Significant departures from the financial statement formats prescribed by industry accounting and audit guides.
• Presentation: Misclassification of a material transaction or balance.
• Presentation: Improper classification of material line items in the statement of cash flows as to operations, investing or financing activities.
• Disclosure: Omission of significant required disclosures related to material financial statement balances or transactions.
• Disclosure: Omission of disclosure of significant accounting policies applied (GAAP or OCBOA).
• Disclosure: Omission of significant matters related to the understanding of the financial statements (the cumulative material effect of a number of disclosure deficiencies).
• Disclosure: Failure to include a summary of significant assumptions in a financial forecast or projection.

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Audit Procedures and Documentation
(Significant Deficiencies):

• Planning: Failure to use a written audit program.
• Planning: Failure to document the auditor's consideration of the internal control structure.
• Planning: Failure to assess or document risk of fraud.
• Fieldwork: Failure to request a legal representation letter, if necessary to corroborate management representations.
• Fieldwork: Failure to obtain a client management representation letter.
• Fieldwork: Failure to perform or document key audit areas.
• Fieldwork: Failure to document tests of compliance for engagements subject to Government Auditing Standards.
• Fieldwork: Failure to perform adequate tests in key audit areas.
• Fieldwork: Failure to observe inventory when the amount is material to the balance sheet and the auditor's report does not report a scope limitation.
• Fieldwork: Failure to perform or document essential audit procedures required by an industry audit guide.
• Fieldwork: Failure to confirm significant receivables or document appropriateness and use of alternative audit procedures.
• Fieldwork: Failure to assess the level of materiality and control risk.
• Fieldwork: Failure to document the nature and extent of analytical procedures
• Fieldwork: Failure to review loan covenants when the related debt is significant to the financial statement.
• Fieldwork: Failure to perform audit cut-off procedures.
• Fieldwork: Failure to document communications between predecessor and successor auditors.
• Fieldwork: Failure to perform a review of subsequent events.

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SSARS Procedures and Documentation
(Significant Deficiencies):

• Review: Failure to perform analytical and inquiry procedures for review engagements.
• Review: Failure to document analytical and inquiry procedures in a review engagement.
• Review: Failure to obtain a client management representation letter for a review engagement.
• Compilation: Failure to "read" compiled financial statements for obvious or material errors.
• Compilation: Failure to obtain an engagement letter for an engagement where the accountant is not required to issue a compilation report.

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Attestation Procedures and Documentation
(Significant Deficiencies):

• Procedures: Failure to obtain a client management representation letter for an examination of internal control.
• Procedures: Failure to obtain a client management representation letter regarding managements’ assumptions for a pro forma financial statement.
• Procedures: Failure to appropriately label pro forma information to distinguish it from historical financial information.

Peer Review Guide > Common Engagement Deficiencies >  Significant

© 1997-2002, Duane Reyhl, CPA
Updated: April 17, 2005