report on 2015 inspection of pricewaterhousecoopers llp€¦ · report on 2015 inspection of...

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Report on

2015 Inspection of PricewaterhouseCoopers LLP(Headquartered in New York, NY)

Issued by the

Public Company Accounting Oversight Board

August 10, 2016

THIS IS A PUBLIC VERSION OF

PORTIONS OF THE COMPLFROM THIS DOCUMENT IN

SECTIONS 104(g)OF THE SARBANES

A PCAOB INSPECTION REPORT

ETE REPORT ARE OMITTEDORDER TO COMPLY WITH

(2) AND 105(b)(5)(A)

PCAOB RELEASE NO. 104-2016-140

-OXLEY ACT OF 2002

PCAOB Release No. 104-2016-140

2015 INSPECTION OF PRICEWATERHOUSECOOPERS LLP

Preface

In 2015, the Public Company Accounting Oversight Board ("PCAOB" or "theBoard") conducted an inspection of the registered public accounting firmPricewaterhouseCoopers LLP ("the Firm") pursuant to the Sarbanes-Oxley Act of 2002("the Act").

Inspections are designed and performed to provide a basis for assessing thedegree of compliance by a firm with applicable requirements related to auditing issuers.For a description of the procedures the Board's inspectors may perform to fulfill thisresponsibility, see Part I.D of this report (which also contains additional informationconcerning PCAOB inspections generally). The inspection included reviews of portionsof selected issuer audits. These reviews were intended to identify whether deficienciesexisted in the reviewed work, and whether such deficiencies indicated defects orpotential defects in the Firm's system of quality control over audits. In addition, theinspection included a review of policies and procedures related to certain quality controlprocesses of the Firm that could be expected to affect audit quality.

The Board is issuing this report in accordance with the requirements of the Act.The Board is releasing to the public Part I of the report, portions of Appendix C,Appendix D, and Appendix E. Appendix C consists of the Firm's comments, if any, on adraft of the report. If the nonpublic portions of the report discuss criticisms of or potentialdefects in the Firm's system of quality control, those discussions also could eventuallybe made public, but only to the extent the Firm fails to address the criticisms to theBoard's satisfaction within 12 months of the issuance of the report. Appendix D presentsthe text of the paragraphs of the auditing standards that are referenced in Part I.A inrelation to the description of auditing deficiencies there.

Note on this report's citations to auditing standards: On March 31, 2015, thePCAOB adopted a reorganization of its auditing standards using a topical structure anda single, integrated numbering system. See Reorganization of PCAOB AuditingStandards and Related Amendments to PCAOB Standards and Rules, PCAOB ReleaseNo. 2015-002 (Mar. 31, 2015). The reorganization will be effective as of December 31,2016, but the reorganized numbering system may be used before that date. In thisreport, citations to PCAOB auditing standards use the numbering system and titles ofstandards that were in effect at the time of the primary inspection procedures. A tablecross-referencing the section numbers of those standards included in Part I of thisreport as reorganized is included at Appendix E.

PCAOB Release No. 104-2016-140Inspection of PricewaterhouseCoopers LLP

August 10, 2016Page 2

PART I

INSPECTION PROCEDURES AND CERTAIN OBSERVATIONS

Members of the Board's staff ("the inspection team") conducted primaryprocedures1 for the inspection from March 2015 to March 2016. The inspection teamperformed field work at the Firm's National Office and at 28 of its approximately 74 U.S.practice offices.

A. Review of Audit Engagements

The inspection procedures included reviews of portions of 53 issuer auditsperformed by the Firm and a review of the Firm's audit work on two other issuer auditengagements in which the Firm played a role but was not the principal auditor. Theinspection team identified matters that it considered to be deficiencies in theperformance of the work it reviewed. Two of the deficiencies relate to auditing aspectsof an issuer's financial statements that the issuer restated after the primary inspectionprocedures.2 In addition, in six of the audits described below, after the primaryinspection procedures, the Firm revised its opinion on the effectiveness of the issuer'sinternal control over financial reporting ("ICFR") to express an adverse opinion.

The descriptions of the deficiencies in Part I.A of this report include, at the end ofthe description of each deficiency, references to specific paragraphs of the auditingstandards that relate to those deficiencies. The text of those paragraphs is set forth inAppendix D to this report. The references in this sub-Part include only standards that

1 For this purpose, the time span for "primary procedures" includes fieldwork, other review of audit work papers, and the evaluation of the Firm's quality controlpolicies and procedures through review of documentation and interviews of Firmpersonnel. The time span does not include (1) inspection planning, which maycommence months before the primary procedures, and (2) inspection follow-upprocedures, wrap-up, analysis of results, and the preparation of the inspection report,which generally extend beyond the primary procedures.

2 The 2015 inspection did not include review of any additional audit workrelated to these restatements.



primarily relate to the deficiencies; they do not present a comprehensive list of everyauditing standard that applies to the deficiencies. Further, certain broadly applicableaspects of the auditing standards that may be relevant to a deficiency, such asprovisions requiring due professional care, including the exercise of professionalskepticism; the accumulation of sufficient appropriate audit evidence; and theperformance of procedures that address risks, are not included in the references to theauditing standards in this sub-Part, unless the lack of compliance with these standardsis the primary reason for the deficiency. These broadly applicable provisions aredescribed in Part I.B of this report.

Certain of the deficiencies identified were of such significance that it appeared tothe inspection team that the Firm, at the time it issued its audit report, had not obtainedsufficient appropriate audit evidence to support its opinion that the financial statementswere presented fairly, in all material respects, in accordance with the applicablefinancial reporting framework and/or its opinion about whether the issuer hadmaintained, in all material respects, effective internal control over financial reporting("ICFR"). In other words, in these audits, the auditor issued an opinion without satisfyingits fundamental obligation to obtain reasonable assurance about whether the financialstatements were free of material misstatement and/or the issuer maintained effectiveICFR.

The fact that one or more deficiencies in an audit reach this level of significancedoes not necessarily indicate that the financial statements are misstated or that thereare undisclosed material weaknesses in ICFR. It is often not possible for the inspectionteam, based only on the information available from the auditor, to reach a conclusion onthose points.

Whether or not associated with a disclosed financial reporting misstatement, anauditor's failure to obtain the reasonable assurance that the auditor is required to obtainis a serious matter. It is a failure to accomplish the essential purpose of the audit, and itmeans that, based on the audit work performed, the audit opinion should not have beenissued.3

3 Inclusion in an inspection report does not mean that the deficiencyremained unaddressed after the inspection team brought it to the firm's attention.Depending upon the circumstances, compliance with PCAOB standards may requirethe firm to perform additional audit procedures, or to inform a client of the need for



The audit deficiencies that reached this level of significance are described in PartI.A.1 through I.A.12, below.

Effects on Audit Opinions

Of the 12 issuer audits that appear in Part I.A, deficiencies in 10 audits relate totesting controls for purposes of the ICFR opinion, and deficiencies in nine audits relateto the substantive testing performed for purposes of the opinion on the financialstatements, as noted in the table below. Of the nine audits in which substantive testingdeficiencies were identified, two audits included deficiencies in substantive testing thatthe inspection team determined were caused by a reliance on controls that wasexcessive in light of deficiencies in the testing of controls.

Number of Audits

Deficiencies included in Part I.A related to boththe financial statement audit and the ICFRaudit

7

Deficiencies included in Part I.A related to thefinancial statement audit only

2

Deficiencies included in Part I.A related to theICFR audit only

3

Total 12

changes to its financial statements or reporting on internal control, or to take steps toprevent reliance on its previously expressed audit opinions. The Board expects thatfirms will comply with these standards, and an inspection may include a review of theadequacy of a firm's compliance with these requirements, either with respect topreviously identified deficiencies or deficiencies identified during that inspection. Failureby a firm to take appropriate actions, or a firm's misrepresentations in responding to aninspection report about whether it has taken such actions, could be a basis for Boarddisciplinary sanctions.



Most Frequently Identified Audit Deficiencies

The following table lists, in summary form, the types of deficiencies that areincluded most frequently in Part I.A of this report. A general description of each type isprovided in the table; the description of each deficiency in Part I.A contains morespecific information about the individual deficiency. The table includes only the threemost frequently identified deficiencies that are in Part I.A of this report and is not asummary of all deficiencies in Part I.A.

Issue Part I.A AuditsFailure to sufficiently test the design and/oroperating effectiveness of controls that theFirm selected for testing.

8 Audits:Issuers A, B, C,E, F, G, I, and J

Failure to sufficiently test significantassumptions or data that the issuer used indeveloping an estimate.

7 Audits:Issuers A, B, C,D, E, F, and H

Failure to test controls over or test theaccuracy and completeness of issuer-produced data or reports.

6 Audits:Issuers A, B, C,

E, H, and I

Audit Deficiencies

A.1. Issuer A

In this audit, the Firm failed in the following respects to obtain sufficientappropriate audit evidence to support its audit opinions on the financial statements andon the effectiveness of ICFR –

The Firm's procedures related to the valuation of goodwill for one of theissuer's reporting units were insufficient. Specifically –

o The Firm selected for testing two controls over the issuer's analysisof the possible impairment of goodwill. One of these controlsconsisted of management's review of the impairment analysis andthe other consisted of management's review of the strategic plan on



which cash-flow forecasts used in the analysis were based. TheFirm failed to sufficiently test these controls, as its procedures werelimited to inquiring of management, comparing the financialinformation used in the analysis with financial information from theissuer's systems, comparing the cash-flow forecasts used in theimpairment analysis with the cash-flow forecasts included in theissuer's strategic plan, and inspecting notes and subsequentchanges to the cash-flow forecasts as evidence that the reviewshad occurred. The Firm failed to evaluate whether the reviewprocedures that the control owners performed to assess (1) thereasonableness of the cash-flow forecasts, including the type andamount of certain corporate expenses allocated to the reportingunit, and (2) the reasonableness of the working capital and debtadjustments that were used to determine the fair value of thereporting unit were designed and operating to meet the objectivesof the control. (AS No. 5, paragraphs 42 and 44)

o The Firm failed to sufficiently evaluate the reasonableness of thecash-flow forecasts that the issuer used to determine the fair valueof the reporting unit's goodwill. Specifically –

The Firm compared the actual results for the year underaudit to the issuer's cash-flow forecasts made in the prioryear and to the cash-flow forecasts used in the analysis. TheFirm concluded that the cash-flow forecasts used in theanalysis were reasonable without considering (1) that theforecasts were significantly different from the actual resultsfor the year under audit and (2) that the actual results for theyear under audit were significantly different from the issuer'scash-flow forecasts for that year that had been made in theprior year. (AS No. 14, paragraph 3; AU 328, paragraphs.26, .28, .31, and .36)

The Firm failed to evaluate the reasonableness of theallocation of corporate expenses to the cash-flow forecastsfor the reporting unit. (AU 328, paragraphs .26 and .28)



o The issuer had inappropriately included certain items in itscalculation of the working-capital adjustment and inappropriatelyexcluded certain items in its calculation of the debt adjustment;these adjustments were used in determining the fair value of thereporting unit. The Firm, however, failed to identify and evaluate theeffect of these errors. (AU 328, paragraph .39)

o The Firm concluded that the percentage that the issuer applied toits annual revenue to determine the working-capital adjustment wasreasonable without considering that the percentage represented asignificant difference from the historical percentage that the issuerhad experienced. (AS No. 14, paragraph 3; AU 328, paragraphs.26, .28, .31, and .36)

The Firm's procedures related to the valuation of certain of the issuer'sinventory were insufficient. Specifically –

o The Firm failed to identify and test any controls over the accuracyand completeness of both the quantities and prices of rawmaterials, labor, and overhead included in the bill of materials,which was used to determine the cost of work-in-progress andfinished goods inventory. (AS No. 5, paragraph 39)

o The Firm selected for testing a control that included management'sreview of the capitalization of variances from standard inventorycosts, but it failed to sufficiently test this control. Specifically, theFirm limited its testing to (1) inquiring of management, (2)assessing the calculation of purchase price variances forreasonableness, and (3) determining that the related journal entrieshad been posted and approved. The Firm failed to test whether thecontrol operated at a level of precision that would prevent or detectmaterial misstatements, as it failed to ascertain and evaluate thenature of the review procedures performed, the criteria used toidentify items for follow up, and how those items were resolved. (ASNo. 5, paragraphs 42 and 44)



o The Firm failed to perform sufficient substantive procedures to testwork-in-progress and finished goods inventory. Specifically –

The Firm designed its substantive procedures – includingsample sizes – based on a level of control reliance that wasnot supported due to the deficiencies in the Firm's testing ofcontrols that are discussed above. As a result, the samplesizes the Firm used to test the valuation of these categoriesof inventory were too small to provide sufficient evidence.(AS No. 13, paragraphs 16, 18, and 37; AU 350, paragraphs.19, .23, and .23A)

With respect to work-in-progress and finished goodsinventories, the Firm failed to test the calculation of thevariances between actual and standard costs for rawmaterials, labor, and overhead. In addition, the Firm failed totest whether the costs for raw materials used in determiningthe value of the items the Firm selected for testing were thesame as the standard costs that the issuer had approvedand that the Firm had tested. (AS No. 13, paragraph 8)

During the year, the issuer acquired a significant business. The customer-retention rate was an important assumption that the issuer used todetermine the value of the acquired customer-relationship intangibleasset. The Firm failed to test the accuracy and completeness of the datathat the issuer used to determine the customer-retention rate. (AU 328,paragraph .39)

A.2. Issuer B


During the year, the issuer acquired a significant business. The Firm'stesting related to the valuation of the customer-relationship intangible



asset acquired in this transaction was insufficient in the following respects–

o The Firm selected for testing a control over the valuation of theintangible asset. One aspect of this control consisted of a review ofthe 20-year cash-flow forecasts used to value the intangible asset,including a comparison of the underlying customer-retention rateassumption to historical customer-retention rates. The Firm failed tosufficiently test this aspect of the control, as it limited its testing toinquiring of management, obtaining meeting agendas, andinspecting emails noting comments from the control owner relatedto revisions made to the cash-flow forecasts. The Firm failed toevaluate the appropriateness of (1) the control owner's review ofthe reasonableness of the forecasted cash flows for any of theforecast periods beyond the three years that followed the currentyear and (2) the control owner's review of the reasonableness ofthe customer-retention rate. In addition, the Firm failed to identifyand test any controls over the accuracy and completeness of thehistorical customer-retention data used in the operation of thecontrol. (AS No. 5, paragraphs 39, 42, and 44)

o The Firm failed to perform sufficient substantive procedures toevaluate the reasonableness of the cash-flow forecasts, includingthe underlying customer-retention rate assumption, that the issuerused in determining the value of the intangible asset. Specifically –

For a sample of customer contracts, the Firm compared theforecasted revenue for the current year for each contract tothe actual revenue. For many of these contracts, the Firmidentified significant differences; however, it failed toevaluate whether these differences indicated thatadjustments should have been made to the issuer's cash-flow forecasts. (AS No. 14, paragraph 3; AU 328,paragraphs .26, .28, .31, and .36)

The Firm failed to perform any procedures to evaluate theforecasted cash flows for any of the forecast periods beyond



the three years that followed the current year. (AU 328,paragraphs .26 and .28)

The Firm failed to test the accuracy and completeness of thehistorical information used in determining the customer-retention rate assumption, or test controls over thisinformation as discussed above. (AU 328, paragraph .39)

The issuer's assets included several customer-relationship intangibleassets that had been recorded in a previous year. The customer-relationship intangible assets were based on relationships establishedthrough specific customer contracts. The issuer's financial statementsdisclosed that it would review and update the remaining useful economiclives of these assets whenever events indicated that the estimatedduration of the specific customer relationships had decreased. The Firm'stesting related to the valuation and remaining useful lives of certain ofthese customer-relationship intangible assets was insufficient. Specifically–

o The Firm selected for testing a control that included the issuer'sassessment of indicators of potential impairment for theseintangible assets. Although the Firm identified that the issuer hadnot maintained information about which specific customerssupported these intangible assets, the Firm failed to evaluate theimplications of this on its assessment of the effectiveness of thiscontrol. (AS No. 5, paragraph 38)

o The Firm failed to identify and test any controls over the issuer'sassessment of the appropriateness of the remaining usefuleconomic lives of these intangible assets. (AS No. 5, paragraph 39)

o The Firm failed to perform sufficient substantive procedures to testthe valuation of these intangible assets. Specifically, even thoughthe issuer had not maintained information about which specificcustomers supported these intangible assets, as noted above, theFirm's testing was limited to (1) inquiring of management; (2)evaluating issuer, industry, and economic factors for indicators of



potential impairment; and (3) re-calculating the future amortizationof the intangible assets, without performing any procedures toassess the potential impairment of the customer relationships thatsupported the intangible assets. (AS No. 14, paragraph 3; AU 342,paragraph .11)

The issuer engaged an external party ("the consultants") to perform itstesting of controls. The Firm used the work of the consultants as evidenceof the operating effectiveness of controls for almost all of the controls thatthe Firm considered to be of low and medium risk and that the Firmselected for testing, The Firm's use of the work of the consultants wasexcessive because the Firm's testing of the consultants' work was limitedto reperformance for a small percentage of the controls, even though theFirm had information indicating that the consultants might have a low levelof objectivity because they were engaged by the issuer's managementand reported directly to the control owner for some of the controls theytested. (AU 322, paragraphs .10, .24, and .26)

A.3. Issuer C


During the year, the issuer acquired a significant business. The Firm'stesting related to the issuer's accounting for the business combination wasinsufficient in the following respects –

o The Firm selected for testing a control that included the review ofcash-flow forecasts and other significant assumptions used todetermine the fair value of acquired intangible assets; however, itfailed to sufficiently test this control. Specifically, the Firm limited itstesting to inquiring of management; inspecting the cash-flowforecast model; and reading a presentation to the board ofdirectors, a due diligence report, and certain emails and notes. TheFirm failed to evaluate the specific nature of the review proceduresthat the control owners performed to assess the reasonableness of



the cash-flow forecasts and other significant assumptions. (AS No.5, paragraphs 42 and 44)

o The Firm failed to perform sufficient procedures to evaluate thereasonableness of certain significant assumptions underlying thecash-flow forecasts that the issuer used to determine the values ofthe customer-relationship and technology-related intangible assets.Specifically, for the customer-relationship intangible assets, theFirm tested the overall projected revenue growth rate for theacquired business, but failed to test the specific revenue growthrates for the different groups of customers that were used todetermine the values of the customer-relationship intangible assets.In addition, the Firm failed to test certain historical data used indeveloping attrition-rate assumptions. Further, for a significantassumption used to determine the value of the technology-relatedintangible asset, the Firm limited its testing to inquiry. (AU 328,paragraphs .26, .28, and .39)

The Firm identified several likely sources of potential misstatement relatedto capitalized labor hours for internally developed software. The Firm'sprocedures related to the capitalization of labor costs were insufficient.Specifically –

o The Firm selected for testing a control that included the review andapproval of employee labor hours to be capitalized. The Firm testedthe design of this aspect of the control, but it failed to test whether itwas operating effectively. In addition, the Firm selected for testing acontrol that consisted of the comparison of budgeted hours toactual hours incurred by project, but failed to identify and test anycontrols over the accuracy and completeness of the budgetedhours used in the operation of that control. (AS No. 5, paragraphs39 and 44)

o The Firm determined the sample size of its substantive test of theaccuracy and occurrence of employee labor hours capitalized tointernally developed software costs based on a level of controlreliance that was not supported due to the deficiencies in the Firm's



testing of the controls discussed above. As a result, the samplesize the Firm used to test capitalized labor hours was too small toprovide sufficient evidence. (AS No. 13, paragraphs 16, 18, and 37;AU 350, paragraphs .19, .23, and .23A)

The Firm failed to identify and test any controls that addressed the riskthat the Firm identified related to the accuracy and completeness of datathat were used to record one type of revenue for certain components. (ASNo. 5, paragraph 39)

A.4. Issuer D

In this audit, the Firm failed to obtain sufficient appropriate audit evidence tosupport its audit opinions on the financial statements and on the effectiveness of ICFR.The issuer manufactured complex products and recognized revenue primarily using thepercentage-of-completion method. For one of the issuer's two segments, whichrepresented a majority of the issuer's revenue, the Firm failed to perform sufficientprocedures related to revenue as follows –

For two of the segment's significant components, the Firm failed to identifyand test any controls over the selection of the method for determining thestage of completion for individual contracts. (AS No. 5, paragraph 39)

The Firm selected certain open and closed contracts to evaluate thereasonableness of the significant assumptions used to determine theestimated costs to complete contracts, contract reserves, and anysubsequent adjustments. The Firm's procedures to test the open contractswere limited to inquiring of management. (AU 342, paragraph .11)

The Firm selected a sample of contracts for testing; one of these contractscontained certain performance incentives and another contained asignificant modification. The Firm failed to evaluate whether the issuer'saccounting related to these types of provisions was in conformity withGAAP. (AS No. 14, paragraph 30)



A.5. Issuer E

In this audit, the Firm failed to obtain sufficient appropriate audit evidence tosupport its audit opinions on the financial statements and on the effectiveness of ICFR.During the year, the issuer acquired multiple significant businesses. The Firm's testingrelated to the valuation of certain acquired intangible assets was insufficient in thefollowing respects –

To develop the attrition rates used in determining the fair value of acquiredcustomer-relationship intangible assets, the issuer used attrition rates forother companies in the industry and, for certain of the acquisitions, alsoused historical data or qualitative considerations. The Firm's proceduresrelated to the attrition rates that the issuer developed were insufficient.Specifically –

o The Firm selected for testing a control that included a review of thereasonableness of the attrition rates; however, it failed tosufficiently test this aspect of the control. Specifically, the Firmlimited its testing of this aspect to inquiring of management,obtaining historical and industry data that the issuer used indetermining the attrition rates, and inspecting documents thatindicated approval by the control owner. The Firm failed to (1)ascertain and evaluate the nature of the control owner's review ofthe extent to which the industry data related to companies that werecomparable to the issuer and (2) identify and test any controls overthe accuracy and completeness of the historical data used in theperformance of the control. (AS No. 5, paragraphs 39, 42, and 44)

o The Firm failed to test whether the industry data related tocompanies that were comparable to the issuer. In addition, the Firmfailed to test the accuracy and/or completeness of the historicaldata that the issuer used in developing the attrition rates. (AU 328,paragraphs .26, .28, .31, .36, and .39)

o For one of the acquired businesses, the Firm documented that theattrition rate was determined assuming long-standing customerrelationships and that the rate was reasonable based on a



reluctance of customers to change suppliers. The Firm, however,failed to (1) obtain corroboration of the representation that theacquired business had long-standing relationships with itscustomers and (2) consider the implications of the recent loss ofcustomers by another acquired business with similar productcharacteristics. (AS No. 14, paragraph 3; AU 328, paragraphs .26,.28, .31, and .36)

For one of the acquired businesses, the Firm failed to sufficiently evaluatethe reasonableness of certain other significant assumptions underlying thecash-flow forecasts that the issuer used in determining the value ofacquired trademark and customer-relationship intangible assets ("originalforecasts"). The Firm's procedures to test the original forecasts consistedof (1) comparing the original forecasts to five years of historical results, (2)comparing the first four months of the original forecasts to the actualresults for the four months from the date of the acquisition to year end("look-back analysis"), and (3) comparing the original forecasts to theforecasts used in the issuer's annual analysis of the potential impairmentof goodwill (performed at year end). These procedures were insufficient inthe following respects –

o The Firm concluded the original forecasts were reasonable, eventhough the Firm's procedures to evaluate the reasons for thesignificant differences between the original forecasts and the five-year historical results were limited to inquiry. (AU 328, paragraphs.26, .28, .31, and .36)

o The Firm identified significant differences between the originalforecasts and (1) the actual results used in the look-back analysisand (2) the forecasts in the goodwill impairment analysis, despitethe relatively short period between these analyses, and identifiedreasons for these differences. The Firm concluded that the originalforecasts used in the analyses were reasonable without consideringwhether the reasons for the differences were known, and shouldhave been taken into account, when the original forecasts weredeveloped. (AS No. 14, paragraph 3; AU 328, paragraphs .26, .28,.31, and .36)



o The values of the individual intangible assets were determinedbased on forecasts of cash flows for sub-units below the reporting-unit level. The Firm, however, performed its look-back analysis andcomparison of the original forecasts to five-year historical resultsbased on cash flows aggregated at the reporting-unit level. As aresult, the Firm's procedures were not precise enough to providesufficient evidence regarding the significant assumptions affectingthe determination of fair values for the individual intangible assets.(AU 328, paragraphs .26 and .28)

A.6. Issuer F

In this audit of a software and hardware provider, the Firm failed in the followingrespects to obtain sufficient appropriate audit evidence to support its audit opinions onthe financial statements and on the effectiveness of ICFR –

The issuer planned to release several new products that were internallydeveloped. These new products were based on technology that the issuerhad previously acquired and recorded as an indefinite-lived intangibleasset. The issuer planned to phase out the existing significant productsthat used this technology. The Firm's procedures related to the issuer'sanalysis of the possible impairment of this intangible asset wereinsufficient in the following respects –

o The Firm selected for testing two controls that consisted of (1) thereview of cash-flow forecasts and certain other assumptions usedin determining the fair value of the intangible asset and (2) thedevelopment, review, and approval of the issuer's budget, whichwas used in developing the cash-flow forecasts. The Firm failed tosufficiently test these controls. Specifically –

For the first control, the Firm limited its testing to inquiring ofmanagement and inspecting industry data used in the board-approved five-year plan.

For the second control, the Firm limited its testing toinquiring of management, inspecting board presentations



and related minutes to obtain evidence that a review hadbeen performed, and noting that the review covered certaintopics.

The Firm failed to evaluate the nature of the review procedures thatthe control owners performed to assess the reasonableness of thecash-flow forecasts and the related assumptions and budget. (ASNo. 5, paragraphs 42 and 44)

o The Firm failed to perform sufficient procedures to evaluate thereasonableness of the discount rate that the issuer used indetermining the fair value of the intangible asset. Specifically, theFirm limited its procedures to comparing the rate to a range of ratesthat it had used in its testing three years earlier; the high end of theFirm's range was the rate that the issuer used to determine the fairvalue of the asset three years earlier and the low end of the rangewas calculated by subtracting the company-specific risk premiumfrom the issuer's rate. The Firm failed to consider (1) thereasonableness of the current company-specific risk premium,which had been reduced as compared with the premium threeyears earlier, and (2) whether the rate should have been revisedgiven the risk associated with the release of the new products. (AU328, paragraphs .26, .28, and .36)

o The Firm failed to perform sufficient procedures to evaluate thereasonableness of the revenue assumptions underlying the cash-flow forecasts that the issuer used in determining the fair value ofthe intangible asset. The Firm's procedures to test theseassumptions consisted of (1) inquiring of management, (2)comparing revenue forecasts for the previous and current years toactual results ("look-back analysis"), (3) comparing the revenueforecasts for future years to the forecasts for those years in theprior-year and current-year budgets ("budget comparisons"), and(4) calculating certain historical revenue growth rates andcomparing them to the growth rates in the forecast. The Firm alsoperformed a sensitivity analysis that provided little to no substantiveassurance, as it used scenarios that were unlikely given the Firm's



understanding of the facts and circumstances. The Firm'sprocedures were insufficient because the Firm failed to considerwhether the historical data related to the existing products that wereused in the look-back analysis, budget comparison, andcomparison of historical growth rates were relevant given theissuer's plans to release the new products and phase out theexisting products. In addition, in performing its look-back analysisand budget comparison procedures, the Firm concluded that theforecasts were reasonable, even though the Firm's procedures toevaluate the reasons for the significant differences between theforecasted and actual revenues were limited to inquiry. (AU 328,paragraphs .26, .28, .31, and .36)

For certain product sales, the issuer reported revenue on a gross ratherthan net basis. The Firm agreed with this presentation and based itsconclusion on the fact that the issuer had inventory risk, credit risk, andleverage in establishing the pricing of the product. The Firm, however,failed to obtain corroboration of the issuer's assertion that it was subject toinventory risk, and there was no evidence in the audit documentation, andno persuasive other evidence, that the Firm had evaluated the othercriteria set forth in GAAP for reporting revenue on a gross basis. (AS No.14, paragraph 30)

A.7. Issuer G

In this audit, the Firm failed to obtain sufficient appropriate audit evidence tosupport its audit opinion on the effectiveness of ICFR. The issuer initiated, processed,and recorded revenue and inventory transactions through numerous divisions. For oneof the issuer's geographic regions, the Firm reduced the number of divisions that itselected for testing based on the assumption that two entity-level controls ("ELCs")operated effectively across all of the divisions. This assumption, and therefore theassociated reduction in the scope of the Firm's testing, was not supported as follows –

One of the ELCs that the Firm selected for testing was described by theFirm as a quarterly review of certain income statement accounts for eachdivision. The Firm, however, failed to identify that the review did notinclude all of the divisions. (AS No. 5, paragraphs 42, 44, and B11)



The second ELC that the Firm selected for testing consisted of a quarterlyreview of balance sheet fluctuations at the level of the issuer'sconsolidated financial statements. The Firm failed to evaluate whether thecontrol operated at a level of precision that would prevent or detectmaterial misstatements at the division level, given that the review wasperformed based on results at the consolidated level. In addition, the Firmfailed to evaluate the specific nature of the review procedures performed,including how items selected for follow up were resolved. (AS No. 5,paragraphs 42, 44, and B11)

A.8. Issuer H

In this audit of an issuer in the financial services industry, the Firm failed in thefollowing respects to obtain sufficient appropriate audit evidence to support its auditopinion on the financial statements –

The Firm failed to perform sufficient procedures to test the issuer'sallowance for loan losses ("ALL"). Specifically –

o For most of the issuer's loans, the Firm planned to use the work ofthe issuer's loan-review function ("LRF") to test the loan risk-ratingprocess, which was used to identify potentially impaired loans. TheFirm limited its procedures to evaluating the competence andobjectivity of the LRF personnel, reading the LRF reports, andevaluating the conclusions in those reports. The Firm failed toevaluate whether the scope of the LRF work was sufficient to testthe issuer's loan risk-rating process. In addition, the Firm failed toperform any testing of the LRF's work and therefore was not able toevaluate whether (1) the LRF reports were consistent with theresults of the work performed and (2) the conclusions reached wereappropriate. (AS No. 13, paragraph 8)

o For certain loans acquired with credit impairment, the Firmdocumented that it designed its substantive procedures assuminghigh reliance on controls and that its procedures to test these loanswere dual-purpose in nature. The Firm, however, failed to performsufficient procedures to achieve the objectives of both the test of



the control over the valuation of these loans and its substantivetesting. Specifically –

For part of the sample that the Firm selected for dual-purpose testing, the Firm performed only the procedures thattested the control. For the remainder of the sample, itperformed only substantive procedures. In addition, the Firmperformed part of its testing as of an interim date and dividedits sample between loans outstanding at the interim date andthose outstanding at year end; the Firm, however, selectedsome of the same loans for testing at both dates. As a result,the Firm failed to perform both control and substantivetesting for an appropriate sample of items based on thesample size for its dual-purpose test. (AS No. 13, paragraph47; AU 350, paragraph .25)

In evaluating errors identified through its testing, the Firmlimited its quantitative evaluation to netting the variancesidentified and concluding that the net amount wasimmaterial. In addition, the Firm failed to evaluate the effectof these errors when reaching its conclusion on theeffectiveness of the control. (AS No. 13, paragraph 34; AU350, paragraph .26)

The Firm failed to perform sufficient procedures to test appraisals that theissuer used to value certain real estate assets at year end. Specifically,the Firm failed to (1) evaluate the qualifications and objectivity of certain ofthe appraisers, (2) evaluate the appropriateness of the methods and thereasonableness of the assumptions underlying the appraisals, and (3) testthe data provided to the appraisers. (AU 328, paragraphs .26 and .28; AU336, paragraphs .08, .10, and .12)

A.9. Issuer I

In this audit of an issuer in the financial services industry, the Firm failed to obtainsufficient appropriate audit evidence to support its audit opinion on the effectiveness ofICFR, as it failed to sufficiently test controls over the ALL. The Firm selected for testing



two controls, one of which included reviews of the loan delinquency status and the otherof loan charge-offs. The loan delinquency status and loan charge-offs were significantinputs in the calculation of the general reserve component of the ALL. The Firm failed tosufficiently test these controls as follows –

Numerous employees of the issuer had the ability to change thedelinquency and charge-off status for loans, and the issuer performedthese controls to detect possible manipulation of loan delinquencies andcharge-offs. Although the Firm identified that the control owners could alsomake similar changes to loans, the Firm failed to consider this fact whenevaluating the design effectiveness of the controls. (AS No. 5, paragraph42)

The Firm's procedures to test these controls were limited to inquiring ofmanagement and inspecting certain documents that included signaturesor notations to indicate that the reviews performed as part of the controlshad occurred. The Firm failed to (1) determine if the control owners'reviews included evaluating whether changes to loans were within theissuer's policy and (2) ascertain and evaluate the criteria used to identifyitems for follow-up and how those items were resolved. In addition, indesigning its tests of one of these controls and evaluating the results, theFirm failed to consider the risk that the control was not performedconsistently, given (1) the very large number of control owners and (2)information in the Firm's work papers that suggested that the level ofreview varied significantly among control owners. (AS No. 5, paragraphs42 and 44)

The Firm failed to sufficiently test the design effectiveness of the issuer'scontrol over the accuracy and completeness of a report used in theperformance of one of these controls. Specifically, the Firm failed toidentify that the control was not designed to cover all the key data in thereport. (AS No. 5, paragraph 42)

A.10. Issuer J

In this audit of a healthcare provider, the Firm failed to obtain sufficientappropriate audit evidence to support its audit opinion on the effectiveness of ICFR, as



the Firm's testing of controls over patient-service revenue and accounts receivable wasinsufficient. Specifically –

The Firm selected for testing a control that consisted of a review of thereasonableness of the allowances for contractual adjustments anduncollectible amounts. The Firm's testing of this control was limited toinquiring of management, inspecting documents for evidence of reviewand approval, comparing amounts in the analysis to the general ledgerand/or other documentation, and inspecting calendar invitations thatindicated meetings had occurred. The Firm's testing did not include (1)ascertaining and evaluating the nature of the review procedures that thecontrol owners performed to assess the reasonableness of the allowancesor (2) evaluating the criteria used by the control owners to identify mattersfor follow up and whether those matters were appropriately addressed. Asa result, the Firm failed to evaluate whether the control operated at a levelof precision that would prevent or detect material misstatements. (AS No.5, paragraphs 42 and 44)

In its walkthroughs, the Firm identified two controls over the occurrence ofone type of revenue; however, the Firm failed to test the operatingeffectiveness of either of these controls, or to identify and test any othercontrols that would address this assertion. (AS No. 5, paragraph 44)

The Firm's strategy for testing controls over revenue included testinginformation-technology general controls ("ITGCs") over important systemsthat processed and recorded revenue transactions. The Firm selected fortesting a change-management control that was intended to identifyunauthorized changes to the source code of internally developed systems.The issuer determined that this control was ineffective, and the Firmidentified six compensating controls. The Firm failed to sufficientlyevaluate whether these compensating controls operated at a level ofprecision that would prevent or detect a material misstatement resultingfrom the identified deficiency. Specifically, for four of these compensatingcontrols, the Firm failed to evaluate whether the controls addressed therisk of unauthorized changes to source code that was intended to beaddressed by the ineffective control. In addition, the Firm failed to considerthat one of the two remaining compensating controls relied on the



ineffective control discussed above. Further, the Firm failed to test thedesign and operating effectiveness of the last compensating control. (ASNo. 5, paragraph 68)

The Firm tested an application control at an interim date using a sample ofone item for each relevant scenario; this approach was based on anassumption that ITGCs were operating effectively, which was notsupported due to the deficiencies in the testing of ITGCs that aredescribed above. As a result, the Firm's testing of this control wasinsufficient. (AS No. 5, paragraphs 46 and 47)

A.11. Issuer K


During the year, the issuer recorded an impairment charge related tocertain real estate held for investment and, in a subsequent quarter,determined that the charge was an error. The Firm failed to evaluatewhether this error should have had an effect on the Firm's conclusion onthe effectiveness of the issuer's controls relating to the determination ofadjustments to the valuation of real estate held for investment. (AS No. 5,paragraph B8)

For one of the issuer's equity investments, the Firm sent a letter of auditinquiry to an external lawyer. For certain ongoing litigation, the lawyer'sresponse did not include an evaluation of the likelihood of an unfavorableoutcome or an estimate of the amount or range of potential loss, but theFirm failed to follow up to obtain that information. (AU 337, paragraph .04)

A.12. Issuer L

The Firm was engaged by the principal auditor of an issuer to audit the financialinformation of a wholly owned subsidiary to support the principal auditor's opinion on theconsolidated financial statements. The Firm failed to obtain sufficient appropriate auditevidence to fulfill the objectives of its role in the audit, as the Firm failed to test an



addition to property, plant, and equipment that was several times the establishedmateriality level. (AS No. 13, paragraph 8)

B. Auditing Standards

Each deficiency described in Part I.A above could relate to several provisions ofthe standards that govern the conduct of audits. The paragraphs of the standards thatare cited for each deficiency are those that most directly relate to the deficiency. Thedeficiencies also may relate, however, to other paragraphs of those standards and toother auditing standards, including those concerning due professional care, responsesto risk assessments, and audit evidence.

Many audit deficiencies involve a lack of due professional care. AU 230, DueProfessional Care in the Performance of Work, paragraphs .02, .05, and .06, requiresthe independent auditor to plan and perform his or her work with due professional careand sets forth aspects of that requirement. AU 230, paragraphs .07 through .09, and ASNo. 13, The Auditor's Responses to the Risks of Material Misstatement, paragraph 7,specify that due professional care requires the exercise of professional skepticism.These standards state that professional skepticism is an attitude that includes aquestioning mind and a critical assessment of the appropriateness and sufficiency ofaudit evidence.

AS No. 13, paragraphs 3, 5, and 8, requires the auditor to design and implementaudit responses that address the risks of material misstatement. AS No. 15, AuditEvidence, paragraph 4, requires the auditor to plan and perform audit procedures toobtain sufficient appropriate audit evidence to provide a reasonable basis for the auditopinion. Sufficiency is the measure of the quantity of audit evidence, and the quantityneeded is affected by the risk of material misstatement (in the audit of financialstatements) or the risk associated with the control (in the audit of ICFR) and the qualityof the audit evidence obtained. The appropriateness of evidence is measured by itsquality; to be appropriate, evidence must be both relevant and reliable in providingsupport for the related conclusions.

The paragraphs of the standards that are described immediately above are notcited in Part I.A, unless those paragraphs are the most directly related to the relevantdeficiency.



B.1. List of Specific Auditing Standards Referenced in Part I.A

The table below lists the specific auditing standards that are referenced in PartI.A of this report, cross-referenced to the issuer audits for which each standard is cited.For each auditing standard, the table also provides the number of distinct deficienciesfor which the standard is cited for each of the relevant issuer audits. This informationidentifies only the number of times that the standard is referenced, regardless ofwhether the reference includes multiple paragraphs or relates to multiple financialstatement accounts.

PCAOB Auditing Standards Audits Number ofDeficiencies

per AuditAS No. 5, An Audit of Internal Control OverFinancial Reporting That Is Integrated with AnAudit of Financial Statements

Issuer AIssuer BIssuer CIssuer DIssuer EIssuer FIssuer GIssuer IIssuer JIssuer K

3331112341

AS No. 13, The Auditor's Responses to the Risksof Material Misstatement

Issuer AIssuer CIssuer HIssuer L

2131

AS No. 14, Evaluating Audit Results Issuer AIssuer BIssuer DIssuer EIssuer F

22121

AU 322, The Auditor's Consideration of theInternal Audit Function in an Audit of Financial

Issuer B 1



PCAOB Auditing Standards Audits Number ofDeficiencies

per AuditStatements

AU 328, Auditing Fair Value Measurements andDisclosures

Issuer AIssuer BIssuer CIssuer EIssuer FIssuer H

531521

AU 336, Using the Work of a Specialist Issuer H 1

AU 337, Inquiry of a Client's Lawyer ConcerningLitigation, Claims, and Assessments

Issuer K 1

AU 342, Auditing Accounting Estimates Issuer BIssuer D

11

AU 350, Audit Sampling Issuer AIssuer CIssuer H

112

B.2. Financial Statement Accounts or Auditing Areas Related to Identified AuditDeficiencies

The table below lists the financial statement accounts or auditing areas related toeach deficiency included in Part I.A of this report and identifies the audits described inPart I.A where deficiencies relating to the respective areas were observed.4 The

4 Certain deficiencies that affect multiple accounts or areas, such as thoserelated to the use of consultants as evidence of the operating effectiveness of controls,are excluded from this table, but are included in Appendix D.



following standards were cited for only one issuer and are excluded from the table: AU336 and AU 337.5

AS No.5

AS No.13

AS No.14

AU 328 AU 342 AU 350

Business combinations,including contingentconsideration

B, C, E B, E A, B, C,E

Definite-lived long-livedassets, including amortization

C C C

Fixed assets LImpairment of goodwill andintangible assets

A, B, F A, B A, F B

Inventory and relatedreserves

A, G A A

Loans, including ALL I H H HOther long-lived assets K HRevenue, including accountsreceivable, deferred revenue,and allowances

C, D, G,J

D, F D

B.3. Audit Deficiencies by Industry

The table below lists the industries6 of the issuers for which audit deficiencieswere discussed in Part I.A of this report, and cross-references the issuer to the specificauditing standards related to the deficiencies.7

5 The AU 336 issue for issuer H related to other long-lived assets. The AU337 issue for issuer K related to legal contingencies.

6 The majority of industry sector data is based on Global IndustryClassification Standard ("GICS") data obtained from Standard & Poor's ("S&P"). Ininstances where GICS for an issuer is not available from S&P, classifications areassigned based upon North American Industry Classification System data.

7 Where identifying the industry of the issuer may enhance theunderstanding of the description of a deficiency in Part I.A, industry information is alsoprovided there, unless doing so would have the effect of making the issuer identifiable.



AS No.5

ASNo.13

ASNo.14

AU322

AU328

AU336

AU337

AU342

AU350

ConsumerStaples

A A A A A

FinancialServices

I, K H H H K H

Health Care JIndustrials B, D B, D B B B, DInformationTechnology

C, F C F C, F C

Materials G LOther E E E

C. Data Related to the Issuer Audits Selected for Inspection8

C.1. Industries of Issuers Inspected

The chart below categorizes the 55 issuers whose audits were inspected in 2015,based on the issuer's industry.9

8 Where the audit work inspected related to an engagement in which theFirm played a role but was not the principal auditor, the industry and the revenueincluded in the tables and charts in this section are those of the entity for which an auditreport was issued by the primary auditor. As discussed above, the inspection processincluded reviews of portions of 53 selected issuer audits completed by the Firm and theFirm's audit work on two other issuer audit engagements in which it played a role butwas not the principal auditor.

9 See Footnote 7 for additional information on how industry sectors wereclassified.



C.2. Revenue Ranges of Issuers Inspected

The chart below categorizes, based upon revenue, the 55 issuers whose auditswere inspected in 2015.10 This presentation of revenue data is intended to provideinformation about the size of issuer audits that were inspected and is not indicative ofwhether the inspection included a review of the Firm's auditing of revenue in the issueraudits selected for review.

10 The revenue amounts reflected in the chart are for the issuer's fiscal yearend that corresponds to the audit inspected by the PCAOB. The revenue amounts wereobtained from S&P and reflect a standardized approach to presenting revenue amounts.

Consumer

Discretionary

9%

ConsumerStaples

5%

Energy7%

FinancialServices

16%Health Care24%

Industrials13%

InformationTechnology

15%

Materials9%

Utilities2%

Industries of IssuersInspected

Industry

Numberof AuditsInspected Percentage

ConsumerDiscretionary 5 9%ConsumerStaples 3 5%Energy 4 7%FinancialServices 9 16%Health Care 13 24%Industrials 7 13%InformationTechnology 8 15%Materials 5 9%Utilities 1 2%



D. Information Concerning PCAOB Inspections that is Generally Applicable toAnnually Inspected Firms

Board inspections include reviews of certain portions of selected audit workperformed by the inspected firm and reviews of certain aspects of the firm's qualitycontrol system. The inspections are designed to identify deficiencies in audit work anddefects or potential defects in the firm's system of quality control related to the firm'saudits. The focus on deficiencies, defects, and potential defects necessarily carriesthrough to reports on inspections and, accordingly, Board inspection reports are notintended to serve as balanced report cards or overall rating tools. Further, the inclusionin an inspection report of certain deficiencies, defects, and potential defects should notbe construed as an indication that the Board has made any determination about otheraspects of the inspected firm's systems, policies, procedures, practices, or conduct notincluded within the report.

< 100 million5%

100 – 500million

20%

500 million –1 billion

13%1 - 2.5billion29%

2.5 – 5billion

9%

5 – 10billion

9%

10 – 50billion13%

> 50 billion2%

Revenue Ranges of Issuers Inspected(in US $)

Revenue(in US$)

Numberof AuditsInspected Percentage

< 100 million 3 5%100 – 500million 11 20%500 million –1 billion 7 13%1 - 2.5 billion 16 29%2.5 – 5 billion 5 9%5 – 10 billion 5 9%10 – 50 billion 7 13%> 50 billion 1 2%



D.1. Reviews of Audit Work

Inspections include reviews of portions of selected audits of financial statementsand, where applicable, audits of ICFR. For these audits, the inspection team selectscertain portions of the audits for inspection, and it reviews the engagement team's workpapers and interviews engagement personnel regarding those portions. If the inspectionteam identifies a potential issue that it is unable to resolve through discussion with thefirm and any review of additional work papers or other documentation, the inspectionteam ordinarily provides the firm with a written comment form on the matter and the firmis allowed the opportunity to provide a written response to the comment form. If theresponse does not resolve the inspection team's concerns, the matter is considered adeficiency and is evaluated for inclusion in the inspection report.

The inspection team selects the audits, and the specific portions of those audits,that it will review, and the inspected firm is not allowed an opportunity to limit orinfluence the selections. Audit deficiencies that the inspection team may identify includea firm's failure to identify, or to address appropriately, financial statementmisstatements, including failures to comply with disclosure requirements,11 as well as afirm's failure to perform, or to perform sufficiently, certain necessary audit procedures.An inspection of an annually inspected firm does not involve the review of all of thefirm's audits, nor is it designed to identify every deficiency in the reviewed audits.Accordingly, a Board inspection report should not be understood to provide anyassurance that a firm's audit work, or the relevant issuers' financial statements orreporting on ICFR, are free of any deficiencies not specifically described in aninspection report.

11 When it comes to the Board's attention that an issuer's financialstatements appear not to present fairly, in a material respect, the financial position,results of operations, or cash flows of the issuer in conformity with the applicablefinancial reporting framework, the Board's practice is to report that information to theSecurities and Exchange Commission ("SEC" or "the Commission"), which hasjurisdiction to determine proper accounting in issuers' financial statements. Anydescription in this report of financial statement misstatements or failures to comply withSEC disclosure requirements should not be understood as an indication that the SEChas considered or made any determination regarding these issues unless otherwiseexpressly stated.



In some cases, the conclusion that a firm did not perform a procedure may bebased on the absence of documentation and the absence of persuasive other evidence,even if the firm claimed to have performed the procedure. AS No. 3, AuditDocumentation, provides that, in various circumstances including PCAOB inspections, afirm that has not adequately documented that it performed a procedure, obtainedevidence, or reached an appropriate conclusion must demonstrate with persuasiveother evidence that it did so, and that oral assertions and explanations alone do notconstitute persuasive other evidence. In reaching its conclusions, an inspection teamconsiders whether audit documentation or any other evidence that a firm might provideto the inspection team supports the firm's contention that it performed a procedure,obtained evidence, or reached an appropriate conclusion. In the case of every mattercited in the public portion of a final inspection report, the inspection team has carefullyconsidered any contention by the firm that it did so but just did not document its work,and the inspection team has concluded that the available evidence does not support thecontention that the firm sufficiently performed the necessary work.

Identified deficiencies in the audit work that exceed a significance threshold(which is described in Part I.A of the inspection report) are summarized in the publicportion of the inspection report.12

The Board cautions against extrapolating from the results presented in the publicportion of a report to broader conclusions about the frequency of deficienciesthroughout the firm's practice. Individual audits and areas of inspection focus are mostoften selected on a risk-weighted basis and not randomly. Areas of focus vary amongselected audits, but often involve audit work on the most difficult or inherently uncertainareas of financial statements. Thus, the audit work is generally selected for inspectionbased on factors that, in the inspection team's view, heighten the possibility that auditing

12 The discussion in this report of any deficiency observed in a particularaudit reflects information reported to the Board by the inspection team and does notreflect any determination by the Board as to whether the Firm has engaged in anyconduct for which it could be sanctioned through the Board's disciplinary process. Inaddition, any references in this report to violations or potential violations of law, rules, orprofessional standards are not a result of an adversarial adjudicative process and donot constitute conclusive findings for purposes of imposing legal liability.



deficiencies are present, rather than through a process intended to identify arepresentative sample.

D.2. Review of a Firm's Quality Control System

QC 20, System of Quality Control for a CPA Firm's Accounting and AuditingPractice, provides that an auditing firm has a responsibility to ensure that its personnelcomply with the applicable professional standards. This standard specifies that a firm'ssystem of quality control should encompass the following elements: (1) independence,integrity, and objectivity; (2) personnel management; (3) acceptance and continuance ofissuer audit engagements; (4) engagement performance; and (5) monitoring.

The inspection team's assessment of a firm's quality control system is derivedboth from the results of its procedures specifically focused on the firm's quality controlpolicies and procedures, and also from inferences that can be drawn from deficienciesin the performance of individual audits. Audit deficiencies, whether alone or whenaggregated, may indicate areas where a firm's system has failed to provide reasonableassurance of quality in the performance of audits. Even deficiencies that do not result inan insufficiently supported audit opinion or a failure to obtain sufficient appropriate auditevidence to fulfill the objectives of the firm's role in an audit may indicate a defect orpotential defect in a firm's quality control system.13 If identified deficiencies, whenaccumulated and evaluated, indicate defects or potential defects in the firm's system ofquality control, the nonpublic portion of this report would include a discussion of thoseissues. When evaluating whether identified deficiencies in individual audits indicate adefect or potential defect in a firm's system of quality control, the inspection team

13 Not every audit deficiency suggests a defect or potential defect in a firm'squality control system, and this report does not discuss every audit deficiency theinspection team identified.



considers the nature, significance, and frequency of deficiencies;14 related firmmethodology, guidance, and practices; and possible root causes.

Inspections also include a review of certain of the firm's practices, policies, andprocesses related to audit quality, which constitute a part of the firm's quality controlsystem. The inspection team customizes the procedures it performs with respect to thefirm's practices, policies, and processes related to audit quality, bearing in mind thefirm's structure, procedures performed in prior inspections, past and current inspectionobservations, an assessment of risk related to each area, and other factors. The areasgenerally considered for review include (1) management structure and processes,including the tone at the top; (2) practices for partner management, including allocationof partner resources and partner evaluation, compensation, admission, and disciplinaryactions; (3) policies and procedures for considering and addressing the risks involved inaccepting and retaining issuer audit engagements, including the application of the firm'srisk-rating system; (4) processes related to the firm's use of audit work that the firm'sforeign affiliates perform on the foreign operations of the firm's U.S. issuer audits; and(5) the firm's processes for monitoring audit performance, including processes foridentifying and assessing indicators of deficiencies in audit performance, independencepolicies and procedures, and processes for responding to defects or potential defects inquality control. A description of the procedures generally applied to these areas isbelow.

D.2.a. Review of Management Structure and Processes, Including theTone at the Top

Procedures in this area are designed to focus on (1) how management isstructured and operates the firm's business, and the implications that the managementstructure and processes have on audit performance and (2) whether actions and

14 An evaluation of the frequency of a type of deficiency may includeconsideration of how often the inspection team reviewed audit work that presented theopportunity for similar deficiencies to occur. In some cases, even a type of deficiencythat is observed infrequently in a particular inspection may, because of somecombination of its nature, its significance, and the frequency with which it has beenobserved in previous inspections of the firm, be cause for concern about a qualitycontrol defect or potential defect.



communications by the firm's leadership – the tone at the top – demonstrate acommitment to audit quality. To assess this area, the inspection team may interviewmembers of the firm's leadership and review significant management reports anddocuments, as well as information regarding financial metrics and other processes thatthe firm uses to plan and evaluate its business.

D.2.b. Review of Practices for Partner Management, Including Allocationof Partner Resources and Partner Evaluation, Compensation,Admission, and Disciplinary Actions

Procedures in this area are designed to focus on (1) whether the firm's processesrelated to partner evaluation, compensation, admission, termination, and disciplinaryactions could be expected to encourage an appropriate emphasis on audit quality andtechnical competence, as distinct from marketing or other activities of the firm; (2) thefirm's processes for allocating its partner resources; and (3) the accountability andresponsibilities of the different levels of firm management with respect to partnermanagement. The inspection team may interview members of the firm's managementand review documentation related to certain of these topics. In addition, the inspectionteam's evaluation may include the results of interviews of audit partners regarding theirresponsibilities and allocation of time. Further, the inspection team may review a sampleof partners' personnel files.

D.2.c. Review of Policies and Procedures for Considering and Addressingthe Risks Involved in Accepting and Retaining Issuer AuditEngagements, Including the Application of the Firm's Risk-RatingSystem

The inspection team may consider the firm's documented policies andprocedures in this area. In addition, the inspection team may select certain issuer auditsto (1) evaluate compliance with the firm's policies and procedures for identifying andassessing the risks involved in accepting or continuing the issuer audit engagementsand (2) observe whether the audit procedures were responsive to the risks identifiedduring the firm's process.



D.2.d. Review of Processes Related to a Firm's Use of Audit Work that theFirm's Foreign Affiliates Perform on the Foreign Operations of theFirm's U.S. Issuer Audits

The inspection team may review the firm's policies and procedures related to itssupervision and control of work performed by foreign affiliates on the firm's U.S. issueraudits, review available information relating to the most recent internal inspections offoreign affiliated firms, interview members of the firm's leadership, and review the U.S.engagement teams' supervision concerning, and procedures for control of, the auditwork that the firm's foreign affiliates performed on a sample of audits.

D.2.e. Review of a Firm's Processes for Monitoring Audit Performance,Including Processes for Identifying and Assessing Indicators ofDeficiencies in Audit Performance, Independence Policies andProcedures, and Processes for Responding to Defects or PotentialDefects in Quality Control

D.2.e.i. Review of Processes for Identifying and AssessingIndicators of Deficiencies in Audit Performance

Procedures in this area are designed to identify and assess the monitoringprocesses that the firm uses to monitor audit quality for individual engagements and forthe firm as a whole. The inspection team may interview members of the firm'smanagement and review documents relating to the firm's identification and evaluationof, and response to, possible indicators of deficiencies in audit performance. In addition,the inspection team may review documents related to the design, operation, andevaluation of findings of the firm's internal inspection program, and may compare theresults of its review of audit work to those from the internal inspection's review of thesame audit work.

D.2.e.ii. Review of Response to Defects or Potential Defects inQuality Control

The inspection team may review steps the firm has taken to address possiblequality control deficiencies and assess the design and effectiveness of the underlyingprocesses. In addition, the inspection team may inspect audits of issuers whose audits



had been reviewed during previous PCAOB inspections of the firm to ascertain whetherthe audit procedures in areas with previous deficiencies have improved.

D.2.e.iii. Review of Certain Other Policies and Procedures Relatedto Monitoring Audit Quality

The inspection team may assess policies, procedures, and guidance related toaspects of independence requirements and the firm's consultation processes, as well asthe firm's compliance with these requirements and processes. In addition, the inspectionteam may review documents, including certain newly issued policies and procedures,and interview firm management to consider the firm's methods for developing auditpolicies, procedures, and methodologies, including internal guidance and trainingmaterials.

END OF PART I



PART II, PART III, APPENDIX A, AND APPENDIX B OF THIS REPORT ARENONPUBLIC AND ARE OMITTED FROM THIS PUBLIC DOCUMENT


August 10, 2016Page C-1

APPENDIX C

RESPONSE OF THE FIRM TO DRAFT INSPECTION REPORT

Pursuant to section 104(f) of the Act, 15 U.S.C. § 7214(f), and PCAOB Rule4007(a), the Firm provided a written response to a draft of this report. Pursuant tosection 104(f) of the Act and PCAOB Rule 4007(b), the Firm's response, minus anyportion granted confidential treatment, is attached hereto and made part of this finalinspection report.15

15 The Board does not make public any of a firm's comments that address anonpublic portion of the report unless a firm specifically requests otherwise. In somecases, the result may be that none of a firm's response is made publicly available. Inaddition, pursuant to section 104(f) of the Act, 15 U.S.C. § 7214(f), and PCAOB Rule4007(b), if a firm requests, and the Board grants, confidential treatment for any of thefirm's comments on a draft report, the Board does not include those comments in thefinal report at all. The Board routinely grants confidential treatment, if requested, for anyportion of a firm's response that addresses any point in the draft that the Board omitsfrom, or any inaccurate statement in the draft that the Board corrects in, the final report.

PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, NY 10017 T: (646) 471 3000, F: (813) 286 6000, www.pwc.com/us

July 27, 2016

Ms. Helen A. Munter, Director Division of Registration and Inspections Public Company Accounting Oversight Board 1666 K Street, N.W. Washington, D.C. 20006 Re: Response to Draft Report on the 2015 Inspection of PricewaterhouseCoopers LLP Dear Ms. Munter: On behalf of PricewaterhouseCoopers LLP (the “Firm”), we are pleased to provide our response to the Public Company Accounting Oversight Board's (“PCAOB” or the “Board”) Draft Report on the 2015 Inspection of our Firm's 2014 audits (the “Report”).

We recognize the inspection process provides a valuable opportunity to improve the quality of our audits. We continue to support the PCAOB in its mission and are committed to furthering the public interest through the preparation of informative, accurate and independent audit reports. Bringing value to the capital markets by consistently performing high-quality audits remains our top priority, and we will address the matters raised in the Report in a thorough and thoughtful way. We understand that many of our stakeholders will review the PCAOB’s final report and our response and have therefore included a link to our most recent annual audit quality report to encourage our stakeholders to see the tangible steps we are taking to maintain and improve audit quality. (http://www.pwc.com/us/en/cfodirect/issues/auditing/our-focus-on-audit-quality.html)

We have evaluated each of the observations set forth in Part I - Inspection Procedures and Certain Observations of the Report and have taken appropriate actions under both PCAOB standards and our policies. Our evaluation included those steps we considered necessary to comply with AU 390, Consideration of Omitted Procedures After the Report Date, and where applicable, AU 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report and AS No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated With An Audit of Financial Statements.

We look forward to continuing our dialogue with the PCAOB and would be pleased to discuss any aspect of this response or any other questions you may have.

Sincerely,

Tim Ryan Maria C. Moats US Chairman and Senior Partner US Assurance Leader PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP


August 10, 2016Page D-1

APPENDIX D

AUDITING STANDARDS REFERENCED IN PART I.A

This appendix provides the text of the auditing standard paragraphs that arereferenced in Part I.A of this report. Footnotes that are included in this appendix, andany other Notes, are from the original auditing standards that are referenced. While thisappendix contains the specific portions of the relevant standards cited with respect tothe deficiencies in Part I.A of this report, other portions of the standards (including thosedescribed in Part I.B of this report) may provide additional context, descriptions, relatedrequirements, or explanations; the complete standards are available on the PCAOB'swebsite at http://pcaobus.org/STANDARDS/Pages/default.aspx.

AS No. 5, An Audit of Internal Control Over Financial Reporting That Is Integratedwith An Audit of Financial Statements

USING A TOP-DOWNAPPROACH

Understanding LikelySources of Misstatement

AS No. 5.38 In performing a walkthrough, at the points atwhich important processing procedures occur, the auditorquestions the company's personnel about theirunderstanding of what is required by the company'sprescribed procedures and controls. These probingquestions, combined with the other walkthroughprocedures, allow the auditor to gain a sufficientunderstanding of the process and to be able to identifyimportant points at which a necessary control is missingor not designed effectively. Additionally, probingquestions that go beyond a narrow focus on the singletransaction used as the basis for the walkthrough allowthe auditor to gain an understanding of the different typesof significant transactions handled by the process.

Issuer B

Selecting Controls to Test

AS No. 5.39 The auditor should test those controls that areimportant to the auditor's conclusion about whether thecompany's controls sufficiently address the assessed riskof misstatement to each relevant assertion.

Issuers A, B, C,D, and E

TESTING CONTROLS

Testing DesignEffectiveness

AS No. 5.42 The auditor should test the design effectiveness of Issuers A, B, C,




controls by determining whether the company's controls, ifthey are operated as prescribed by persons possessing thenecessary authority and competence to perform the controleffectively, satisfy the company's control objectives andcan effectively prevent or detect errors or fraud that couldresult in material misstatements in the financial statements.

Note: A smaller, less complex company mightachieve its control objectives in a different mannerfrom a larger, more complex organization. Forexample, a smaller, less complex company mighthave fewer employees in the accounting function,limiting opportunities to segregate duties andleading the company to implement alternativecontrols to achieve its control objectives. In suchcircumstances, the auditor should evaluatewhether those alternative controls are effective.

E, F, G, I, and J

Testing OperatingEffectiveness

AS No. 5.44 The auditor should test the operating effectivenessof a control by determining whether the control is operatingas designed and whether the person performing the controlpossesses the necessary authority and competence toperform the control effectively.

Note: In some situations, particularly in smallercompanies, a company might use a third party toprovide assistance with certain financial reportingfunctions. When assessing the competence ofpersonnel responsible for a company's financialreporting and associated controls, the auditor maytake into account the combined competence ofcompany personnel and other parties that assistwith functions related to financial reporting.

Issuers A, B, C,E, F, G, I, and J

Relationship of Risk to theEvidence to be Obtained

AS No. 5.46 For each control selected for testing, the evidencenecessary to persuade the auditor that the control iseffective depends upon the risk associated with the control.The risk associated with a control consists of the risk thatthe control might not be effective and, if not effective, therisk that a material weakness would result. As the riskassociated with the control being tested increases, theevidence that the auditor should obtain also increases

Issuer J




Note: Although the auditor must obtain evidenceabout the effectiveness of controls for eachrelevant assertion, the auditor is not responsiblefor obtaining sufficient evidence to support anopinion about the effectiveness of each individualcontrol. Rather, the auditor's objective is toexpress an opinion on the company's internalcontrol over financial reporting overall. This allowsthe auditor to vary the evidence obtained regardingthe effectiveness of individual controls selected fortesting based on the risk associated with theindividual control.

AS No. 5.47 Factors that affect the risk associated with acontrol include –

The nature and materiality of misstatementsthat the control is intended to prevent ordetect;

The inherent risk associated with the relatedaccount(s) and assertion(s);

Whether there have been changes in thevolume or nature of transactions that mightadversely affect control design or operatingeffectiveness;

Whether the account has a history of errors;

The effectiveness of entity-level controls,especially controls that monitor othercontrols;

The nature of the control and the frequencywith which it operates;

The degree to which the control relies on theeffectiveness of other controls (e.g., thecontrol environment or informationtechnology general controls);

The competence of the personnel whoperform the control or monitor itsperformance and whether there have beenchanges in key personnel who perform thecontrol or monitor its performance;

Whether the control relies on performance byan individual or is automated (i.e., an

Issuer J




automated control would generally beexpected to be lower risk if relevantinformation technology general controls areeffective); and

Note: A less complex company or businessunit with simple business processes andcentralized accounting operations mighthave relatively simple information systemsthat make greater use of off-the-shelfpackaged software without modification. Inthe areas in which off-the-shelf software isused, the auditor's testing of informationtechnology controls might focus on theapplication controls built into the pre-packaged software that management relieson to achieve its control objectives and theIT general controls that are important to theeffective operation of those applicationcontrols.

The complexity of the control and thesignificance of the judgments that must bemade in connection with its operation.

Note: Generally, a conclusion that a control is notoperating effectively can be supported by lessevidence than is necessary to support aconclusion that a control is operating effectively.

EVALUATING IDENTIFIEDDEFICIENCIES

AS No. 5.68 The auditor should evaluate the effect ofcompensating controls when determining whether a controldeficiency or combination of deficiencies is a materialweakness. To have a mitigating effect, the compensatingcontrol should operate at a level of precision that wouldprevent or detect a misstatement that could be material.

Issuer J

APPENDIX B - SpecialTopics

INTEGRATION OF AUDITS

AS No. 5.B8 Effect of Substantive Procedures on the Auditor'sConclusions About the Operating Effectiveness of Controls.In an audit of internal control over financial reporting, theauditor should evaluate the effect of the findings of thesubstantive auditing procedures performed in the audit offinancial statements on the effectiveness of internal control

Issuer K




over financial reporting. This evaluation should include, ata minimum –

The auditor's risk assessments in connectionwith the selection and application ofsubstantive procedures, especially thoserelated to fraud.

Findings with respect to illegal acts and relatedparty transactions.

Indications of management bias in makingaccounting estimates and in selectingaccounting principles.

Misstatements detected by substantiveprocedures. The extent of such misstatementsmight alter the auditor's judgment about theeffectiveness of controls.

MULTIPLE LOCATIONSSCOPING DECISIONS

AS No. 5.B11 In assessing and responding to risk, the auditorshould test controls over specific risks that present areasonable possibility of material misstatement to thecompany's consolidated financial statements. In lower-risklocations or business units, the auditor first might evaluatewhether testing entity-level controls, including controls inplace to provide assurance that appropriate controls existthroughout the organization, provides the auditor withsufficient evidence.

Issuer G

AS No. 13, The Auditor's Responses to the Risks of Material Misstatement

Responses Involving theNature, Timing, and Extentof Audit Procedures

AS No. 13.8 The auditor should design and perform auditprocedures in a manner that addresses the assessedrisks of material misstatement for each relevant assertionof each significant account and disclosure.

Issuers A, H,and L

Testing Controls

TESTING CONTROLS INAN AUDIT OF FINANCIALSTATEMENTS

AS No. 13.16 Controls to be Tested. If the auditor plans to Issuers A and C



AS No. 13, The Auditor's Responses to the Risks of Material Misstatementassess control risk at less than the maximum by relying oncontrols,12/ and the nature, timing, and extent of plannedsubstantive procedures are based on that lowerassessment, the auditor must obtain evidence that thecontrols selected for testing are designed effectively andoperated effectively during the entire period ofreliance.13/ However, the auditor is not required to assesscontrol risk at less than the maximum for all relevantassertions and, for a variety of reasons, the auditor maychoose not to do so.

Footnotes to AS No. 13.16

12/ Reliance on controls that is supported by sufficient and appropriate audit evidence allows theauditor to assess control risk at less than the maximum, which results in a lower assessed risk of materialmisstatement. In turn, this allows the auditor to modify the nature, timing, and extent of planned substantiveprocedures.

13/ Terms defined in Appendix A, Definitions, are set in boldface type the first time they appear.

AS No. 13.18 Evidence about the Effectiveness of Controls inthe Audit of Financial Statements. In designing andperforming tests of controls for the audit of financialstatements, the evidence necessary to support theauditor's control risk assessment depends on the degreeof reliance the auditor plans to place on the effectivenessof a control. The auditor should obtain more persuasiveaudit evidence from tests of controls the greater thereliance the auditor places on the effectiveness of acontrol. The auditor also should obtain more persuasiveevidence about the effectiveness of controls for eachrelevant assertion for which the audit approach consistsprimarily of tests of controls, including situations in whichsubstantive procedures alone cannot provide sufficientappropriate audit evidence.

Issuers A and C

ASSESSING CONTROLRISK

AS No. 13.34 When deficiencies affecting the controls on whichthe auditor intends to rely are detected, the auditor shouldevaluate the severity of the deficiencies and the effect onthe auditor's control risk assessments. If the auditor plansto rely on controls relating to an assertion but the controlsthat the auditor tests are ineffective because of controldeficiencies, the auditor should:

a. Perform tests of other controls related to thesame assertion as the ineffective controls, or

Issuer H



AS No. 13, The Auditor's Responses to the Risks of Material Misstatement

b. Revise the control risk assessment andmodify the planned substantive proceduresas necessary in light of the increasedassessment of risk.

Note: Auditing Standard No. 5establishes requirements for evaluating theseverity of a control deficiency andcommunicating identified control deficienciesto management and the audit committee inan integrated audit. AU sec. 325,Communications About Control Deficienciesin an Audit of Financial Statements,establishes requirements for communicatingsignificant deficiencies and materialweaknesses in an audit of financialstatements only.

Substantive Procedures

AS No. 13.37 As the assessed risk of material misstatementincreases, the evidence from substantive procedures thatthe auditor should obtain also increases. The evidenceprovided by the auditor's substantive procedures dependsupon the mix of the nature, timing, and extent of thoseprocedures. Further, for an individual assertion, differentcombinations of the nature, timing, and extent of testingmight provide sufficient appropriate evidence to respondto the assessed risk of material misstatement.

Issuers A and C

Dual-purpose Tests

AS No. 13.47 In some situations, the auditor might perform asubstantive test of a transaction concurrently with a test ofa control relevant to that transaction (a "dual-purposetest"). In those situations, the auditor should design thedual-purpose test to achieve the objectives of both the testof the control and the substantive test. Also, whenperforming a dual-purpose test, the auditor shouldevaluate the results of the test in forming conclusionsabout both the assertion and the effectiveness of thecontrol being tested.20/

Issuer H

Footnote to AS No. 13.47

20/ Paragraph .44 of AU sec. 350 discusses applying audit sampling in dual-purpose tests.



AS No. 14, Evaluating Audit Results

Evaluating the Results ofthe Audit of FinancialStatements

AS No. 14.3 In forming an opinion on whether the financialstatements are presented fairly, in all material respects, inconformity with the applicable financial reportingframework, the auditor should take into account all relevantaudit evidence, regardless of whether it appears tocorroborate or to contradict the assertions in the financialstatements.

Issuers A, B, andE

EVALUATING THEPRESENTATION OF THEFINANCIAL STATEMENTS,INCLUDING THEDISCLOSURES

AS No. 14.30 The auditor must evaluate whether the financialstatements are presented fairly, in all material respects, inconformity with the applicable financial reportingframework.

Note: AU sec. 411, The Meaning of Present Fairlyin Conformity With Generally AcceptedAccounting Principles, establishes requirementsfor evaluating the presentation of the financialstatements. Auditing Standard No. 6, EvaluatingConsistency of Financial Statements, establishesrequirements regarding evaluating theconsistency of the accounting principles used infinancial statements.

Note: The auditor should look to the requirementsof the Securities and Exchange Commission forthe company under audit with respect to theaccounting principles applicable to that company.

Issuers D and F

AU 322, The Auditor's Consideration of the Internal Audit Function in an Audit ofFinancial Statements

Assessing theCompetence andObjectivity of the InternalAuditors

Objectivity of the InternalAuditors




AU 322.10 When assessing the internal auditors' objectivity,the auditor should obtain or update information from prioryears about such factors as—

The organizational status of the internalauditor responsible for the internal auditfunction, including—

Whether the internal auditor reports toan officer of sufficient status to ensurebroad audit coverage and adequateconsideration of, and action on, thefindings and recommendations of theinternal auditors.

Whether the internal auditor has directaccess and reports regularly to the boardof directors, the audit committee, or theowner-manager.

Whether the board of directors, the auditcommittee, or the owner-manageroversees employment decisions relatedto the internal auditor.

Policies to maintain internal auditors'objectivity about the areas audited,including—

Policies prohibiting internal auditors fromauditing areas where relatives areemployed in important or audit-sensitivepositions.

Policies prohibiting internal auditors fromauditing areas where they were recentlyassigned or are scheduled to beassigned on completion ofresponsibilities in the internal auditfunction.

Issuer B

Evaluating and Testingthe Effectiveness ofInternal Auditors' Work

AU 322.24 The auditor should perform procedures toevaluate the quality and effectiveness of the internalauditors' work, as described in paragraphs .12 through.17, that significantly affects the nature, timing, andextent of the auditor's procedures. The nature and extentof the procedures the auditor should perform when

Issuer B




making this evaluation are a matter of judgmentdepending on the extent of the effect of the internalauditors' work on the auditor's procedures for significantaccount balances or classes of transactions.

AU 322.26 In making the evaluation, the auditor should testsome of the internal auditors' work related to thesignificant financial statement assertions. These testsmay be accomplished by either (a) examining some ofthe controls, transactions, or balances that the internalauditors examined or (b) examining similar controls,transactions, or balances not actually examined by theinternal auditors. In reaching conclusions about theinternal auditors' work, the auditor should compare theresults of his or her tests with the results of the internalauditors' work. The extent of this testing will depend onthe circumstances and should be sufficient to enable theauditor to make an evaluation of the overall quality andeffectiveness of the internal audit work being consideredby the auditor.

Issuer B

AU 328, Auditing Fair Value Measurements and Disclosures

Testing Management'sSignificant Assumptions,the Valuation Model, andthe Underlying Data

AU 328.26 The auditor's understanding of the reliability of theprocess used by management to determine fair value is animportant element in support of the resulting amounts andtherefore affects the nature, timing, and extent of auditprocedures. When testing the entity's fair valuemeasurements and disclosures, the auditor evaluateswhether:

a. Management's assumptions are reasonableand reflect, or are not inconsistent with, marketinformation (see paragraph .06).

b. The fair value measurement was determinedusing an appropriate model, if applicable.

c. Management used relevant information thatwas reasonably available at the time.

Issuers A, B, C,E, F, and H

AU 328.28 Where applicable, the auditor should evaluatewhether the significant assumptions used by management

Issuers A, B, C,E, F, and H



AU 328, Auditing Fair Value Measurements and Disclosuresin measuring fair value, taken individually and as a whole,provide a reasonable basis for the fair value measurementsand disclosures in the entity's financial statements.

AU 328.31 Assumptions ordinarily are supported by differingtypes of evidence from internal and external sources thatprovide objective support for the assumptions used. Theauditor evaluates the source and reliability of evidencesupporting management's assumptions, includingconsideration of the assumptions in light of historical andmarket information.

Issuers A, B, E,and F

AU 328.36 To be reasonable, the assumptions on which thefair value measurements are based (for example, thediscount rate used in calculating the present value of futurecash flows),fn 5 individually and taken as a whole, need tobe realistic and consistent with:

a. The general economic environment, the economicenvironment of the specific industry, and theentity's economic circumstances;

b. Existing market information;

c. The plans of the entity, including whatmanagement expects will be the outcome ofspecific objectives and strategies;

d. Assumptions made in prior periods, if appropriate;

e. Past experience of, or previous conditionsexperienced by, the entity to the extent currentlyapplicable;

f. Other matters relating to the financial statements,for example, assumptions used by management inaccounting estimates for financial statementaccounts other than those relating to fair valuemeasurements and disclosures; and

g. The risk associated with cash flows, if applicable,including the potential variability in the amount andtiming of the cash flows and the related effect onthe discount rate.

Where assumptions are reflective of management's intentand ability to carry out specific courses of action, theauditor considers whether they are consistent with theentity's plans and past experience.

Issuers A, B, E,and F

Footnote to AU 328.36



AU 328, Auditing Fair Value Measurements and Disclosuresfn 5 The auditor also should consider requirements of GAAP that may influence the selection of

assumptions (see FASB Concepts Statement No. 7).

AU 328.39 The auditor should test the data used to developthe fair value measurements and disclosures and evaluatewhether the fair value measurements have been properlydetermined from such data and management'sassumptions. Specifically, the auditor evaluates whetherthe data on which the fair value measurements are based,including the data used in the work of a specialist, isaccurate, complete, and relevant; and whether fair valuemeasurements have been properly determined using suchdata and management's assumptions. The auditor's testsalso may include, for example, procedures such asverifying the source of the data, mathematicalrecomputation of inputs, and reviewing of information forinternal consistency, including whether such information isconsistent with management's intent and ability to carry outspecific courses of action discussed in paragraph .17.

Issuers A, B, C,and E

AU 336, Using the Work of a Specialist

Qualifications and Work ofa Specialist

AU 336.08 The auditor should consider the following toevaluate the professional qualifications of the specialist indetermining that the specialist possesses the necessaryskill or knowledge in the particular field:

a. The professional certification, license, or otherrecognition of the competence of the specialistin his or her field, as appropriate

b. The reputation and standing of the specialist inthe views of peers and others familiar with thespecialist's capability or performance

c. The specialist's experience in the type of workunder consideration.

Issuer H

Relationship of theSpecialist to the Client

AU 336.10 The auditor should evaluate the relationshipfn 6 ofthe specialist to the client, including circumstances thatmight impair the specialist's objectivity. Suchcircumstances include situations in which the client has theability—through employment, ownership, contractual right,

Issuer H



AU 336, Using the Work of a Specialist

family relationship, or otherwise—to directly or indirectlycontrol or significantly influence the specialist.


fn 6 The term relationship includes, but is not limited to, those situations meeting the definition of"related parties" contained in the financial reporting framework applicable to the company under audit.

Using the Findings of theSpecialist

AU 336.12 The appropriateness and reasonableness ofmethods and assumptions used and their application arethe responsibility of the specialist. The auditor should (a)obtain an understanding of the methods and assumptionsused by the specialist, (b) make appropriate tests of dataprovided to the specialist, taking into account the auditor'sassessment of control risk, and (c) evaluate whether thespecialist's findings support the related assertions in thefinancial statements. Ordinarily, the auditor would use thework of the specialist unless the auditor's procedures leadhim or her to believe the findings are unreasonable in thecircumstances. If the auditor believes the findings areunreasonable, he or she should apply additionalprocedures, which may include obtaining the opinion ofanother specialist.

Issuer H

AU 337, Inquiry of a Client's Lawyer Concerning Litigation, Claims, andAssessments

Auditing Considerations

AU 337.04 With respect to litigation, claims, and assessments,the independent auditor should obtain evidential matterrelevant to the following factors:

a. The existence of a condition, situation, or setof circumstances indicating an uncertainty asto the possible loss to an entity arising fromlitigation, claims, and assessments.

b. The period in which the underlying cause forlegal action occurred.

c. The degree of probability of an unfavorableoutcome.

d. The amount or range of potential loss.

Issuer K



AU 342, Auditing Accounting Estimates

EvaluatingReasonableness

AU 342.11 Review and test management's process. In manysituations, the auditor assesses the reasonableness of anaccounting estimate by performing procedures to test theprocess used by management to make the estimate. Thefollowing are procedures the auditor may considerperforming when using this approach:

a. Identify whether there are controls over thepreparation of accounting estimates andsupporting data that may be useful in theevaluation.

b. Identify the sources of data and factors thatmanagement used in forming the assumptions,and consider whether such data and factorsare relevant, reliable, and sufficient for thepurpose based on information gathered inother audit tests.

c. Consider whether there are additional keyfactors or alternative assumptions about thefactors.

d. Evaluate whether the assumptions areconsistent with each other, the supportingdata, relevant historical data, and industrydata.

e. Analyze historical data used in developing theassumptions to assess whether the data iscomparable and consistent with data of theperiod under audit, and consider whether suchdata is sufficiently reliable for the purpose.

f. Consider whether changes in the business orindustry may cause other factors to becomesignificant to the assumptions.

g. Review available documentation of theassumptions used in developing theaccounting estimates and inquire about anyother plans, goals, and objectives of the entity,as well as consider their relationship to theassumptions.

h. Consider using the work of a specialistregarding certain assumptions (section 336,Using the Work of a Specialist).

i. Test the calculations used by management totranslate the assumptions and key factors intothe accounting estimate.

Issuers B and D



AU 350, Audit Sampling

Sampling In SubstantiveTests Of Details

AU 350.19 The second standard of field work states, "Asufficient understanding of the internal control structure isto be obtained to plan the audit and to determine thenature, timing, and extent of tests to be performed." Afterassessing and considering the levels of inherent andcontrol risks, the auditor performs substantive tests torestrict detection risk to an acceptable level. As theassessed levels of inherent risk, control risk, and detectionrisk for other substantive procedures directed toward thesame specific audit objective decreases, the auditor'sallowable risk of incorrect acceptance for the substantivetests of details increases and, thus, the smaller therequired sample size for the substantive tests of details.For example, if inherent and control risks are assessed atthe maximum, and no other substantive tests directedtoward the same specific audit objectives are performed,the auditor should allow for a low risk of incorrectacceptance for the substantive tests of details.fn 3 Thus, theauditor would select a larger sample size for the tests ofdetails than if he allowed a higher risk of incorrectacceptance.

Issuers A and C


fn 3 Some auditors prefer to think of risk levels in quantitative terms. For example, in thecircumstances described, an auditor might think in terms of a 5 percent risk of incorrect acceptance for thesubstantive test of details. Risk levels used in sampling applications in other fields are not necessarily relevantin determining appropriate levels for applications in auditing because an audit includes many interrelated testsand sources of evidence.

AU 350.23 To determine the number of items to be selected ina sample for a particular substantive test of details, theauditor should take into account tolerable misstatement forthe population; the allowable risk of incorrect acceptance(based on the assessments of inherent risk, control risk,and the detection risk related to the substantive analyticalprocedures or other relevant substantive tests); and thecharacteristics of the population, including the expectedsize and frequency of misstatements.

Issuers A and C

AU 350.23A Table 1 of the Appendix describes the effects ofthe factors discussed in the preceding paragraph onsample sizes in a statistical or nonstatistical samplingapproach. When circumstances are similar, the effect onsample size of those factors should be similar regardless of

Issuers A and C



AU 350, Audit Samplingwhether a statistical or nonstatistical approach is used.Thus, when a nonstatistical sampling approach is appliedproperly, the resulting sample size ordinarily will becomparable to, or larger than, the sample size resultingfrom an efficient and effectively designed statistical sample.

Performance andEvaluation

AU 350.25 Auditing procedures that are appropriate to theparticular audit objective should be applied to each sampleitem. In some circumstances the auditor may not be able toapply the planned audit procedures to selected sampleitems because, for example, supporting documentationmay be missing. The auditor's treatment of unexamineditems will depend on their effect on his evaluation of thesample. If the auditor's evaluation of the sample resultswould not be altered by considering those unexamineditems to be misstated, it is not necessary to examine theitems. However, if considering those unexamined items tobe misstated would lead to a conclusion that the balance orclass contains material misstatement, the auditor shouldconsider alternative procedures that would provide him withsufficient evidence to form a conclusion. The auditor alsoshould evaluate whether the reasons for his or her inabilityto examine the items have (a) implications in relation to hisor her risk assessments (including the assessment of fraudrisk), (b) implications regarding the integrity ofmanagement or employees, and (c) possible effects onother aspects of the audit.

Issuer H

AU 350.26 The auditor should project the misstatementresults of the sample to the items from which the samplewas selected. fn 5fn 6 There are several acceptable ways toproject misstatements from a sample. For example, anauditor may have selected a sample of every twentieth item(50 items) from a population containing one thousanditems. If he discovered overstatements of $3,000 in thatsample, the auditor could project a $60,000 overstatementby dividing the amount of misstatement in the sample bythe fraction of total items from the population included inthe sample. The auditor should add that projection to themisstatements discovered in any items examined 100percent. This total projected misstatement should becompared with the tolerable misstatement for the accountbalance or class of transactions, and appropriateconsideration should be given to sampling risk. If the totalprojected misstatement is less than tolerable misstatementfor the account balance or class of transactions, the auditorshould consider the risk that such a result might be

Issuer H



AU 350, Audit Samplingobtained even though the true monetary misstatement forthe population exceeds tolerable misstatement. Forexample, if the tolerable misstatement in an accountbalance of $1 million is $50,000 and the total projectedmisstatement based on an appropriate sample (seeparagraph .23) is $10,000, he may be reasonably assuredthat there is an acceptably low sampling risk that the truemonetary misstatement for the population exceedstolerable misstatement. On the other hand, if the totalprojected misstatement is close to the tolerablemisstatement, the auditor may conclude that there is anunacceptably high risk that the actual misstatements in thepopulation exceed the tolerable misstatement. An auditoruses professional judgment in making such evaluations.

Footnotes to AU 350.26

fn 5 If the auditor has separated the items subject to sampling into relatively homogeneous groups(see paragraph .22), he separately projects the misstatement results of each group and sums them.

fn 6 Paragraphs 10 through 23 of Auditing Standard No. 14, Evaluating Audit Results, discuss theauditor's consideration of differences between the accounting records and the underlying facts andcircumstances.


August 10, 2016Page E-1

APPENDIX E

REORGANIZED STANDARDS REFERENCED IN PART I

On March 31, 2015, the PCAOB adopted the reorganization of its auditingstandards using a topical structure and a single, integrated numbering system. SeeReorganization of PCAOB Auditing Standards and Related Amendments to PCAOBStandards and Rules, PCAOB Release No. 2015-002 (Mar. 31, 2015). On September17, 2015, the SEC approved the PCAOB's adoption of the reorganization. Thereorganized standards will be effective as of December 31, 2016. The citations toPCAOB auditing standards included in this report use the numbering system and titlesof standards that were in effect at the time of the primary inspection procedures. Thistable provides the section numbers of those standards included in Part I of this report asreorganized, as well as the titles of the standards both before and after thereorganization. The complete standards are available on the PCAOB's website athttp://pcaobus.org/STANDARDS/Pages/default.aspx.

Auditing Standards – before thereorganization

Auditing Standards – as reorganized

AS No. 3 Audit Documentation AS 1215 Audit Documentation

AS No. 5 An Audit of Internal ControlOver Financial Reporting ThatIs Integrated with An Audit ofFinancial Statements

AS 2201 An Audit of Internal ControlOver Financial Reporting ThatIs Integrated with An Audit ofFinancial Statements

AS No. 13 The Auditor's Responses tothe Risks of MaterialMisstatement

AS 2301 The Auditor's Responses tothe Risks of MaterialMisstatement

AS No. 14 Evaluating Audit Results AS 2810 Evaluating Audit ResultsAS No. 15 Audit Evidence AS 1105 Audit EvidenceAU 230 Due Professional Care in the

Performance of WorkAS 1015 Due Professional Care in the

Performance of WorkAU 322 The Auditor's Consideration of

the Internal Audit Function inan Audit of FinancialStatements

AS 2605 Consideration of the InternalAudit Function

AU 328 Auditing Fair ValueMeasurements and

AS 2502 Auditing Fair ValueMeasurements and


August 10, 2016Page E-2

Auditing Standards – before thereorganization

Auditing Standards – as reorganized

Disclosures Disclosures

AU 336 Using the Work of a Specialist AS 1210 Using the Work of a Specialist

AU 337 Inquiry of a Client's LawyerConcerning Litigation, Claims,and Assessments

AS 2505 Inquiry of a Client's LawyerConcerning Litigation, Claims,and Assessments

AU 342 Auditing Accounting Estimates AS 2501 Auditing Accounting EstimatesAU 350 Audit Sampling AS 2315 Audit Sampling

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