Confronting conflicting audit evidence

Part one

In part one of this two-part series on contradictory audit evidence, Thomas Ray, distinguished lecturer at Baruch College and former Chief Auditor of the PCAOB, describes the auditor’s responsibility for investigating contradictory evidence and hints that a company’s management might have a significant role to play.

One of the PCAOB’s recurring themes in both auditing standards and inspection results is the need for auditors to properly evaluate and consider the effects of contradictory audit evidence. Contradictory evidence:

• Indicates that a financial statement amount or disclosure is incorrect
• Or, is inconsistent with other audit evidence obtained

When auditors are faced with contradictory evidence, they need to evaluate how that evidence may affect the financial statements and the conduct of the audit.

In a report dated Oct. 15, 2015, which summarized inspections findings related to the recently implemented “risk assessment” auditing standards, the PCAOB identified instances in which auditors did not properly evaluate contradictory audit evidence. Fast-forward to today and the PCAOB continues to raise this issue as a concern.

An auditor's responsibility is clearly outlined in the PCAOB's audit standards and provides direction to help auditors identify and evaluate contradictory audit evidence. Those standards also specifically require the auditor to document information identified relating to significant findings or issues that are inconsistent with or contradicts the auditor's final conclusions.

So, what is company management supposed to do to help?

The purpose of this two-part series is to identify ways companies can respond to the concerns of an audit regulator. These responses can reduce incidents involving conflicting audit evidence, help the company’s auditor satisfy its responsibility, and improve company processes.

Check back for part two of this blog series, where Thomas Ray examines seven considerations for companies preparing and evaluating contradictory audit evidence.