The US audit watchdog has slammed Ernst & Young's audit of an unidentified mortgage company.
The Public Company Accounting Oversight board found problems with the audit, among other audits it has reviewed, and stated in its report that the firm 'failed to perform substantive procedures to test whether the repurchases of whole pool mortgage loans had been made in accordance with the terms of the related mortgage loan sales agreements, in order to determine whether the accounting treatment related to these loans was appropriate.'
The mortgage company had provided financing to certain non-affiliated entities, which used the financing to originate mortgage loans. In certain cases, the company then purchased these mortgage loans.
But the PCAOB noted no evidence in the audit documentation, and no persuasive other evidence, that E&Y had evaluated whether these non-affiliated entities were variable interest entities, as required by accounting standards.
On a second company audit assessed by the PCAOB, the firm was found to have failed to perform sufficient procedures to test the company's allowances for notes and accounts receivable, as the firm failed to test the reasonableness of the specific reserve percentages the company applied, other than by comparing them to the prior year, obtaining issuer-prepared schedules, and holding discussions with management.
'While the Firm also performed analytical procedures in support of its testing, these procedures lacked sufficient precision to detect misstatements that might, individually or in the aggregate, be material. In addition, there was no evidence in the audit documentation, and no persuasive other evidence, that the Firm had tested the issuer's aging of notes receivable,' the PCAOB said.
In a separate audit, the firm failed to perform appropriate substantive tests of certain software development costs that the issuer had capitalised in the year under audit. While the firm tested the issuer's relevant internal controls and reviewed checklists prepared by the issuer, there was no evidence in the audit documentation, and no persuasive other evidence, that the firm had performed substantive procedures to test the issuer's assertion that technological feasibility had been obtained, such as reviewing a detailed program design or a working model.
The firm responded to the report stating: 'Although we do not always agree with the characterization in the report of the work we performed or the related audit documentation, in some instances we did agree to perform certain additional procedures or improve aspects of our audit documentation in response to the inspection. In no instance did these actions change our original audit conclusions or affect our reports on the issuers' financial statements.'
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