Rattray & Associates CPA LLC - Public Company Accounting ...

PCAOB Release No. 104-2012-104A2010 INSPECTION OF RATTRAY & ASSOCIATES CPA LLCIn 2010, the Public Company Accounting Oversight Board ("PCAOB" or "theBoard") conducted an inspection of the registered public accounting firm Rattray &Associates CPA LLC 1/ ("the Firm"). The Board is issuing this report of that inspection inaccordance with the requirements of the Sarbanes-Oxley Act of 2002 ("the Act").The Board is making portions of the report publicly available. Specifically, theBoard is releasing to the public Part I of the report and portions of Part IV of the report.Part IV of the report consists of the Firm's comments, if any, on a draft of the report. 2/The Board has elsewhere described in detail its approach to making inspectionrelatedinformation publicly available consistent with legal restrictions. 3/ A substantialportion of the Board's criticisms of a firm (specifically criticisms of the firm's qualitycontrol system), and the Board's dialogue with the firm about those criticisms, occursout of public view, unless the firm fails to make progress to the Board's satisfaction inaddressing those criticisms. In addition, the Board generally does not discloseotherwise nonpublic information, learned through inspections, about the firm or itsclients. Accordingly, information in those categories generally does not appear in thepublicly available portion of an inspection report.1/The Firm has issued audit reports under the names of Harris F. Rattrayand Harris F. Rattray CPA.2/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 addition,pursuant to section 104(f) of the Act, 15 U.S.C. § 7214(f), and PCAOB Rule 4007(b), if afirm requests, and the Board grants, confidential treatment for any of the firm'scomments on a draft report, the Board does not include those comments in the finalreport 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.3/See Statement Concerning the Issuance of Inspection Reports, PCAOBRelease No. 104-2004-001 (August 26, 2004).

PCAOB Release No. 104-2012-104AInspection of Rattray & Associates CPA LLCMarch 1, 2012Page 2PART IINSPECTION PROCEDURES AND CERTAIN OBSERVATIONSMembers of the Board's inspection staff ("the inspection team") conductedprimary procedures for the inspection from June 28, 2010 to July 2, 2010. Theseprocedures were tailored to the nature of the Firm, certain aspects of which theinspection team understood at the outset of the inspection to be as follows:Number of officesOwnership structure1 (Pembroke Pines, Florida)Limited liability companyNumber of partners 1Number of professional staff 4/NoneNumber of issuer audit clients 5/ 2Board inspections are designed to identify and address weaknesses anddeficiencies related to how a firm conducts audits. 6/ To achieve that goal, Board4/"Professional staff" includes all personnel of the Firm, except partners orshareholders and administrative support personnel.5/The number of issuer audit clients shown here is based on the Firm's selfreportingand the inspection team's review of certain information for inspection planningpurposes. It does not reflect any Board determination concerning which, or how many,of the Firm's audit clients are "issuers" as defined in the Act. In some circumstances, aBoard inspection may include a review of a firm's audit of financial statements andinternal control over financial reporting ("ICFR") of an issuer that ceased to be an auditclient before the inspection, and any such former clients are not included in the numbershown here.6/This focus on weaknesses and deficiencies necessarily carries through toreports on inspections and, accordingly, Board inspection reports are not intended toserve as balanced report cards or overall rating tools.

PCAOB Release No. 104-2012-104AInspection of Rattray & Associates CPA LLCMarch 1, 2012Page 3inspections include reviews of certain aspects of selected audits performed by the firmand reviews of other matters related to the firm's quality control system.In the course of reviewing aspects of selected audits, an inspection may identifyways in which a particular audit is deficient, including failures by the firm to identify, or toaddress appropriately, respects in which an issuer's financial statements do not presentfairly the financial position, results of operations, or cash flows of the issuer inconformity with GAAP. 7/ It is not the purpose of an inspection, however, to review all ofa firm's audits or to identify every respect in which a reviewed audit is deficient.Accordingly, a Board inspection report should not be understood to provide anyassurance that the firm's audits, or its issuer clients' financial statements or reporting oninternal control, are free of any deficiencies not specifically described in an inspectionreport.In addition, inclusion of a deficiency in an inspection report does not mean thatthe deficiency remained unaddressed after the inspection team brought it to the firm'sattention. Under PCAOB standards, when audit deficiencies are discovered after thedate of the audit report, a firm must take appropriate action to assess the importance ofthe deficiencies to the firm's present ability to support its previously expressed auditopinions. 8/ Depending upon the circumstances, compliance with these standards mayrequire the firm to perform additional audit procedures, or to inform a client of the needfor changes to its financial statements or reporting on internal control, or to take steps toprevent reliance on previously expressed audit opinions. A Board inspection does nottypically include review of a firm's actions to address deficiencies identified in that7/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 GAAP, the Board'spractice is to report that information to the SEC, which has jurisdiction to determineproper accounting in issuers' financial statements.8/See AU 390, Consideration of Omitted Procedures After the Report Date,and AU 561, Subsequent Discovery of Facts Existing at the Date of the Auditor's Report(both included among the PCAOB's interim auditing standards, pursuant to PCAOBRule 3200T), and PCAOB Auditing Standard No. 5, An Audit of Internal Control OverFinancial Reporting That is Integrated with An Audit of Financial Statements ("AS No.5"), 98.

PCAOB Release No. 104-2012-104AInspection of Rattray & Associates CPA LLCMarch 1, 2012Page 4inspection, but the Board expects that firms are attempting to take appropriate action,and firms frequently represent that they have taken, are taking, or will take, action. If,through subsequent inspections or other processes, the Board determines that the firmfailed to take appropriate action, that failure may be grounds for a Board disciplinarysanction.A. Review of Audit EngagementsThe inspection procedures included a review of aspects of the Firm's auditing offinancial statements of two issuers. The scope of this review was determined accordingto the Board's criteria, and the Firm was not allowed an opportunity to limit or influencethe scope.The inspection team identified what it considered to be audit deficiencies. Thosedeficiencies included failures by the Firm to identify or appropriately address errors inthe issuer's application of GAAP, including, in some cases, errors that appeared likely tobe material to the issuer's financial statements. In addition, the deficiencies includedfailures by the Firm to perform, or to perform sufficiently, certain necessary auditprocedures.In some cases, an inspection team's observation that a firm failed to perform aprocedure may be based on the absence of documentation and the absence ofpersuasive other evidence, even if a firm claims to have performed the procedure.PCAOB Auditing Standard No. 3, Audit Documentation ("AS No. 3"), provides that, invarious circumstances including PCAOB inspections, a firm that has not adequatelydocumented that it performed a procedure, obtained evidence, or reached anappropriate conclusion must demonstrate with persuasive other evidence that it did so,and that oral assertions and explanations alone do not constitute persuasive otherevidence. See AS No. 3, paragraph 9 and Appendix A to AS No. 3, paragraph A28.For purposes of the inspection, an observation that the Firm did not perform aprocedure, obtain evidence, or reach an appropriate conclusion may be based on theabsence of such documentation and the absence of persuasive other evidence.The deficiencies identified in both of the audits reviewed included deficiencies ofsuch significance that it appeared to the inspection team that the Firm, at the time itissued its audit report, had not obtained sufficient competent evidential matter tosupport its opinion on the issuer's financial statements. Those deficiencies were –

PCAOB Release No. 104-2012-104AInspection of Rattray & Associates CPA LLCMarch 1, 2012Page 5(1) the Firm's failure to identify, or to address appropriately, departures fromGAAP that related to potentially material misstatements in the audited financialstatements concerning amounts reported in the statement of cash flows;(2) the failure, in both audits, to perform engagement planning procedures,assess inherent risk and control risk, and develop an overall strategy for theexpected conduct and scope of the audit;(3) the failure to perform audit procedures to test investments accounted forusing the cost method;(4) the failure, in both audits, to perform sufficient audit procedures to testrevenue;(5) the failure to perform sufficient audit procedures to test accountsreceivable;(6) the failure to perform sufficient audit procedures to test equitytransactions;(7) the failure to perform audit procedures to test share-based payments;(8) the failure to perform audit procedures to test the sale of a business;(9) the failure to perform audit procedures to test related party transactions;(10) the issuance of an opinion on internal control over financial reportingwithout having performed sufficient procedures related to internal control overfinancial reporting;(11) the failure, in both audits, to perform procedures to evaluate whether therewas substantial doubt about an issuer's ability to continue as a going concernand the corresponding failure to evaluate related disclosures; and(12) the failure to obtain written representations from management for the yearunder audit.

PCAOB Release No. 104-2012-104AInspection of Rattray & Associates CPA LLCMarch 1, 2012Page 6B. Review of Quality Control SystemIn addition to evaluating the quality of the audit work performed on specificaudits, the inspection included review of certain of the Firm's practices, policies, andprocedures related to audit quality. This review addressed practices, policies, andprocedures concerning audit performance, training, compliance with independencestandards, client acceptance and retention, and the establishment of policies andprocedures. Any defects in, or criticisms of, the Firm's quality control system arediscussed in the nonpublic portion of this report and will remain nonpublic unless theFirm fails to address them to the Board's satisfaction within 12 months of the date of thisreport.END OF PART I

PCAOB Release No. 104-2012-104AInspection of Rattray & Associates CPA LLCMarch 1, 2012Page 7PORTIONS OF THE REST OF THIS REPORT ARE NONPUBLIC AND ARE OMITTEDFROM THIS PUBLIC DOCUMENT

PCAOB Release No. 104-2012-104AInspection of Rattray & Associates CPA LLCMarch 1, 2012Page 8PART II* * * *B. Issues Related to Quality ControlsThe inspection of the Firm included consideration of aspects of the Firm's systemof quality control. Assessment of a firm's quality control system rests both on review ofa firm's stated quality control policies and procedures and on inferences that can bedrawn from respects in which a firm's system has failed to assure quality in the actualperformance of engagements. 9/ On the basis of the information reported by theinspection team, the Board has the following concerns about aspects of the Firm'ssystem of quality control.1. Design of Quality Control SystemPractice MonitoringThe Firm's policies and procedures appear not to provide sufficient assurancethat the Firm is effectively monitoring its accounting and auditing practice. Specifically,the Firm has adopted written quality control policies and procedures for monitoring asrequired by QC Section 20, System of Quality Control for a CPA Firm's Accounting andAuditing Practice, but has not implemented such procedures.2. Audit PerformanceA firm's system of quality control should provide reasonable assurance that thework performed on an audit engagement will meet applicable professional standardsand regulatory requirements. On the basis of the information reported by the inspectionteam, including the audit performance deficiencies described in Part II.A (andsummarized in Part I.A) and any other deficiencies identified below, the Board has9/A firm's failure to comply with the requirements of PCAOB standards whenperforming an audit may be an indication of a potentially significant defect in a firm'squality control system even if that failure did not result in an insufficiently supportedaudit opinion.

PCAOB Release No. 104-2012-104AInspection of Rattray & Associates CPA LLCMarch 1, 2012Page 9concerns that the Firm's system of quality control fails to provide such reasonableassurance in at least the following respects * * * * –* * * *Fraud ProceduresThe Firm's system of quality control appears not to provide sufficient assurancethat the Firm will perform the required procedures in accordance with the provisions ofAU 316, Consideration of Fraud in a Financial Statement Audit. [Issuers A and B]Engagement Completion DocumentThe Firm's system of quality control appears not to provide sufficient assurancethat the Firm will prepare an engagement completion document in accordance with ASNo. 3, which is necessary to demonstrate that the work performed by engagementpersonnel addresses the significant findings and issues of the engagement. [Issuers Aand B]Auditor CommunicationsThe Firm's system of quality control appears not to provide sufficient assurancethat the required auditor communications to the audit committee, or equivalent, occurand are appropriately documented, including required independence confirmations.[Issuers A and B]Appropriate ProceduresThe Firm's system of quality control appears not to provide sufficient assurancethat the Firm will conduct all testing appropriate to a particular audit. The informationreported by the inspection team suggests an apparent pattern of failures to perform theappropriate procedures related to: (1) engagement planning, including assessinginherent risk and control risk and developing an overall strategy for the expectedconduct and scope of the audit, (2) the testing of revenue, and (3) evaluating theissuer's ability to continue as a going concern and the issuer's related disclosures.[Issuers A and B]* * * *

PCAOB Release No. 104-2012-104AInspection of Rattray & Associates CPA LLCMarch 1, 2012Page 10PART IVRESPONSE OF THE FIRM TO DRAFT INSPECTION REPORTPursuant to section 104(f) of the Act, 15 U.S.C. § 7214(f), and PCAOB Rule4007(a), the Board provided the Firm an opportunity to review and comment on a draftof this report. The Firm did not provide a written response.