Date posted: 02/04/2024 8 min read

Reporting on reporting

How well are auditors performing? Recent reports from ASIC and the FMA have some useful pointers for the audit team, as well as the C-suite and board.

Quick take

  • The two regulators – ASIC in Australia and the FMA in New Zealand – conduct annual assessments of audit quality.
  • This year’s findings highlighted judgement in financial reporting, asset valuation, impairment and revenue recognition as areas auditors need to focus on.
  • While the reports are useful, CA ANZ is concerned the small number of audit files assessed may create the impression that audit is not regulated rigorously enough.

Regulators on either side of the Tasman are taking very different approaches to their latest reports on audit quality, but CA ANZ reporting and assurance leader Amir Ghandar FCA says each has important lessons for auditors.

Both reports highlighted similar areas for auditors to focus on: judgement in financial reporting, asset valuation, impairment and revenue recognition.

“That’s not surprising because, of course, those are the most challenging areas, and probably the areas where it’s most likely that you could have different professional views on what needed to be done,” Ghandar says. “Both reports are a very key source of where auditors need to be focused.”

Amir Ghandar FCAPictured: Amir Ghandar FCA

The FMA’s findings

In New Zealand, the Financial Markets Authority (FMA) has outlined areas it wants auditors to focus on, including testing the information prepared by management for accuracy and completeness, and the duties of engagement quality review. Dedicated staff inside audit firms with responsibility for audit quality, or one of the partners in smaller firms, should look at the report in detail, Ghandar says. The report highlights appropriate supervision of junior staff and states that engagement leaders and managers should have sufficient training and time to review work of junior staff.

Careful planning is needed to reflect the revised risk assessment standards, the FMA said. “For material balances, auditors should continue to focus their efforts on the riskiest parts of these balances and transactions by performing a robust risk assessment,” the report states.

Audit firms also need to carry out effective engagement quality reviews – an important internal control to review the quality of key audit judgements in real time.

Over in Australia…

The Australian Securities and Investments Commission (ASIC) is looking at the whole financial reporting supply chain: both reporting of financials and the auditing of the report. Ghandar says the format is valuable in alerting directors and chief financial officers to areas they should focus on, such as the operating and financial review in annual reports and those areas involving estimates and valuations.

“It’s not just simply a matter of ‘the auditors need to sort this out or auditors need to do better’,” he says. “The goal here is accurate and reliable financial reporting, and that takes everyone.”

However, this year ASIC only reviewed 15 audit files, which it selected using a riskbased approach, and CA ANZ is concerned it might not be enough to send the message that there’s strong regulation of the sector.

Auditors need to pay close attention to judgement areas and challenging estimates and judgements, as well as ensuring they undertake sufficient testing and gather enough evidence. ASIC made seven findings relating to impairment of non-financial assets, mostly involved with auditors not obtaining sufficient evidence. Six findings were made in revenue and receivables, including not obtaining sufficient evidence, failure to understand the nature of the revenue cycle and failure to identify a material misstatement.

The regulator reviewed 180 financial reports of ASX-listed entities and other large entities and highlights key areas of concern about financial reporting, breaking them down into industry sectors. The information gives auditors an idea of what they should focus on in their audits.

“It provides them with a good overview of where the issues are occurring in financial reporting,” says Ghandar.

What the reports say

Australia New Zealand 

Title: Annual financial reporting and audit surveillance report 2022–23, by the Australian Securities and Investments Commission.

ASIC combined financial and audit surveillances in one report this year and the new approach focuses on the entire financial reporting chain.

“It is designed to provide pertinent information to relevant stakeholders and help improve financial reporting and audit quality,” the report states.

ASIC selects audit files for surveillance where a change has been made to financial information or the financial report, or where it has concerns that a financial report may have a risk of material misstatement. It reviewed 15 audit files at 11 audit firms.

The key audit areas with audit findings related to:

  • Impairment of non-financial assets and asset values
  • Revenue and receivables.

Title: Audit Quality Monitoring Report 1 July 2022 – 30 June 2023 by the Financial Markets Authority.

Audit quality in New Zealand is improving, although it remains mixed and inconsistent between audit firms and in some instances between audits within the same firm, the FMA report states.

The FMA reviewed 19 audit files, nine of which were of listed entities. It reviewed two large, one medium and one small audit firm.

Although the FMA says results can’t be directly compared to prior years, it is “encouraging” that the percentage of non-compliant audit files decreased to 16% from 28% the previous year. This compares with an average non-compliant rate of 26% internationally, the FMA says.

The report highlighted five areas audit firms should focus on:

1. Testing information prepared by management for accuracy and completeness

2. Duties of engagement quality reviews (EQR) and the process to be followed in finalising the audit

3. Audit procedures and obtaining evidence in assessing the going concern assumption

4. Risk assessment procedures

5. Journal entry testing.

The FMA continues to emphasise the importance of the documentation of audit work performed and the level of evidence obtained.

Search related topics