By Doug Niven FCA

In January 2019, the Australian Securities and Investments Commission (ASIC) released the results from its audit firm inspections for the 18 months to 30 June 2018. These inspections included reviews of audit files relating to listed entities and significant public interest entities at 20 firms of varying sizes, and reviews of aspects of firm quality controls.

In 24% of the total 347 key audit areas that ASIC reviewed across 98 audit files, auditors did not, in our view, obtain reasonable assurance that the financial report was free from material misstatement (findings). This compares to 25% of 390 key audit areas in the 18 months to 31 December 2016.

For the six largest firms, ASIC found in 20% of the key audit areas, auditors did not, in our view, obtain reasonable assurance that the financial report was free from material misstatement. This compares to 23% in the 18 months to 31 December 2016, and represents a welcome reduction in the level of findings.

“The firm’s leadership should give strong, genuine and consistent messages to partners and staff that audit quality is not negotiable.”

The issue of material misstatement in audits

Doug Niven FCA

ASIC’s findings do not necessarily mean that the financial reports audited were materially misstated. In our view, nine of the 98 companies made material changes to the amounts of both the net assets and profits that we believe related to our concerns. Our separate financial reporting surveillance program continues to result in material changes to net assets and profit in 4% of reports reviewed.

Our inspections cover a limited number of files and focus on higher risk audit areas. Caution is needed in generalising the results across the entire market.

Evidence of improved quality in Australia’s audits

ASIC recognises the efforts by firms to improve audit quality and the consistency of audit execution. The overall level of findings suggests that further work and, in some cases, new or revised strategies are needed to improve quality.

Firms should continue to conduct root cause analysis on ASIC and internal findings and review their action plans to improve quality. ASIC’s inspection report includes examples of firm initiatives that appear to have been effective in reducing findings.

To improve audits, focus on culture and talent

Sustainable improvements in audit quality require a focus on culture and talent by firms. In particular:

• all partners and staff should embrace the need to improve audit quality and the consistency of audit execution
• partners and staff should understand and be accountable for their roles in conducting quality audits
• the firm’s leadership should give strong, genuine and consistent messages to partners and staff that audit quality is not negotiable, and this should be supported by holding individuals to account for inadequate audit work.

Engagement partners should:

• spend significant time at audited entities to understand the business and risks, engage with directors and management, and involve themselves in audit risk areas on a timely and comprehensive basis
• work directly with the audit team on risk areas to ensure timely and quality audit work, apply their knowledge and experience throughout the audit, and upskill staff
• undertake comprehensive reviews of audit files at the premises of audited entities, focusing on possible risk areas.

The audit of asset values and revenue continues to have the highest level of findings from our reviews and should continue to be a focus for firms to make sustainable improvements.

Firms should also focus on areas such as adoption of new accounting standards, internal quality reviews, the use of experts, business models and risk assessment, internal controls and tax.

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