Regulators in Australia and New Zealand have reported findings focused on revenue, impairment asset values and the new quality management standards in their latest surveillance of audit quality.

How are Australian auditors performing?

The Australian Securities & Investments Commission (ASIC) reviewed 188 financial reports, identifying 22 financial reporting findings. Additionally, 15 related audit files were reviewed across 11 audit firms, identifying findings in 12 surveillances at nine firms. 

An audit finding is where the regulator concluded auditors did not obtain reasonable assurance that the financial report as a whole was free of material misstatement, although ASIC noted this doesn’t necessarily mean that the financial reports audited were in fact materially misstated.

The largest number of audit findings in FY24 related to the audit of revenue and receivables.

“We identified that some auditors didn’t distinguish between revenue streams. They didn’t design appropriate audit procedures and test performance obligations to ensure the correct recognition of revenue. So, for example, [they] didn’t test whether performance obligations had been satisfied so that the revenue could be recognised in the financial year,” Thea Eszenyi CA, senior executive specialist, companies, registered liquidators and small business at ASIC, said in a CA ANZ webinar on the findings.

“[They] didn’t sufficiently understand the nature of the different revenue streams and actually design appropriate audit procedures for each separate revenue stream, as opposed to just looking at them as an amorphous mass.”

Identifying auditing shortfalls 

ASIC’s financial report found companies and CFOs focused on similar areas including impairment and asset values, with a focus on operating and financial reviews and non-IFRS profit information also key messages.

The regulator identified auditors that did not always test the accuracy or reasonableness of assumptions, inputs and calculations in models, and did not properly consider indicators of impairment.

It made two findings relating to investments and financial instruments where the auditor did not obtain sufficient evidence over the valuation of investments, including testing valuation assumptions and comparable entities. Additionally, in one instance the auditor did not perform procedures to ensure the investment was accounted for correctly.

In terms of loans and borrowings, one auditor did not adequately assess the appropriateness of the going concern assumption and disclosure of a material uncertainty about going concern, including the impact of a subsequent event related to possible non-compliance with a loan covenant.

Eszenyi says that this year ASIC will focus on registerable superannuation entities and grandfathered companies.

“We may also seek information about the systems and controls that auditors rely upon to ensure they comply with their independence and conflict-of-interest requirements,” she says.

New Zealand auditors transition to a new standard

In New Zealand, the Financial Markets Authority (FMA) report examined 19 audit files from nine audit firms for FY24, focusing on how firms implemented the new Professional and Ethical Standard 3: Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements.

The new standard puts more focus on internal control procedures and reviews of the controls that firms must perform to ensure quality management is effective. The FMA found that audit firms have successfully transitioned to the new standard.

Jacco Moison, head of audit and financial reporting at the FMA, said in the webinar that the regulator wanted auditors to focus more on ethics and independence in their implementation of the new standard. 

“It’s a requirement of the standard to identify risk and respond to that. What we’ve seen with most of the audit firms is that they’ve done really well on independence, but the other ethical requirements are a bit undercooked,” he says.

In particular, the FMA wanted to gain an overall understanding of the design of each firm’s system of quality management (SOQM). It looked at assigned roles within the audit firm for ultimate accountability and operational responsibilities, including responsibility for compliance with independence requirements, and the monitoring and remediation process.

A formal performance evaluation mechanism will help ensure quality is adequately linked and evaluated as part of the leaders’ annual performance evaluations, including those with responsibility for SQM and audit partners, the FMA says. But Moison says firms didn’t always achieve that.

More broadly, the FMA identified three areas for further improvement: risks related to fraud and going concern; accounting estimates, including the use of experts; and revenue recognition and the use of service organisations.

“The auditor should clearly document their approach to relying on information from third parties as audit evidence and obtain sufficient evidence to support their conclusions,” the FMA report advises.

Moison adds that this year the FMA will be focusing on banking audits and following up on the implementation of the new quality management requirements.

Amir Ghandar FCA, CA ANZ’s reporting and assurance leader, said in the webinar that the reports were a valuable resource for those involved in preparing and auditing financial statements.

“We would be encouraging auditors, directors and preparers to look at these findings, and take on the focus areas and insights that these programs can provide,” he says.

Find out more

Read Australian Securities & Investments Commission’s Oversight of Financial Reporting and Audit 2023–24 here.

Read the Financial Markets Authority’s Audit Quality Monitoring Report 1 July 2023 – 30 June 2024 here.