The same principle applies to the regulatory landscape in which we find ourselves, where constant vigilance is required on quality controls in accounting practices and the correct application of financial reporting principles. This vigilance will become more important as the Federal Government tightens regulation across the profession in the financial services space and in the field of the audit of self-managed superannuation funds.
A recent report from the Australian Securities and Investments Commission (ASIC) provides some insight into the regulator’s work in the market place. The report makes sobering reading from the perspective of small to medium-sized practices contemplating taking on more audit work.
A wider focus
Although its focus is mainly on the bigger end of the market place, over time ASIC has delved a bit further into the audit and financial reporting population. It is important practitioners and those they audit understand that the regulator may look at them from time to time. This is not just for the purpose of getting a better general knowledge of the regulatory environment. The issues related to audit documentation and audit evidence the Commission is highlighting are areas members of the Institute face problems with on a daily basis.
Financial reporting challenges are faced by all members to a greater or lesser extent, particularly those that are obliged to use International Financial Reporting Standards (IFRS) for the compilation of reports for not-for-profits and incorporated bodies generally. Reading ASIC’s observations in any of its publications in the audit and financial reporting areas is essential for today’s accountant to understand some of the ‘hot spots’ in their profession. This article focuses solely on the audit inspection program report and a range of issues Institute members should note are highlighted throughout.
Audit inspections
By way of background, ASIC conducted audit inspections of 21 firms in the 18 months to 31 December 2010. The regulator increased the sample of audit files examined in larger firms given the impact of the global financial crisis and benchmarking with other audit oversight regulators. ASIC liaises with its international counterparts throughout the year to get an understanding of the way in which fellow regulators are dealing with audit inspections in their own jurisdictions. Although the sample is small there are still lessons that can be learnt from it.
Audit evidence
Most of the files examined, according to ASIC, had the appropriate level of audit evidence in key areas of the audit engagements inspected and it was evident work was done in accordance with the relevant auditing standards issued by the Auditing and Assurance Standards Board.
However, there were some problems spotted by ASIC’s inspectors related to the collection of sufficient appropriate audit evidence.
The corporate regulator found that 17 per cent of the sample of files from large firms had a deficiency in the documentation of the evidence examined by the firm. The figure for other firms was 31 per cent.
This finding could mean that auditors either:
- failed to seek sufficient appropriate audit evidence in a particular circumstance – a cardinal sin in the world of audit, or
- failed to document the evidence that the audit firm had used to arrive at the conclusions in the audit opinion.
It is no accident that the mantra of some auditors is that you document everything you do. Just because you have completed the audit evidence-gathering task does not mean the job is done. Evidence must be presented and documented so that, theoretically, another auditor can look at the work papers related to the engagement and work out precisely what was done in the audit.
The inspection process ASIC has in place has created some concern among auditors about their own firm or individual practices. This is healthy to the extent that it ensures practitioners are encouraged to follow the audit guidance more closely.
The ASIC report states that evidence should support the audit opinion by clearly demonstrating the auditor’s procedures and conclusions on key audit judgement or risk areas.
“Areas where improvements are required include when relying on the work of experts or other auditors, confirmation of key balances, classification of material loan balances, consideration of the risk of fraud, and financial statement disclosures,” the ASIC report states.
