Professional scepticism
The ASIC inspection report dips into what is a critical area in the audit discipline. Professional scepticism is recognised as a key trait in the auditor’s toolkit. ASIC takes a look at professional scepticism and delivers the verdict that there appears to be what it describes as a “shortcoming” in this area.
“Our audit inspection program has identified a number of instances where we have concerns about the auditors’ judgement, and the level and attitude of professional scepticism,” the report states. “Auditing Standard ASA 200 Objective and General Principles Governing and Audit of a Financial Report defines professional scepticism as “an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud and a critical assessment of audit evidence”.
ASIC states that there were a range of things that auditors have failed to do based on the evidence it has seen during the inspection process. The Commission states that auditors:
- appear to have relied heavily on auditee representations, particularly on matters concerning fair value measurement, going concern assumptions and analytical review procedures
- have failed to explore evidence available on other parts of the engagement file that appears inconsistent or contradictory
- have failed to have sufficient regard to historical outcomes in assessing reasonableness of assumptions underlying the auditee’s decisions. Areas of concern include what appear to be optimistic cashflow projections, growth rates and discount rates for impairment testing.
The Commission found circumstances where auditors approached the task of collecting sufficient appropriate audit evidence by seeking to corroborate the auditee’s judgements with audit evidence rather than seek or notice evidence that might lead to further questioning of the auditee’s judgement.
Evidence justifying an auditee’s call on a transaction is fine if it is obtained by a professional who is considering all possible factors. Building a case with audit evidence that substantiates a auditee’s view without taking it further is a little like the auditor playing cheerleader for the auditee rather than watchdog.
It is understandable that the Commission would raise this in the report. Professional scepticism embodied in the inquiring mind of an auditor is the assurance practitioner’s birthright. Where an auditor appears to have gone about seeking to justify an auditee’s figures that scepticism is then left somewhat in doubt.
Quality control issues
ASIC found a range of concerns with the internal quality control systems of firms that were inspected by its teams, particularly the smaller firms that were reviewed by the regulator.
It was found that a majority of smaller firms reviewed have no monitoring program in place and that engagement files were not subject to review. “Without ongoing evaluation and monitoring of their quality control systems, smaller firms may not be able to ascertain whether their systems are operating effectively to facilitate compliance with professional standards and other relevant legal and regulatory requirements,” the ASIC report states.
The regulator states that smaller firms rely on the professional accounting body reviews and ASIC inspection for assurance that their quality control systems are adequate. The regulator asserts that the review programs of accounting bodies and the ASIC inspections are no replacement for a stringent internal monitoring process within the firm.
Client acceptance procedures and client retention policies are not formalised in some of the firms reviewed. ASIC states these smaller firms need to put in place policies so they only engage with clients that fit the firm’s own brief. The report notes that these policies are important as they may save the firm from engaging in work that is clearly beyond the capacity of the personnel employed within the practice.
Institute members should remember, however, that the general quality control standard known as APES 320 contains similar provisions.
The Code of Ethics also requires accountants who are members of the three recognised professional bodies to engage in work for which they are competent.
Some of the firms reviewed still had no systematic method of collecting annual independence declarations as required under the relevant quality control standard, ASQC 1. This quality control standard is the domestic equivalent of an international standard and applies chiefly to Corporations Act 2001 audit engagements. The point made by the regulator is that when a firm is not monitoring this information it could unwittingly end up with conflicts of interest. Systems within a firm need to be set up so that conflicts that may directly affect the independence of an auditor are detected immediately and not after a decision to engage with an entity has been made.
An important – and possibly revealing – paragraph in ASIC’s audit inspection report deals with the existence of up-to-date manuals for audit and audit guidance. It is clear from the suggestion that some smaller firms update their internal resources that there are still practices relying on outdated information.
The regulator has suggested that audit firms use the introduction of the new ‘Clarity’ suite of auditing standards as a ‘clean start’ in order to get their houses in order from a technical standpoint. The Institute’s experience confirms what the regulator illustrates in the report. We do encounter members who have outdated materials or are behind the times.
Audit is an area where integrity, independence and competence are crucial. You need to ensure the materials you use in your practice are the most current available. When in doubt consult the website of the Auditing and Assurance Standards Board. It will be your best friend in a tight situation if you are struggling to find the right piece of guidance.
