Overall, ASIC identified three broad areas for improvement:
- the sufficiency and appropriateness of audit evidence on engagement files. The 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 level of professional scepticism exercised or evidenced on the engagement files by auditors in key areas of audit judgement, including fair value measurement of assets, impairment calculations, going concern assessments and other fundamental areas of audit
- the lack of evidence on audit engagement files about the nature, timing and extent of engagement quality control reviews.
Audit evidence
Risk-based methods are used by ASIC to select firms, engagement files and audit areas for review. Generally where we concluded that audit engagement files did not contain sufficient appropriate audit evidence, this was based on shortcomings identified for specific key areas of audit, rather than all areas of the audit. We found for large firms 17 per cent of engagement files reviewed did not contain sufficient appropriate audit evidence and for other firms the figure was 31 per cent.
Where sufficient appropriate audit evidence was not obtained in key audit areas, the financial reports audited may not be materially misstated. However, the auditor does not have a sufficient basis upon which to reach a conclusion in those audit areas and to support their overall audit opinion on the financial report. To improve audit quality and to ensure auditors’ judgments are robust and well supported, leaders of firms should continue to send strong and consistent messages to partners and staff about the importance of these three areas.
Quality control improvements
Firms we have previously inspected continued to maintain or improve their quality control systems to facilitate compliance with the requirements of the Corporations Act 2001 (the Act), Australian auditing standards, and Australian professional and ethical standards. ASIC has reported its detailed findings separately to each of the firms. ASIC will continue to inspect firms that audit significant public interest entities, monitor regulatory developments in auditing and collaborate with foreign regulators to minimise the regulatory burden on Australian firms.
Focal points
In addition to the areas outlined above, all firms should focus on:
- implementing the new ‘clarity’ standards, particularly those that had substantial changes
- complying with the revised APES 110, the Code of Ethics for Professional Accountants
- relying on the work of internal and external experts engaged by the client and the auditor
- relying on other auditors, whether or not in the same network, including in relation to group audits, service organisations and joint ventures
- ensuring audit quality is maintained irrespective of audit fee pressures
- ensuring that programmes to improve audit efficiencies do not lead to a compromise in audit quality
- obtaining an understanding of the entity’s business model and risk assessment
- monitoring ‘opinion shopping’, particularly where there are communications with an audit firm about their views on specific accounting treatments prior to acceptance of a new engagement
- the involvement of the engagement partners and EQCRs at different stages of the audit, including planning, consultations with the engagement team, and reviewing key judgements and conclusions reached
- the quality and extent of the auditor’s communications with those charged with governance, particularly in relation to unadjusted differences, going concern, fair value measurement and impairment testing
- ensuring material financial statement disclosures are made
- the adequacy and timeliness of reporting suspected contraventions of the Act to ASIC
- complying with the Act’s auditor rotation requirements.
For more information see the media release and report at www.asic.gov.au.
