- the sufficiency and appropriateness of audit evidence obtained by auditors
- the level of professional scepticism exercised by auditors
- the extent of reliance that can be placed on the work of other auditors and experts.[/fastfacts_content][/fastfacts]
Auditors are important ‘gatekeepers’ in our financial system. The quality of an audit supports high-quality financial reports, informed investors and market confidence. ASIC’s audit inspection program aims to promote high-quality external audits of financial reports of listed entities and other public interest entities in Australia.
ASIC’s report for the 18 months to 30 June 2012 covered inspections of 20 Australian audit firms. It found that in 18 per cent of the 602 audit areas reviewed, auditors did not perform all of the procedures necessary to obtain reasonable assurance that the audited financial report was not materially misstated. The figure for the previous 18 months was 14 per cent.
The occurrence of these findings at the larger firms was:
- larger national firms –13 per cent (10 per cent in the previous 18-month period)
- other national and network firms – 21 per cent (18 per cent in the previous 18-month period).
The audit areas reviewed included impairment of assets, going concern assessment and other significant areas involving significant estimates or judgements.
While the financial reports audited may not have been materially misstated, the matters identified are not minor matters of mere compliance with auditing standards. There have been instances in recent years where financial information has been materially misstated and inadequate audit work has resulted in such misstatements not being detected. The result is that investors and the market have been misinformed.
Areas for improvement
ASIC has identified three areas needing improvement:
- the sufficiency and appropriateness of audit evidence obtained by auditors
- the level of professional scepticism exercised by auditors
- the extent of reliance that can be placed on the work of other auditors and experts.
Specific findings related to a long list of areas, such as:
- impairment testing and fair-value measurement
- going concern assessment
- substantive analytical procedures
- journal entry testing
- related party transactions
- subsequent events reviews
- external confirmations
- consideration of the risk of fraud
- over-reliance on management explanations and representations
- insufficient scepticism regarding accounting estimates and choices of accounting treatments
- not reviewing or evaluating the work of other auditors
- inadequate quality control systems.
The ASIC report also identifies industry-specific findings relating to financial institutions, managed investment scheme compliance plans and extractive industries.
