ASIC has released its inaugural integrated financial reporting and audit surveillance report, highlighting the need for improved disclosure of material business risks, impairment of assets, and revenue recognition in financial reports.
The report, which covers the period from 1 July 2022 to 30 June 2023, details the adjustments of $215 million required in the financial information of ASX-listed and other large entities.
ASIC’s surveillance program selected entities from over 29,000 required to lodge financial reports, focusing on those of public interest. ASIC reviewed 180 financial reports and 15 audit files, leading to findings being shared with the directors of 11 companies to enhance financial reporting and audit quality. ASIC emphasizes the importance of the roles of preparers, approvers, and auditors in the financial reporting chain and will refer significant deficiencies to its enforcement team.
Audit findings to 30 June 2023
|Key audit area||Reviewed||Audit findings|
|Impairment of non-financial assets and asset values||45%||39%|
|Revenue and receivables||36%||33%|
|Inventory and cost of goods sold||10%||11%|
|Investments and financial instruments||3%||6%|
The key areas with audit findings continued to relate to impairment of non-financial assets, asset valuations, revenue recognition and recoverability of receivables. The previous year’ Audit inspection report: 1 July 2021 to 30 June 2022 included case studies of good practice on impairment of asset, revenue recognition and related disclosures.
The role of directors and preparers of financial reports
ASIC emphasises that audit quality is essential for high-quality financial reporting and directors, audit committees, and preparers of financial reports play a vital role in supporting the audit process.
The key actions they can take to support audit quality include ensuring specific and relevant Operating and Financial Review (OFR) disclosures, producing high-quality financial information backed by thorough analysis, applying sufficient resources and expertise, communicating effectively with auditors, and maintaining robust auditor selection and remuneration processes.
Directors and management are seen as crucial in fostering continuous audit quality, with further guidance available in ASIC’s Information Sheets 196 and 223.
The role of audit firms and auditors
In the report, ASIC emphasised that all audit firms and auditors should carefully review the financial reporting and audit findings in this report and ensure there is adequate focus on these areas in future audits.
Actions which all progressive audit firms should implement are outlined below:
1. Cultivate a Quality-Centric Culture: Establish and maintain a culture that prioritises audit quality, with clear accountability for partners and staff. This culture should permeate at all levels of the audit firm.
2. Enhance Communication and Education: Engage in effective communication and, where necessary, educate directors, audit committees, and management on how to properly document their financial positions. This includes providing detailed analysis and conclusions aligned with accounting standards, especially in areas where judgement and estimation carry a high level of uncertainty.
3. Resource Adequately: Ensure audit engagements are staffed with personnel who have the right skills and expertise. This also means having strong supervision and review processes to tackle contentious issues promptly, thus avoiding deadline pressures at the end of an audit.
4. Conduct Rigorous Quality Reviews: Implement thorough quality reviews of audits and address any findings by securing the audit evidence necessary to support the audit opinion on the financial reports.
5. Root Cause Analysis: Identify and address the underlying reasons for audit findings. This involves developing and implementing action plans that are continually monitored and revised to be effective and sustainable.
6. Director and Management Engagement: Emphasise the importance of directors and management in supporting continuous audit quality. This can be facilitated by referring to ASIC’s Information Sheets 196 and 223 for further guidance.
Audit firms must reflect on the report’s findings and focus on these key areas in future audits. By doing so, they can help to enhance the overall quality of financial reporting, which is crucial for maintaining market confidence and protecting the interests of shareholders and other stakeholders
What does this mean for National Audits Group
Auditing is a specialist profession and can no longer be regarded simply as an ‘extension’ of services provided by accounting and consulting firms, even when there is no direct or perceived conflict of interest. A dedicated focus from specialists is required to achieve and manage client and regulatory expectations.
The specialist team at National Audits Group places great emphasis on appropriate internal systems and processes, supported by a client-centric culture. We are more than just auditors! Let’s get talking – call now and discuss how National Audits Group can provide cost effective solutions, to meet your operational needs and strategic objectives.
Steven Watson | Director, National Audits Group | www.audits.com.au
For further review
Information Sheet 222 Improving and maintaining audit quality (INFO 222) outlines considerations and examples of initiatives for audit firms to improve and maintain audit quality.
- Rep 774: Annual financial reporting and audit surveillance report 2022-23
- Rep 773: Audit inspection report: 1 July 2021 to 30 June 2022
- Regulatory Guide 260Communicating findings from audit files to directors, audit committees or senior managers
- Information Sheet 196Audit quality – The role of directors and audit committees
- Information Sheet 222Improving and maintaining audit quality
- Information Sheet 223Audit quality – The role of others
- Information Sheet 224ASIC audit surveillances (updates to INFO 224 reflecting ASIC’s integrated approach to financial reporting and audit surveillance will be available shortly)
- ASIC releases first integrated financial reporting and audit surveillance report - 17 November 2023
- Solvency and Going Concern Assessments – Post COVID Update for External Auditors - 25 September 2023
- Embracing Digital Disruption: How Auditors harness the power of technology for financial reporting - 17 July 2023