This time last year, we provided feedback on ASIC’s Audit Inspection Report for the 2020/21 Financial Year. In this report, ASIC found that insufficient work was done in 23% of the 115 key audit areas reviewed across 35 files from the six largest audit firms.
ASIC has now published their Audit Inspection Report for the 2021/22 Financial Year, which reported on the results from its audit firm inspections of 45 audit files across 14 firms. Click here to view the report.
Key statistics at a glance:
|ASX Listed Entitles||-2%||2,175||2,228|
|Registered company auditors||-8%||3,224||3,500|
|Audit firms inspected||-13%||14||16|
|Audit files reviewed||0%||45||45|
|Key audit areas reviewed||-2%||146||149|
|Files with no negative findings||13%||18||16|
|Key audit areas with no negative findings||-8%||94||102|
|Key audit areas with negative findings||11%||52||47|
|Percentage of negative findings (all firms)||13%||36%||32%|
The ASIC Report identified an Increase in negative findings from audit reviews
The file review shows an overall increase in the level of negative findings from 32% last year to 36% this year. The equivalent level of negative findings for the largest six firms (Deloitte, EY, KPMG, PwC, BDO, and Grant Thornton) was 32% compared to 23% last year.
ASIC note that negative findings from their audit reviews do not necessarily mean that the financial reports audited were materially misstated, rather that the auditor did not have sufficient basis to support their opinion on the financial report.
The largest number of negative key audit area findings continued to relate to the audit of revenue and the audit of asset values and impairment of non-financial assets. The increase in negative findings is potentially due to ASIC’s focus on a small number of high-risk audits and higher risk key audit areas within these audits, inclusion of audits of large unlisted entities and the impact of COVID-19 conditions.
The report provided examples of good practice in the areas of audit of revenue and impairment of non-financial assets.
For the first time, the ASIC report included two case studies of good practice in the areas of the audit of revenue and the audit of asset values and impairment of non-financial assets. ASIC Commissioner Sean Hughes said ‘These are areas where we have historically had large numbers of negative findings. We expect these case studies will help auditors to improve their audit processes in these areas.’
Root Cause Analysis is now required on assurance files with identified deficiencies
On 19th October 2022, ASIC released a report (REP 739) following its review of root cause analysis on negative audit quality findings conducted by the largest six audit firms.
The report identified many existing good practices across the six firms, including the inclusion of a wide range of sources of audit files for root cause analysis, and maintaining independence of the root cause analysis teams.
The two most common underlying root causes of audit deficiencies identified by the firms were inadequate skills of audit team members carrying out the work and application of professional scepticism and mindset.
From 15th December 2022, audit firms that perform audits or reviews of financial reports and other financial information, or other assurance or related services engagements will be required to conduct root cause analysis on assurance files with identified deficiencies and to introduce remediation arising from root cause analysis findings.
Are you ready for the new Quality Management and Risk Assessment standards?
New standards for ASQM I, ASA 315, and ASA 220 have become effective from 15th December 2022.
ASQM 1 incorporates a risk-based approach which focuses on audit firms proactively identifying and responding to quality risks. It has been designed to be scalable and tailorable to suit the needs of any audit firm.
ASA 315 will have an impact on the way auditors approach client engagements and assess the risk associated with material misstatement due to management bias or other fraud risk factors.
ASA 220 relates to the audit firm’s system of quality management and the role of engagement teams, including the responsibilities of audit partners.
For further information on these changes, click here to read our recent report on Upcoming Changes in Quality Management and Risk Assessment Standards
Key questions that auditors need to consider:
- Is our audit firm’s methodology fit for purpose?
- What changes need to be made to ensure compliance with the new auditing and quality management standards?
- How can we strike the right balance between consistency and flexibility in our changes to our audit methodology?
Independence will continue to be a focus in 2023
The industry is continuing to look closely at independence issues with clear separation of audit and advisory services the only option for firms committed to providing both services to its clients. In the biggest shake-up of the accounting industry since Arthur Anderson’s collapse 20 years ago, EY looks to be splitting its advisory and assurance businesses in 2023.
National Audits Group remains an industry leader
As an independent auditing firm, National Audits Group provides accountants, advisors and trustees with the confidence that their audits are being managed professionally with regard to all auditing requirements.
For further information, contact us directly at 1300 734 707.
Steven Watson, Director, National Audits Group | www.audits.com.au