ASIC today released the results of its audit firm risk-based inspections for the 18 months to 30 June 2015.
Our findings
ASIC reviewed a total 463 key audit areas across 111 audit files at firms of different sizes. We found that, in our view, in 19% of audit areas, auditors did not obtain reasonable assurance the financial report as a whole was free of material misstatement. This compares with 20% for ASIC’s report covering the previous 18-months ending in December 2013. Our findings are similar to those of audit oversight regulators in other countries.
Commissioner John Price said, ‘Auditors are gatekeepers that play a critical role in ensuring Australian investors can be confident and informed and based on our findings there is a continued need for audit firms to improve audit quality and the consistency of audit execution.
‘While firms continue to make good efforts to improve audit quality, these are yet to be reflected in our risk-based inspection findings,’ Mr Price said.
ASIC findings do not necessarily mean financial reports audited were materially misstated. Rather, in ASIC's view the auditor did not have a sufficient basis to support their opinion on the financial report. We do not report on areas where auditors perform beyond the relevant standards and so, to that extent, the report does not represent a balanced scorecard.
Our surveillance also focuses on higher-risk audit areas and so caution is needed in generalising the results across the entire market. Therefore, our findings should be viewed as an indication of how some firms address more challenging audit situations.
Directors are primarily responsible for the quality of the financial report. Audit quality supports financial reporting quality, and it is in the interests of directors and audit committees to support the audit process.
ASIC inspections suggest audit firms must continue to improve in the following three areas:
- the sufficiency and appropriateness of audit evidence obtained by the auditor
- the level of auditors' professional scepticism, and
- appropriate use of the work of experts and other auditors.
Many of ASIC's findings related to accounting estimates (including impairment of assets) and accounting policy choices.
Initiatives to improve audit quality
ASIC's report outlines areas auditors should continue to focus on to improve audit quality and the consistency of audit execution, as well as future focus areas for our audit inspections.
In 2013, the six largest audit firms responded to ASIC’s requests to prepare action plans to improve audit quality and the consistency of audit execution. Firms should continue to review their plans to ensure they address root causes of findings from ASIC inspections and internal firm quality reviews.
While the six largest audit firms have made efforts to improve audit quality, they need to continue to focus on their action plans and other initiatives. Some initiatives, including a focus on auditors’ experts and coaching on impairment of non-financial assets, appear to have improved aspects of audit quality at some firms while other initiatives will take more time to have full effect.
We also encourage firms to consider reviewing staffing to ensure sufficient and appropriate experience and expertise is available for increasingly complex entities and audits that require significant judgments. This includes access to experts.
Our report also discusses actions directors and audit committees, standard setters, accounting bodies and others can take to support audit quality.
Background
ASIC inspects firms that audit significant public interest entities. ASIC also continues to inspect smaller firms responsible for publicly listed entity audits, or other public interest entities.
The audit areas ASIC reviewed for its report included impairment of assets and other significant areas involving significant estimates or judgments.
For ASIC's regulatory purposes, ASIC considers audit quality concerns matters contribute to the likelihood the auditor:
- obtains reasonable assurance the financial report as a whole is free of material misstatement, and
- ensures material deficiencies detected are addressed or communicated through the audit report.
ASIC publishes its public audit inspection reports every 18 months to inform all audit firms, the investing public, companies, audit committees and other interested stakeholders in the financial reporting chain, of findings and areas of focus.
Other ASIC activities to support audit quality include its financial reporting surveillance program, auditor surveillances not related to our inspections, investigations into corporate collapses and addressing matters from complaints and other intelligence. ASIC's audit inspection reports do not count findings from these other activities.