ASIC today released the results of its risk-based inspections of audit firms for the 18 months to 31 December 2013.

Our findings

In our view, in 20% of the total 454 key audit areas that we reviewed across 107 audit files at firms of different sizes, auditors did not obtain reasonable assurance that the financial report as a whole was free of material misstatement. This compares to 18% for ASIC’s report covering the previous 18-month period ending in June 2012. While our overall levels of findings has not yet improved, the largest six audit firms only finalised their action plans on audit quality for 30 June 2013 year ends, and these plans are yet to have full effect.

Commissioner John Price said, ‘While audit firms have made good efforts to improve audit quality, these are yet to be reflected in our risk-based inspection findings.

‘Auditors are gatekeepers that play a critical role in ensuring that Australian investors can be confident and informed. It is important to continue the work to improve audit quality and the consistency of audit execution.’

Our findings do not necessarily mean that the relevant financial reports audited were materially misstated. Rather, in our 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.

Our inspections suggest that the following three broad areas continue to require improvement by audit firms:

• the sufficiency and appropriateness of audit evidence obtained by the auditor

• the level of professional scepticism exercised by auditors, and

• ensuring appropriate reliance on the work of experts and other auditors.

Many of our findings related to accounting estimates (including impairment of assets) and accounting policy choices.

Initiatives to improve audit quality

Our report outlines areas that auditors should consider in order to improve audit quality and the consistency of audit execution, as well as future focus areas for our audit inspections. We also discuss actions that audit firms, directors and audit committees, standard setters, accounting bodies and others can take to support audit quality.

During 2013, the largest six audit firms responded to ASIC’s requests to prepare action plans to improve audit quality and the consistency of audit execution. We welcome the firms’ response to our request to develop, implement and monitor these comprehensive plans to improve audit quality.

The full effect of these plans is still to be seen. This is because the firms commenced implementing key aspects of the plans for audits of financial reports for the year ended 30 June 2013, which was already 12 months into the 18-month period covered by our report. Further, the plans often concern matters such as the culture within the firms focused on audit quality, which can take time to have effect.

We encourage firms to consider reviewing their staffing structures to ensure that sufficient and appropriate experience and expertise is available for increasingly complex entities and audits that require significant judgements. This includes access to experts.

Other matters

Our report also discusses lessons from separate ASIC surveillances from our audit inspections and the results of our review of audit transparency reports, which were first required in the reporting year ended 30 June 2013.

Download Report 397 Audit inspection program report for 2012–13 (REP 397)

Background

ASIC inspects firms that audit significant public interest entities. ASIC also continues to inspect smaller firms where they are responsible for audits of publicly listed entities, or other public interest entities.

The audit areas reviewed by us for our report included impairment of assets and other significant areas involving significant estimates or judgements.

For our regulatory purposes, we consider that audit quality concerns matters that contribute to the likelihood that the auditor:

• achieves the fundamental objective of obtaining reasonable assurance that 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 our financial reporting surveillance programme, auditor surveillances not related to our inspections, investigations into corporate collapses, and addressing matters from complaints and other intelligence. Our audit inspection reports do not count findings from these other activities.