ASIC today released the results of its audit firm inspections for the 18 months to 31 December 2016, as well as three information sheets related to improving audit quality and our inspection process.
Review findings
ASIC reviewed a total 390 key audit areas across 93 audit files at audit firms of different sizes. We found that, in our view, in 25% of key audit areas, auditors did not obtain reasonable assurance the financial report as a whole was free of material misstatement. (This compares with 19% for the previous 18 months ended 30 June 2015). Our findings are similar in nature to previous years and those of audit oversight regulators in other countries.
Commissioner John Price said, ‘Auditors are play a critical role in ensuring investors can be confident and well informed. Given the efforts by firms to improve audit quality and the consistency of execution of audits, this is a disappointing result. The findings suggest that further work and, in some cases, new or revised strategies are needed to improve quality.
‘We think that good auditors deliver professional, high quality audits through matters such as applying appropriate experience and expertise, effective internal supervision and review, and having robust accountability mechanisms. We encourage all auditors to work to this standard,' he said.
ASIC findings do not necessarily mean that the 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 did not report on areas where auditors perform beyond the relevant standards and so, to that extent, the report does not represent, balanced scorecard.
ASIC’s inspections focus on higher risk audit areas, and so caution is needed in generalising the results across the entire market. The results 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.
Our findings suggest that audit firms should continue to pay particular attention to:
- the audit of asset values – particularly impairment of non-financial assets - including challenging the reasonableness of any forecasts and key assumptions, and the basis of valuation;
- the audit of revenue – including accounting policy choices, substantive analytical procedures, and tests of detail; and
- maintaining a strong culture of audit quality – including strong messages from firm leadership, setting expectations, leading by example, coaching, robust review processes, and effective accountability mechanisms.
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.
Our findings suggest that audit firms should continue to work on improving audit quality and the consistency of audit execution. While firms continue to make good efforts to improve in this area, they should consider enhancing existing initiatives and focus on new and sustainable initiatives to improve audit quality, and maintain a culture focused on this.
Firms should undertake, or continue to undertake, comprehensive analysis to identify the underlying root causes of findings from their own quality reviews of audit files and our audit inspections. They should identify effective solutions to address these root causes, and consider past initiatives of the firm that have been effective in improving audit quality. Our report highlights initiatives that appear to have been successful in reducing inspection findings.
Information sheets
ASIC today also released three information sheets related to audit quality:
- Information Sheet 222 Improving and maintaining audit quality - outlines considerations for auditors to improve and maintain audit quality (INFO 222);
- Information Sheet 223 Audit quality: The role of others – outlines how parties other than audit firms can contribute to audit quality (INFO 223); and
- Information Sheet 224 ASIC audit inspections – outlines ASIC’s approach to inspecting audit firms and measuring inspection findings (INFO 224)
Background
The objective of our audit firm inspection program is to promote the improvement and maintenance of audit quality. We work cooperatively with firms to achieve this objective.
ASIC inspects audit firms that audit listed entities and significant public interest entities.
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.