ASIC today reported on the results from its audit firm inspections for the 12 months to 30 June 2020 and has released a supplementary report of audit quality measures, indicators and other information.

Audit inspection findings

ASIC’s latest review found that auditors did not, in our view, obtain reasonable assurance that the financial reports were free from material misstatement in 27 per cent of the 179 key audit areas that ASIC reviewed across 53 audit files. The results compare to 26 per cent in the 12 months to 30 June 2019.

The largest numbers of adverse findings were in the audit of asset values, particularly impairment of non-financial assets and the audit of revenue.

ASIC Commissioner Cathie Armour said, ‘Audit firms need to work on improving audit quality and significantly reducing the number of instances where auditors do not obtain reasonable assurance that a financial report is free of material misstatement.

‘The current review relates to audits of financial reports up to 31 December 2019 and largely, does not reflect the impact of COVID-19 conditions where audit quality, and the need to properly inform the market and investors through financial reports, will be even more important. There can be more difficult judgements on asset values, liabilities, solvency, going concern and disclosures, as well as challenges from remote working arrangements. Auditors need to respond to these conditions in their audits.

‘The current findings suggest firms’ action plans have not sufficiently improved audit quality. Firms must strengthen existing initiatives and implement further new initiatives to improve audit quality. This includes enhancing a culture focused on audit quality, the experience and expertise of partners and others, supervision and review of audits, and accountability of partners and others for audit quality’, Ms Armour said.

To assist auditors, ASIC’s report includes better practice recommendations from our reviews of conflicts of interest, firm governance and accountability for audit quality at the larger audit firms. The report also includes focus areas for audits under COVID-19 conditions.

Since 2019, ASIC has undertaken a number of regulatory initiatives to promote audit quality, although it was too early for these measures to be reflected in findings from the current review. These include:

• more enforcement actions involving auditor misconduct, with twelve matters concerning auditor misconduct currently being considered or progressed by ASIC for possible enforcement outcomes;
• transparency of audit inspection results, with ASIC’s individual audit inspection reports for the largest six firms being made public during 2019 and 2020
• ASIC reviews of conflicts of interest, firm governance, accountability for quality, culture, talent and root cause analysis focused on audit quality at the largest audit firms; and
• reporting our findings directly to audit committees.

ASIC’s findings do not necessarily mean that the financial reports audited were materially misstated. Rather, in our view, the auditor may not have a sufficient basis to support their opinion on the financial report.

We have reviewed a limited number of files and focused on higher risk audit areas. Our separate risk-based surveillance of the financial reports of public interest entities led to material changes to net assets and profits for 4 per cent to 5 per cent of these financial reports reviewed in recent years.

Information Sheet 224 ASIC audit inspections provides further information on our audit inspection process.

Audit quality measures, indicators and other information

ASIC Report 678 Audit quality measures, indicators and other information: 2019–20 (REP 678) provides a broad group of audit quality measures, indicators and other information to supplement our audit inspection findings.

It includes information from the largest six audit firms showing that the firms caused 78 material corrections to net assets and net profit after tax prior to the release of the financial reports of the largest 300 ASX-listed Australian entities for financial years that ended from 1 April 2019 to 31 March 2020.

Background

The objective of ASIC’s audit inspections is to promote improved audit quality. ASIC’s reviews focus on audits of listed entities and significant public interest entities.

ASIC publishes its audit inspection reports 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 for auditors.

Other ASIC activities to support audit quality include its financial reporting surveillance program, auditor surveillances separate to our inspections, investigations into corporate collapses and addressing matters from complaints and other intelligence. ASIC's audit inspection reports do not incorporate findings from these other activities.