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Friday 28 October 2022

22-296MR ASIC reports on audit inspection findings for 12 months to 30 June 2022

ASIC has today reported on the results from its audit firm inspections of 45 audit files across 14 firms (which included one large unlisted entity file at each of the largest six firms) in the 12 months to 30 June 2022. The audit files were selected from a population of over 2,100 companies listed on the ASX and large unlisted entities audited by the largest six firms.

ASIC Commissioner Sean Hughes said, ‘Audit inspections are designed to promote audit quality and high-quality financial reports. ASIC encourages audit firms to continue to focus on improving audit quality, which will in time improve the overall level of findings. As we announced in July 2022 (see 22-172MR), ASIC will commence routinely communicating negative findings from its reviews of audit files to directors, to further improve the quality of financial reporting.’

‘For the first time our report includes 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. 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,’ said Mr Hughes.

As ASIC reviews only a small sample of audit files on a risk-assessed basis, there will always be variations in negative audit findings from year to year. However, ASIC expects all audit firms to focus on audit quality. They must identify and address the root cause of negative findings and develop and implement action plans to foster an effective and sustainable audit quality system.

While the most recent inspections have shown an overall raw increase in negative findings, this does not mean that the financial reports audited were materially misstated. Rather, in ASIC’s view, the auditor may not have a sufficient basis to support their opinion on the financial report. 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, as well as the inclusion of audits of large unlisted entities and the impact of COVID-19 conditions.

Download 

  • Report 743 Audit inspection report: 1 July 2021 to 30 June 2022 (REP 743)

Report 739 Root cause analysis: Audit firm thematic review

ASIC recently published Report 739 Root cause analysis: Audit firm thematic review (REP 739), following its review of root cause analysis on negative audit quality findings conducted by the largest six audit firms. The report also included our observations and better practice considerations of the largest six firms’ approaches to root cause analysis of negative findings.

ASIC was encouraged that the largest six audit firms demonstrated many good practices in their voluntarily conducted root cause analysis as part of their existing quality control systems.

To ensure that the right remedial actions are introduced to improve audit quality, it is important that all audit firms conduct an objective, thorough and timely root cause analysis on negative audit quality findings to identify and address the real underlying root causes of any deficiencies.

Individual firm reports

The largest six audit firms, where most of our inspection effort is directed, audit 95% of more than 2,100 ASX-listed entities based on market capitalisation.

Below are the individual firm reports for this year:

  • Report 744 BDO firms in Australia: Audit inspection report—1 July 2021 to 30 June 2022 (REP 744)
  • Report 745 Deloitte Touche Tohmatsu Australia: Audit inspection report—1 July 2021 to 30 June 2022 (REP 745)
  • Report 746 Ernst & Young Australia: Audit inspection report—1 July 2021 to 30 June 2022 (REP 746)
  • Report 747 Grant Thornton Australia Limited: Audit inspection report—1 July 2021 to 30 June 2022 (REP 747)
  • Report 748 KPMG Australia: Audit inspection report—1 July 2021 to 30 June 2022 (REP 748)
  • Report 749 PricewaterhouseCoopers Australia: Audit inspection report—1 July 2021 to 30 June 2022 (REP 749)

Overview of audit file reviews – key statistics at a glance

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2,175

Number of ASX listed entities

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3,224

Total number of registered company auditors

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14

Audit firms inspected

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18

Number of industry groups covered by files inspected

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45

Audit files reviewed

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18

Files with no negative findings

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146

Key audit areas reviewed

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94

Key audit areas with no negative findings

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4%

All audit firms' percentage of negative findings increased

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9%

Largest six audit firms' percentage of negative findings increased

Background

ASIC’s audit inspections aim to promote improved audit quality. ASIC’s reviews focus on audits of listed entities, significant public interest entities or other unlisted entities of interest.

Audit inspections are one of our activities directed at promoting high-quality financial reports. Other ASIC activities to support financial report quality include its financial reporting surveillance program, auditor surveillances and enforcement actions. This is 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.

ASIC notes that a limited number of audit files are selected for review applying a risk-based approach, and as a result ASIC would not expect these negative findings to be replicated in all audit files across the entire market. Caution should be exercised before broadly extrapolating the results of the inspections of 45 audit files.

Supplementary information supporting our audit inspection program can be found in the following publications: 

Last updated: 28/10/2022 11:41