Audit quality - The role of others

Directors and audit committees

Information Sheet 196 Audit quality: The role of directors and audit committees (INFO 196) is designed to assist directors and audit committees in their role in supporting the quality of the external audit of a financial report.

The quality of work and documentation by audited entities to support judgements on accounting policies and estimates is an essential part of the financial reporting process and can facilitate an effective audit. The responsibilities of directors for financial reporting are discussed in Information Sheet 183 Directors and financial reporting (INFO 183).

Information Sheet 203 Impairment of non-financial assets: Materials for directors (INFO 203) is designed to help directors and audit committees consider whether the value of non-financial assets shown in financial reports continues to be supportable or whether there is a need for impairment.

We have also worked with the Australian Institute of Company Directors, Chartered Accountants Australia and New Zealand (CA ANZ), CPA Australia and the Institute of Public Accountants to develop a quiz for directors on financial reporting.

Regulatory Guide 260 Communicating findings from audit files to directors, audit committees or senior managers (RG 260) explains when we will communicate findings to audit directors and committees on an exception basis. This information may assist directors and audit committees in supporting audit quality.

Management and preparers of financial reports

Companies must have appropriate processes and records to support the information in their financial report, rather than simply relying on the independent auditor.

Companies should apply appropriate experience and expertise to produce quality financial information and financial reports, particularly in more difficult and complex areas, such as accounting estimates (including impairment of non-financial assets), accounting policies (such as revenue recognition), and taxation. Papers should be prepared for the directors on significant judgements and support conclusions reached.

Information should be produced on a timely basis and be supported by appropriate analysis and documentation for the independent audit. Officers are required to provide auditors with the information and explanations they require for the purposes of the audit.

This will support the quality of financial information in the market and enable auditors to focus on their role in providing independent assurance on the financial report.

The chief executive officer (CEO) and chief financial officer (CFO) of a listed company are also required to give a declaration to the directors about whether in their opinion:

• proper books and records have been kept in accordance with section 286 of the Corporations Act 2001 (Corporations Act)
• the financial statements and notes comply with the accounting standards and give a true and fair view.

Auditing standard setters

Audit quality is underpinned by quality auditing standards. The International Standards on Auditing (ISAs) are the basis for the auditing standards that apply for audits of financial reports under Chapter 2M of the Corporations Act.

In late 2012 and early 2013, we wrote to the International Auditing and Assurance Standards Board (IAASB) suggesting opportunities for improved guidance in the ISAs.

Our suggestions included improved guidance in auditing standards on:

• internal control reviews
• determining sample sizes
• substantive analytical procedures
• group audits
• use of other auditors in relation to interests in joint arrangements and associates
• the use of experts and service organisations.

We continue to encourage the IAASB to address these matters, and improve guidance in such areas as:

• quality reviews of audit files
• auditing values of financial instruments
• substantive testing for significant assertions for material balances and transaction types
• determining materiality
• the use of internal audit.

The IAASB now has active projects on quality control, group audits, the use of experts, accounting estimates (including values of financial instruments), and risk assessment.

Our suggestions have also been provided to Australia’s Auditing and Assurance Standards Board (AUASB).

Ethical standard setters

The international ethical code of the International Ethics Standards Board for Accountants (IESBA) is the basis for the professional ethical code issued by the Accounting Professional and Ethical Standards Board, and has the force of law through the auditing standards.

During 2013 we prepared a submission for the International Organization of Securities Commissions (IOSCO) suggesting improvements to the code, particularly on auditor independence requirements.

The submission included suggestions to adopt a clarity format that clearly distinguishes between requirements and guidance, and to review the appropriateness of ‘safeguards’ that provide exemptions to the independence requirements. These suggestions have since become the basis for active projects of the IESBA.

International regulators

It is important that we work with securities and audit regulators in other countries to promote improved audit quality because many corporations operate across borders and the larger audit firms are part of global networks, our auditing and ethical standards are based on international standards, and our markets are affected by international economic, regulatory and other developments.

The nature of our findings is consistent with the findings of audit regulators in other jurisdictions, as reflected in the inspection findings survey results published by the International Forum of Independent Audit Regulators (IFIAR).

Through IFIAR, we have worked with other major regulators in discussing actions to improve audit quality with the largest six firms internationally. We also led work to develop and finalise a multilateral memorandum of understanding (MMOU) on information sharing between audit regulators. Following assessments of applications to participate in the MMOU, the MMOU was signed by 22 regulators in April 2017.

Through our participation in IOSCO, we have worked with other securities regulators on such matters as:

• possible enhancements to independence of the standard setting governance and arrangements for the IAASB and IESBA
• seeking improvements to the international auditing and ethical standards
• a survey of securities regulators on the role of audit committees in connection with audit quality.

Global network and national firms may use their influence to promote improvements in audit quality at the individual engagement level by means such as policies, requirements, guidance, quality reviews, root cause analysis and monitoring. Strategies at international, national and engagement level can complement each other.

Professional accounting bodies

Professional bodies such as CA ANZ and CPA Australia have undertaken a number of important initiatives to improve audit quality, such as their quality review programs and ongoing training opportunities.

We have suggested to the professional accounting bodies ways in which their firm quality review programs could be further enhanced.

We have also suggested that they provide additional training and workshops on core skills to assist auditors in exercising professional scepticism. CA ANZ and CPA Australia have responded to our suggestions with initiatives in this area. For example, CA ANZ has developed an online e-learning module on professional scepticism.

The bodies also have a key role to play in considering the supply of future auditors. During 2014–15, CA ANZ undertook a review of the extent of requirements to use registered company auditors under state-based legislation, to better understand the demand for these auditors.

Where can I get more information?

• INFO 183 Directors and financial reporting
• INFO 196 Audit quality: The role of directors and audit committees
• INFO 203 Impairment of non-financial assets: Materials for directors
• INFO 222 Improving and maintaining audit quality
• INFO 224 ASIC audit inspections
• Financial reporting quiz for directors

Important notice

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. We encourage you to seek your own professional advice to find out how the applicable laws apply to you, as it is your responsibility to determine your obligations.

You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.