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How can you balance audit quality and financial outcomes?

Article by Managing Director Steven Watson, recently featured by For Accountants publication.

Audit quality concerns continue to attract headlines around the world despite the ongoing efforts of international review bodies to address issues relating to conflict of interest and lack of competition amongst the Top 4 firms. With smaller firms providing audit services, the issue becomes one of quality in a market where price competition is relentless. It can be difficult to maintain profit in a market where clients simply don’t see the value of audits and external bodies demand high quality of reporting.

What’s happening in Australia?

In Australia, there’s ongoing focus on audit quality with ASIC taking a leading role. However, it can be difficult to improve standards when there’s no clear benchmark for the acceptable quality of audits. In the past year, all relevant national bodies including ASIC, AAAPPC, CAANZ and CPA Australia have been reviewing their approach to the measurement and reporting of audit quality.

It’s clear that with audits increasingly being outsourced to overseas service providers, there’s less opportunity for Australian graduates to have audit experience. This has led to a dearth of accountants with audit experience. For many smaller firms, the only way forward is to outsource audit services to specialist providers.

Feedback from regulatory bodies

In 2018, CPA Australia identified the most common ways members breached professional standards or legislative or regulatory requirements identified through their quality review program. The top 10 areas of concern were:

  1. ASA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report
  2. ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards
  3. ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment
  4. ASA 300 Planning an Audit of a Financial Report
  5. ASA 320 Materiality in Planning and Performing an Audit
  6. ASA 330 The Auditor’s Responses to Assessed Risks
  7. ASA 230 Audit Documentation
  8. ASAE 3100 Compliance Engagements
  9. ASA 550 Related Parties
  10. ASA 210 Agreeing the Terms of Audit Engagements

Click here for further information on this review

In January 2019, ASIC issued their audit inspection findings for the period 1 January 2017 to 30 June 2018. In 24% of 347 key audit areas, auditors did not obtain reasonable assurance that the financial report was free from material misstatement.  The highest level of findings from the review were in relation to audit of asset values and revenue measurement, recognition and disclosure.

The report recommended that audit engagement partners should:

  1. spend significant time at the audited entities to understand the business and risks, engage with directors and management, and involve themselves in risk areas of the audit on a timely and comprehensive basis;
  2. work directly with the audit team on risk areas to ensure timely and quality audit work, apply their knowledge and experience throughout the audit process and upskill staff; and
  3. undertake comprehensive reviews of the audit files at the premises of audited entities, focusing on possible risk areas

Click here to download the ASIC report – Audit Inspection Guidelines for 2017-18

AAAPPC in conjunction with CAANZ and CPA Australia recently published a guide to improving audit quality using root cause analysis (RCA).  RCA is a technique for identifying the underlying key cause (or causes) behind review findings, whether specific to one audit or firm wide, so that an appropriate and achievable action (or actions) can be taken to prevent recurrence of negative outcomes and to promote recurrence of positive ones. In general, RCA is a way of preventing faults by identifying the real reason why it has occurred.

This guide suggested that every firm providing audit services should have engagement quality control reviews of certain clients, depending on the jurisdiction and the firm’s own set policies. Each firm should have internal inspections as part of its monitoring, and during each cycle, at least one engagement file per partner must be inspected. Sole practitioner firms should consider bringing in an external audit partner for regular independent review.

Click here to download the AAAPPC guide to improving Audit Quality using Root Cause Analysis

Of course, the responsibility for audit quality lies with the firms that are providing auditing services. Without the right internal culture and formal process for review of standards, the level of breaches will continue to be a concern.

Where should you start with review of your audit quality control standards?

It’s clear that the first step that professional firms providing audit services need to take is to detach audit from other accounting and advisory services. For firms with limited resources, this can be a significant challenge.  Leverage is the key for effective management of service outcomes.

Also, in a market where price competition can lead to discounting to levels affecting the quality of service delivery, it can be difficult to maintain profitability. In this situation, it’s critical that clients understand the audit process and feel confident that their needs are being met whilst ensuring that the quality of outcomes is maintained.

At the very least, you should be reviewing your firm’s Quality Control standards with reference to  APES 325 Risk Management for Firms, APES 320Quality Control for Firms and  ASQC 1 Quality Control for Firms that perform Audits and Reviews of Financial Reports, Other Financial Information, and other Assurance Engagements.

As a critical part of its ongoing commitment to Quality Control, the National Audits Group conducts a formal annual review of Quality Control guidelines for audits. Key areas of focus for this year’s review have included:

  1. Internal policy statements relating to documentation, leadership responsibilities, internal independence and ethical requirements;
  2. New client checklist and interview forms;
  3. Policies and processes for continuing engagements;
  4. HR policies focusing on staff recruitment, professional development and performance review.

How can the National Audits Group help?

The team at National Audits Group places the focus on audit quality at the highest level. We recognise that one poor audit could have a significant effect on business reputation and sustainability.

If you’d like to discuss options for separating your external audits from other professional services provided by your firm, contact Steven Watson at National Audits Group

Email: [email protected]

Ph: 1300 734 707

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