Audit quality continues to be acceptable or better on a good majority of the audits reviewed by the ICAEW. However, according to Inspect the results – Audit Monitoring 2019, ‘around a quarter of audits are not as good as they should be and we are keen to see an improvement in the overall profile’. The report is based on more than 590 audit monitoring reviews.
The picture is broadly similar across different types of audit client, except for pension schemes. The ICAEW notes that a higher percentage of pension scheme audits required significant improvement (13%) than for other categories. The weakest pension scheme audits were performed by firms that had failed to recognise the specialist knowledge required and had not invested sufficiently in training and tailored procedures.
As well as a covering the top 10 most common areas for improvement, the report take a closer look at three key areas: revenue; going concern; and group audits. Many of the points raised in the report were on the adequacy of audit evidence relate to revenue.
The report said: “Firms do not always test the completeness assertion when appropriate. This may be because they didn’t carry out a planned test in the way it was designed, or because the test design was flawed, for example because it tested back from the accounting records rather than forwards from outside the accounting system. Sometimes completeness is not assessed as a risk. This may be justified, but sometimes we consider the assessment is inappropriate given the nature of the business.”
It added that: “Auditing of revenue from construction contracts is often challenging because of the judgements involved. If audit teams are not experienced in auditing such businesses they sometimes fail to tailor their approach sufficiently to reflect the way that revenue is recognised and end up with a fragmented approach as a result. With IFRS 15 now in place (for periods beginning on/after 1 January 2018) bringing more prescriptive rules for revenue recognition, firms need to pay extra attention to ensure their clients’ accounting policies are appropriate.”
Going concern continues to be a crucial audit area in the current climate of uncertainty but firms do not always give this area enough attention with either inadequate testing or showing insufficient scepticism, or with documentation failing to demonstrate the challenge that may have taken place.
On group audits, the report said: “Not all firms are experienced in auditing groups, and some will never have tackled the audit of a group with overseas components where they need to rely on component auditors. ISA 600 contains requirements to ensure the group auditor takes responsibility for the group audit opinion, requiring the group auditor to obtain a proper understanding of the group and to carry out sufficient procedures of its own. This includes the need to review the working papers of component auditors if relying on that work for the purpose of the group audit.”
Nevertheless, the ICAEW said: “We had no major concerns on the majority of our visits. However, some form of follow-up action was needed in just over a quarter of cases. In around 10% of cases, the issues were significant enough to report to the Audit Registration Committee (ARC) for consideration of regulatory action.” Most of the reports to the ARC reflected significant weaknesses in audit work, often combined with ineffective internal cold file review processes. Some of the firms involved have now been restricted from taking on new audits without prior permission.
Vigilance is needed in other areas, notably among ethical matters and issues of independence, for example, principals or persons closely associated with them holding shares in audit clients, and fee dependency issues. Such issues attract regulatory penalties and in 2018 there was a significant increase in the number of firms falling foul of the independence and eligibility rules.