Improving Audit Quality
Annually, audit firms invest vast quantities of blood, sweat and tears in delivering quality auditing and related services to their clients. Yet, audit regulators still report many common audit quality deficiencies in their annual inspections reports, most of which are repeat findings. It is important to root out the causes to make lasting improvements to audit quality, which, in turn, will lead to efficient and profitable firms.
Firm-level deficiencies – quality system
Firm-wide deficiencies reported on by audit regulators mainly revolve around firm leadership, engagement performance and independence issues.
While some improvements have been made by leadership, there is still a trend of recurring deficiencies at firm and engagement level. This raises questions about firm leadership’s ability to sufficiently promote a culture of quality within the firm, and ensure high audit quality in a consistent and sustainable manner. When leadership decides to oppose all deficiencies identified through regulatory inspections, root causes of such deficiencies may be overlooked, rather than addressed.
Recurring deficiencies at engagement level also bring the adequacy of policies and procedures ensuring consistent quality of engagement performance under scrutiny. This does not only involve deficiencies in the firm’s audit methodology and templates, but also the efficiency of engagement quality control reviews, and control over modifications to engagement files during the lockdown period and archived engagement files.
The increase in the number of deficiencies relating to independence over the past few years is alarming. This is indicative of the fact that controls at firms do not adequately ensure the appropriate identification, and evaluation of threats and breaches of relevant ethical requirements, and the applicable response. Issues identified include inadequate consideration of conflicts of interest, the proportion of fees from non-assurance services to total audit fees, and prohibited services provided to audit clients.
Engagement-level deficiencies – engagement files
Audit regulators still commonly report on engagement-level deficiencies in the following areas:
- Revenue, trade and other receivables; goodwill; group audits; and areas of significant auditor judgment (including accounting estimates)
- Financial statement presentation and disclosure verification
- Risk assessment
- Concluding on unadjusted misstatements
- Audit reports.
How can these deficiencies be addressed appropriately?
When audit firms identify audit quality findings through external inspection results or internal monitoring, it is crucial to perform a thorough and brutally honest root cause analysis. Sugar coating or becoming defensive is ill-advised. Involving the whole audit team may prove extremely valuable in identifying the true root causes of deficiencies. Persist in asking “why” until you identify the real reason for the deficiencies occurring or recurring. Only when the true root causes are identified can the deficiencies be effectively addressed through appropriate remediation activities.
The next step is to develop a sensible plan to remediate the root causes of the identified deficiencies. Set SMART goals: ensure that your remedial action plan is specific, measurable, attainable, relevant and time-bound. Creating an overly optimistic or generalised remedial action plan will only set you up for failure.
Once you have a sound remedial action plan in place, it is critical that you monitor the remediation process and the implementation of the plan. Stick to your objectives and keep each other accountable by reporting frequently on the progress achieved and obstacles encountered, as well as proposed solutions to ensure that the goals are achieved in time.
Do not underestimate the value of implementing robust monitoring processes at both firm and engagement level, taking into account the risks previously identified, and proactively monitoring implementation of remedial measures. This will not only mitigate the risk of recurring deficiencies, but will also achieve continuous high audit quality.
In summary
Understanding the root causes of recurring deficiencies will assist firms in effectively addressing the underlying quality risks and improving audit quality. This will lead to efficiency and profitability, lower business risk to the firm, and competent and professional staff.
LEAF can assist firms with the implementation of quality systems; monitoring compliance with the system; assessing engagement performance through thorough file reviews; amendments to methodology; providing practical advice; and training staff on the relevant requirements and deficiencies identified.
References
1. IFIAR: Survey of Inspection Findings 2020, issued March 2021.
2. IRBA: Public Inspections Report on Audit Quality – 7th Inspections Cycle 2021, issued January 2022.
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