Change on the schedule for audit in 2022by
Dudley Gould explores the year ahead for the audit industry and how it looks set to be another busy one in relation to both reforms and tech.
Efforts related to audit reform will continue to develop, with the government due to respond to the consultation on audit reform at the beginning of the year. It will be interesting to see how overarching reforms are, particularly in the face of business resistance because the original proposals went too far.
From a tech perspective, we will see open banking move to mainstream use in UK audits with auditors leveraging verified transactional data to automate existing audit tests and strengthening fraud testing to comply with the updated ISA (UK) 240 standard.
Additionally, there will likely be further debate around remote working and the continued development of tech tools to support the completion of remote audits.
Reform – government response
In January, we can finally expect the government to release its response to the 2021 audit consultation from 2021. This document was originally due to be released at the end of the year, but it’s possible that the timing of the announcement has been delayed by Covid disruptions, not to mention lobbying from businesses against certain proposals. This includes the requirement for directors to sign off companies’ internal controls. These actions angered investors, who are keen to protect their interests.
While we already know that there are plans in place forcing FTSE 350 companies to give work to challenger audit firms, the government will need to reveal how far reforms will go to prevent further corporate failure.
Focus on fraud
The auditing standard ISA (UK) 240 was updated for the first time in 16 years and is effective for audits beginning on or after 15 December 2021.
The revised standard seeks to clarify the auditor’s role and responsibility in identifying fraud. The changes do not change the scope of audits but enhance requirements related to identifying and assessing that financial statements are free from material misstatement due to fraud.
Additionally, it's possible that the Department for Business, Energy and Industrial Strategy’s (BEIS) white paper recommendation for directors being held personally responsible for the accuracy of their company’s financial statements may be included within reforms.
This increased focus on fraud will mean that technology use will have a bigger role in helping auditors do the heavy lifting. Open banking enabled tools in particular will have a large part to play in identifying risk and improving audit quality.
2022 will be the year open banking comes of age in audit and is routinely used to instantly obtain transactional data from source and automate a range of audit-related workflows such as verifying the cash book and the recoverability of debtors.
To safeguard client data, auditors should ensure they are using directly regulated open banking providers, instead of third parties that raise data security concerns from data crossing borders and being used for non-approved activities.
Additionally, planned changes to the 90-day reauthentication of bank feeds will give auditors more flexibility to request access for longer periods, making it easier to review the going concern status for audits signed off after more than three months.
As open banking spreads internationally, UK auditors can now obtain independently verified transactional data for their clients’ overseas bank accounts.
The UK’s adoption of open banking was further ahead of Europe due to the UK’s Competition and Markets Authority (CMA) mandating the nine largest banks to create open APIs one year earlier than PSD2, the European payments directive.
America’s adoption of open banking is industry-led instead of regulatory-led, which has meant adoption is a little slower than in the UK and Europe.
Working from home
The conversation around working from home will continue. At present, there is a split of opinion amongst the Big Four. KPMG is concerned that remote working could damage audit quality and limit learning opportunities for younger staff, so its UK auditors will be expected to be in the office for four days a week. Conversely, PwC is letting allowing all 40,000 of its US-based staff work from anywhere in the country.
While this debate is likely to evolve, tech tools will continue to be developed for audit assignments to be completed remotely due to a combination of work from home advocacy and continued business disruption from new variants of Covid.
Audit firms, including PwC, is already using drones for stock takes, proving that it's possible to confirm the existence of remote fixed assets
These are just a few expected audit developments for 2022. However, through compounding technological growth, including the rise of DeFi, change can happen quickly and there are likely to be further developments in the year ahead that support both regulatory changes and efficiencies of audit job completion.
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Dudley is a Chartered Accountant formerly with KPMG and Moore Kingston Smith. He founded Audapio, a solution leveraging Open Banking to improve audit quality and efficiency before joining Circit as VP of business development.