ICAEW ‘disappointed’ at audit quality resultsby
Audit quality standards continue to cause concern within the ICAEW's regulatory framework. Julia Penny reviews this year's audit monitoring report and suggest a few strategies for auditors who want to improve.
The chair of the ICAEW’s regulatory board expressed “disappointment” that audit quality results remained largely static in the past year.
Introducing the institute’s Audit Monitoring 2020 Report, issued in late September, board chairman Michael Caplan explained that the annual inspection cycle prevents a simple year-on-year comparison. Nonetheless, he was concerned that 8% of audits performed in 2019 required significant improvements and 18% of audits required improvements.
“We do not consider these to be acceptable figures,” he wrote.
Audit quality findings
ICAEW auditors are reviewed on a regular basis by the institute’s Quality Assurance Department (QAD), which is overseen by Caplan’s Independent Regulatory Board (IRB).
The QAD uses grades audits into four categories:
- Satisfactory – no concerns, although there may be minor improvement points identified;
- Acceptable - limited concerns in relatively isolated areas;
- Improvement required - more gaps or weaknesses in evidence or more widespread weaknesses in documentation;
- Significant improvement required – significant concerns over the adequacy or appropriateness of audit evidence or judgements in one key area or multiple issues across several different areas.
Overall, approximately 25% of audits in 2019 (the year which the 2020 report covers) were judged satisfactory, with a further 50% judged acceptable. This means that roughly 75% of audits reviewed are judged to be of an appropriate quality. The 18% of “improvement required” audits lagged behind the comparable figure of 16% for 2017 and 2018. The 8% needing significant improvement was down from 10% in 2018, but level with the 8% recorded in 2017.
A number of the firms with the poorest outcomes (9% in total) were referred to the Audit Registration Committee (ARC), which has a range of options to deal with quality issues includeing:
- impose conditions, such as further hot or cold file reviews being required for submission
- impose restrictions, such as not being able to take on new audits without permission
- impose fines or refer firms for further disciplinary investigation
- withdraw audit registration (in the most serious cases).
Clearly, no auditor wants their file to be in the bottom two categories of quality and no firm wants to have sanctions imposed for poor quality work. With that in mind it is worth looking at the key findings identified in the report and also how firms can adopt a right-first-time culture to avoid such failings.
Scepticism and judgment
As might be expected the areas in which particularly important quality issues were identified are often in relation to scepticism and judgment. Within this the following were all identified as important:
- Going concern
- Long-term construction contracts
- Property valuations.
To help auditors improve, the report sets out examples of the good practice they have seen. For instance, in the case of going concern, good practice seen included:
- Consideration of worst-case scenarios when assessing forecasts
- Use of a restructuring professional to help stress test scenarios
- Careful consideration of Brexit implications
- Use of a flowchart to work through various going concern scenarios to identify the appropriate audit opinion
- Thorough documentation of thought processes and supporting conclusions, demonstrating scepticism and challenge of management.
In addition to these key areas, the report identifies that the ISAs which are most commonly breached are ISA 500 on audit evidence; ISA 230 on audit documentation; and ISA 315 on identifying and assessing risk. This is not really a surprise though, as these requirements essentially affect every part of every audit.
The QAD, meanwhile, continues to work with firms to address quality issues, for example with videos such as False Assurance and Without Question that are used in larger networks across the globe. Smaller firms, however, have made less use of these films and associated workshop sessions, which bring to life the pressures that auditors face in remaining independent and providing a quality audit.
Getting it right first time
One way to ensure a quality product, whether the product is audit or the latest car model, is to develop a culture of getting it right first time. There is plenty in ISA 200 and ISQC 1 regarding ensuring that quality is achieved in audits, but ultimately it comes down to a commitment throughout the firm to aim for better outcomes.
Right-first-time means that you must consider what is needed to achieve the quality audit you want, including the detail of how this will be achieved. For instance, to do a good job of auditing going concern, the partner must first recognise how big an issue this is going to be and therefore how much time and other resources it will take.
If going concern is likely to be a material risk, as is the case for lots of audits in the current pandemic environment, then consideration must be given to whether more senior staff than usual are required, expert assistance is needed, or the audit will need more time to complete. If you are going to get it right first time these factors need to be considered early enough to change the plans for the audit, including the dates and staffing requirements.
Following on from initial planning, the partner will need to ensure that all of the team understand the issues at stake and their role in the audit in relation to these issues. For instance, if a member of the team doesn’t appreciate that the audit of revenue or debtors, for example, have vital links to the going concern work, they may not be able to see the relevance of matters that need escalating in connection with these areas.
The partner and manager should ensure that everyone understands what is expected of them explicitly. For example, there may be a tendency for team members not to check that their work covers everything in the audit programme because they know it will be reviewed. But this is both sloppy and inefficient, and risks that the reviewer also misses something. In a right-first-time culture, individuals should be both empowered (with necessary time and training) and expected (with clear communication of this expectation) to fully complete the work allocated to them. If they cannot complete the work appropriately or in time, they should raise it urgently with the manager or partner.
In developing a right-first-time culture firms will need to recognise that individuals need on the job coaching to learn what “right” looks like, even if this needs to happen remotely. If staff have not learnt what is needed to do a good job, quality can spiral downward and have an impact that lingers for years.
It is also important to recognise what has gone wrong in the past and to use root cause analysis to identify why it went wrong. For instance, providing further training on the audit of going concern is not going to be effective if the root cause of poor work in this area is a lack of time and resources on the audit to address it properly.
In conclusion, nobody wants to be in the bottom categories for audit quality, or worse still find themselves on the disciplinary pages of their professional body. A proactive approach by developing a right-first-time culture can help to limit the risk of this happening and will also improve efficiency, as fewer pieces of work will need to be repeated or corrected.
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Julia Penny is the principal of JS Penny Ltd which provides technical and training consulting on anti-money laundering procedures, auditing and financial reporting. Julia is a member of ICAEW Board and Council, chair of the ICAEW Ethics Advisory Committee and past chair of the ICAEW...