Steve Collings runs the rule over the ICAEW’s 2018 audit monitoring report and finds that while audit quality remains relatively consistent, there is still room for improvement.
In this two-part series, Collings examines some of the main weaknesses featured in the report and offers guidance as to how auditors can overcome these failings.
The first part will focus on some of the key findings from the report and look at audit evidence and documentation. Part two will be published next week, and will cover audit sampling, written representations and going concern, and will also feature a case study from the report.
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The ICAEW has issued their 2018 audit monitoring report, which examines the findings of their audit inspections during 2017. ICAEW conducted 619 monitoring visits, 611 as a UK Recognised Supervisory Body and eight under the Crown Dependencies’ recognised auditor oversight regime.
The body comments in its report that while audit quality remains relatively consistent overall, there is still room for improvement.
In addition, ICAEW also reviewed 1,019 audits including 26 AIM and Nex companies, five market-traded entities (under the Crown Dependencies regime), 199 charities and 44 pension schemes. 473 audits were of entities which would have applied FRS 102 for the first time (excluding early adoption).
Of these reviews:
- 76% were either satisfactory or generally acceptable;
- 16% required improvement; and
- 8% required significant improvement.
ICAEW also reviewed limited aspects of a further 161 audits and 238 engagements completed under the Solicitors’ Regulation Authority’s Accounts Rules which require registered auditor status.
ICAEW is required to make a report to the Audit Registration Committee (ARC) where there are significant concerns about a firm’s compliance with the Audit Regulations. According to the report, in 2017, one in ten audit monitoring reviews resulted in a report to the ARC.
Poor audit quality has been cited as a key issue by ICAEW in 36 out of 60 reports to the ARC in 2017. Some, but not all, cases also contained significant financial reporting issues.
This article will pull out some of the main weaknesses featured in the ICAEW’s audit monitoring report and offer guidance, where applicable, as to how auditors can overcome these failings.
There are issues in the report which deal with the ethical standard and eligibility to practise as a registered auditor, but this article will not cover these.
Insufficient audit evidence is the most common significant weakness on audit files according to ICAEW and it has identified the top three ISAs which cause audit quality weaknesses:
- ISA (UK) 500 Audit Evidence
- ISA (UK) 230 Audit Documentation
- ISA (UK) 315 Identifying and Assessing the Risk of Material Misstatement Through Understanding the Entity and Its Environment
The next three most common ISAs where non-compliance was noted are:
- ISA (UK) 530 Audit Sampling
- ISA (UK) 580 Written Representations
- ISA (UK) 570 Going Concern
ISA (UK) 500 Audit Evidence
ICAEW cites insufficient audit evidence as the main weakness on audit files. Most issues surround revenue testing, fixed assets, stock and work in progress, and other areas where professional judgement is needed such as goodwill and intangible assets.
Problems frequently encountered include the sufficiency of audit evidence for:
- completeness of revenue;
- rights and obligations relating to fixed assets; and
- the valuation of stock and work in progress.
Completeness of revenue seems to rear its head quite frequently – not only by professional bodies but also in general file reviews. It is likely that such criticisms are because auditors are not starting substantive procedures at the right point in the sales cycle. When testing the completeness of income, the auditor should start from ‘outside’ of the accounting system: ie in the sales cycle, the starting point will be the customer’s order. Some auditors have started from the sales invoice, which may not be the source of the transaction and hence part of the overall test is missed out.
ISA (UK) 230 Audit Documentation
ICAEW has said there are “significant issues” where audit documentation is concerned. Common problems include firms failing to record material aspects of their audit work, or the link between the audit evidence and the final conclusion of the audit.
In some (limited) instances, ICAEW has found significant parts of audit files which ‘go missing’ or the file has not been assembled and archived within 60 days of signing the auditor’s report (as required by paragraph A54 of ISQC (UK) 1).
If there are ‘gaps’ between the audit work performed (or expected to have been performed) and the overall conclusion on the area being audited, this will result in a file being criticised. Keep in mind that ISA (UK) 230 requires audit documentation to be prepared in such a way that it enables an experienced auditor, with no previous connection to the audit to understand:
- the nature, timing and extent of audit procedures performed to comply with the ISAs (UK) and applicable legal and regulatory requirements;
- the results of the audit procedures performed and the audit evidence obtained; and
- significant matters arising from the audit, the conclusions reached thereon and significant professional judgements made in reaching those conclusions.
Next week’s second and final part will cover audit sampling, written representations and going concern, and also features a case study from the report.
About Steven Collings
Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.