Date posted: 17/12/2019 4 min read

ASIC’s insights to improve audit quality

Chartered Accountants Australia and New Zealand (CA ANZ) welcomes the release of ASIC’s Audit Inspection Report 2018-2019.

In brief

  • ASIC has published its 2018-19 Audit Inspection Report
  • The report calls for an increased focus by audit firms on culture, governance and accountability
  • ASIC has released an accompanying report that presents a wider view of audit quality indicators

ASIC's Audit Inspection Report for 2018-19 provides a key input into the profession's continued focus on improving audit quality.

Chartered Accountants Australia and New Zealand (CA ANZ) welcomes the release of the report, which shows there is still need for improvement. CA ANZ will continue to work to provide resources to members and to drive the changes the profession needs to make.

The report calls for auditors to increase their focus on culture and talent, with consistent messaging from firm leaders and accountability for partners and staff to promote external and internal quality. ASIC also wants firms to ensure their action plans are reviewed and updated to help them identify the root causes of findings.

ASIC's findings show that firms need to continue to focus on the audit of asset values, particularly the impairment of non-financial assets. Auditors need to challenge the reasonableness of any forecasts, key assumptions or basis of valuations. Revenue is an area where ASIC found issues with accounting policy choices, substantive analytical and tests of details. Other focus areas include the sufficiency and appropriateness of audit evidence, professional scepticism and the appropriate use of the work of experts and other auditors.

ASIC will continue to undertake new regulatory initiatives including a 'why not litigate' approach to enforcement, greater transparency in its reports, completing its review of conflicts of interest, culture, talent, governance and accountability for audit quality at the six largest firms, and reviewing the effectiveness of the root cause analysis firms conduct on certain adverse findings. CA ANZ supports this approach.

‘The report calls for auditors to increase their focus on culture and talent, with consistent messaging from firm leaders and accountability for partners and staff to promote external and internal quality.’

The report also discusses the roles directors, audit committees and other stakeholders play in audit quality. It highlights that management has a role in supporting audit quality, and the need to focus on the information provided to auditors. ASIC will be consulting on whether it should change its reporting of findings from audit inspections to directors and audit committees from an exception basis to routine reporting in 2020. 

Our Comprehensive Plan on Audit and Risk in Australia put forward 15 steps to improve audit quality, confidence and the relevance of risk that auditors focus on. These steps include how potential conflicts of interest are addressed, strengthening prohibitions on non-audit services, a focus on auditors' skills, and improving audit quality oversight.

We are pleased that ASIC has also released an accompanying Audit Quality Measures indicators and other information 2018-19 report, which provides a wider view of audit quality. We have encouraged ASIC to take a more balanced scorecard approach for a number of years and it is pleasing to see this taken up. We would still like to see more granular information on how ASIC views the severity of the issues it identifies.

The wider lens provided by the Audit Quality Measures report provides additional insights, such as the fact that the percentage of actual misstatements in financial reports related to the audit inspections has been decreasing steadily – from 11% in 2015 to 2% in 2019.

But the bar continues to rise for the profession and the focus on audit quality is sharper than ever. Earlier this year, CA ANZ launched Root Cause Analysis guidance which provides a comprehensive approach for firms and auditors to use to understand what is causing audit quality problems so that effective solutions can be found.

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