Date posted: 27/11/2018 4 min read

FMA Audit Quality Report notes both improvement and need to do better

The Financial Markets Authority acknowledges improvements in the quality of New Zealand audits and sets out where further improvements can be made.

In Brief

  • The FMA says New Zealand audit quality has improved
  • Concerns remain over inconsistencies in the quality of individual audits within audit firms
  • The report sets out areas of deficient audits

The overall quality of New Zealand audits has improved in recent years, says the Financial Markets Authority's Audit Quality Report 2018.

"This indicates that actions taken by audit firms as a result of our feedback have been effective. In only 4 per cent of the areas we highlighted we did not identify any subsequent improvements", the report released this week says.

"However, inconsistencies in the quality of individual audits within the same audit firm continue to be a concern."

The report says audit firms need to consider why audit quality varies significantly across individual files, even though the same policies and procedures are applied across all of the firm's audits.

The number of audit firms has fallen from 40 to 19 since 2011, but the report says despite that decrease, "we haven't been alerted that FMC [Financial Markets Conduct] reporting entities are having difficulties finding suitable auditors".

Areas requiring additional attention

The Audit Quality Report covers areas the FMA considers contributed to deficient audits. These areas relate to:

  • Emphasising directors' responsibilities for audit quality
  • Improving auditor independence
  • Improving effectiveness of addressing key findings by audit firms
  • Improving audit procedures when assessing management experts
  • Auditing accounting estimates
  • Auditing of schemes and funds
  • Responding to risk and executing key audit procedures.

"Addressing these areas will therefore have the largest impact on improving audit quality."

The FMA says its audit reviews have highlighted the direct link between the quality of an audit and the quality of the financial information provided by the entity being audited.

Garth Stanish, FMA Director of Capital Markets, said: "When an auditor is given poor quality information, there is an increased chance that the audit file was classified by us as requiring significant improvements."

"Auditors should also clearly tell directors when they are having difficulty getting the appropriate information and consider the impact of this issue on their audit opinion. Both auditors and directors have a role to play in raising audit standards."

The FMA published a guide for directors last year, setting out how directors can contribute to audit quality. Directors and management have primary responsibility for ensuring financial statements are compliant.

The FMA is required to carry out a quality review of the systems, policies and procedures of registered audit firms and licensed auditors at least once every four years, publishing an annual report of its findings. Its oversight of auditors is restricted to examining the audit files of Financial Markets Conduct Act reporting entities which includes entities such as companies listed on the NZX and managed investment funds.

Audit quality survey

The FMA has commissioned an independent research company to hold a survey to increase its understanding of public and industry perceptions of audit quality in New Zealand. The FMA would like you to participate if you are involved in some capacity in audits of FMC reporting entities, such as a director of a listed company, member of an Audit and Risk Committee (ARC), fund/wealth manager, or as an auditor, and also investors.

Click on this link to access the survey. It is open until 14 December.

Read the report

For this year’s report, the FMA reviewed five registered firms and 24 audit files.

Download

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