Improving and maintaining audit quality

This information sheet (INFO 222) gives guidance to audit firms when considering how to improve and maintain audit quality.

It covers:

What is audit quality?

Audit quality refers to matters that contribute to the likelihood that the auditor will:

  • achieve the fundamental objective of obtaining reasonable assurance that the financial report as a whole is free of material misstatement; and
  • ensure material deficiencies detected are addressed or communicated through the audit report.

This includes appropriately challenging key accounting estimates and treatments that can materially affect the reported financial position and results.

This view is consistent with the objective of the audit (see paragraph 11 of Auditing Standard ASA 200 Overall objectives of the independent auditor and the conduct of an audit in accordance with Australian auditing standards).

Why is audit quality important?

The quality of financial reports is key to confident and informed markets and investors. The purpose of the independent audit is to provide confidence in the quality of financial reports. Improving audit quality and the consistency of audit execution is essential to maintaining confidence in the independent assurance they provide.

If a company fails but its financial report did not properly show its declining financial position and results or going concern issues, it is reasonable for questions to be asked about the role played by the company directors and the auditor. Questions may also be asked if investment decisions are made using financial reports that do not reflect a company’s true financial position and performance.

Directors are responsible for the quality of the financial report – which is supported by the quality of the audit – so it is in the interests of directors and audit committees to support the audit process. This includes ensuring that management produces quality financial information on a timely basis, and that the audit is appropriately resourced. We strongly caution against selecting auditors on the basis of cost rather than to ensure a quality audit.

Auditors must obtain reasonable assurance that financial reports are free of material misstatement, apply sufficient scepticism to accounting estimates and treatments, and address any deficiencies detected so that investors and other users of financial reports can have confidence in the quality of the information they contain.

Professional scepticism

Exercising professional scepticism is a critical part of conducting quality audits. The auditor must critically assess, with a questioning mind, the validity of the audit evidence obtained and management’s judgements on accounting estimates and treatments.

Auditors should not:

  • be over-reliant on, or readily accept, the explanations and representations of the management of audited entities without challenging matters such as key underlying assumptions, or
  • seek out evidence to corroborate estimates or treatments rather than appropriately challenging them.

What good looks like for audit firms

Auditors should deliver professional, high quality audits through:

  • a strong internal culture focused on quality audits and professional scepticism
  • applying appropriate resources, experience and expertise to audits
  • effective internal supervision and review
  • robust accountability mechanisms
  • identifying and addressing audit risks and issues on a timely basis
  • accepting and addressing findings from audit inspections, including findings on asset values and revenue recognition.

Key audit quality improvement initiatives

Factors audit firms should consider to improve audit quality include:

  • conducting effective quality reviews of audits
  • remediating findings by obtaining the audit evidence necessary to form an opinion on the financial report
  • identifying root causes of findings from their own quality reviews and our audit inspections
  • developing and implementing action plans to address those findings, and monitoring and revising these action plans to ensure that they are effective
  • reviewing their staff structure to ensure they are appropriately resourced to undertake increasingly complex audits into the future.

Audit firm quality reviews

Conducting effective firm quality reviews is key to maintaining and improving audit quality. The effectiveness of these reviews can be enhanced by considering the issues in Table 1.

Table 1: Issues to consider for effective audit firm quality reviews

Issue

Considerations

Suitability of reviewers
  • Do reviewers have appropriate experience, seniority and authority (including any relevant industry expertise)?
  • Are reviewers independent? Can they be affected by matters such as the relationship with other partners and the possibility of deficiencies in their own audit work? Do they report directly to the chair of the firm?
  • Should full-time reviewers should be used?
  • Do reviewers apply sufficient professional scepticism and resist pressure not to report findings?
Review coverage
  • What is the scope and coverage of reviews?
  • How are audit files and audit areas selected for review (having regard to risk and coverage)?
  • Do quality reviews cover the work of the auditor’s own experts, and is their work assessed against standards that apply to auditors?
  • What is the depth of reviews of individual audit files and audit areas, including the amount of time allowed for such reviews?
  • Is the work of internal firm specialists covered?
  • Are project management of audits and the adequacy of partner involvement covered?
Review and reporting
  • Do reviews deal with difficult judgement areas or apply a ‘tick-a-box’ approach?
  • Is there is a presumption that work that is not documented has not been done?
  • Are any attempts by reviewers to rationalise away findings appropriate?
  • Are findings reported regardless of potential legal issues or liability?
  • Is there is a genuine assessment of the severity of findings and the probability of misstatements?
  • How are findings identified and addressed?
  • Are findings communicated throughout the firm to promote improved audit quality for engagements not reviewed?
Remedial action
  • Is remedial action taken when needed?

Where ASIC audit inspections or internal firm quality reviews identify that sufficient appropriate audit evidence has not been obtained, firms should remediate deficiencies by obtaining the evidence necessary to support the audit opinion. 

Partners and firms should not hesitate to revisit an audited entity to undertake additional work. Undertaking the work necessary to complete their audits for the reporting period in question will ensure that the audit report is supportable and that the market can be properly informed if any material misstatements are detected.

Some partners may resist accepting and addressing findings from internal quality reviews and audit inspections. This could be due to concerns about loss of reputation, impact on performance evaluations and remuneration, possible liability or disciplinary actions, or additional audit costs. While it is important to have a good dialogue between partners and ASIC to ensure that our findings are appropriate, it is in the interests of the partners, firms, audited entities, directors and users of financial reports that findings are addressed.

Firms should have processes in place to require partners to take remedial action. In significant cases where firms do not accept findings and implement initiatives to address them, we will consider issuing an audit deficiency report to the directors or audit committee of the audited entity, or taking other appropriate action.

The confidentiality restrictions imposed on ASIC under the Australian Securities and Investments Commission Act 2001 were amended in 2012 to give us the ability to report findings to audit committees, directors and management of audited entities. We have issued Regulatory Guide 260 Communicating findings from audit files to directors, audit committees or senior managers (RG 260), which includes our criteria for communicating matters from our audit file reviews to audit committees and directors on an exception basis.

Conducting an effective root cause analysis

We suggest that audit firms undertake, or continue to undertake, comprehensive and critical analysis to identify the underlying root causes of audit quality findings from ASIC’s audit inspections and the firm’s own quality reviews. This includes identifying and implementing actions to address those root causes.

An effective internal quality review program is essential to this process, including identifying individual engagement issues and thematic findings across engagements.

We suggest that firms continue to develop a culture where partners and staff:

  • recognise and accept findings
  • support improvements to audit quality
  • support and undertake genuine root cause identification
  • implement effective solutions to address root causes of audit deficiencies.

Consideration should be given to:

  • developing guidance and training to assist audit teams and offices to undertake effective root cause analysis that identifies the real underlying root causes, rather than superficial causes
  • using independent teams to interview audit team members and others in the firm to identify the causes of findings and undertake the root cause analysis
  • using suitably qualified and experienced reviewers with sufficient authority to perform the root cause analysis
  • conducting group learning sessions to discuss identified causes of findings and the solutions to be implemented
  • sharing the results of the root cause analysis within the firm to enable the implementation of solutions throughout the firm
  • using audit quality indicators to identify potential factors leading to findings
  • identifying factors supporting high-quality engagements
  • ensuring that the process and solutions are promoted and supported by firm leaders.

We suggest that firms share, or continue to share, root causes and solutions with other firms in their networks and learn from those other firms. Firms that are not part of networks should consider sharing root causes and solutions with other similar firms locally.

Effective root cause analysis is an important element of developing firm action plans to improve audit quality.

Audit firm action plans to improve audit quality

Better auditors focus on maintaining audit quality and appropriately balance this imperative with risks and commercial pressures. They recognise that quality is essential to the acceptance of a firm’s audit services and its reputation in the market.

Firms should consider implementing or continue action plans with particular focus on:

  • the culture of the firm, including strong messages from the firm's leadership about the importance of audit quality, setting expectations and leading by example
  • the experience and expertise of partners and staff, including increased and better use of experts
  • supervision and review, including greater partner involvement in working with audit teams in the planning and execution of audits, robust review processes during the engagement, robust post-completion quality reviews, and real-time quality reviews of engagements
  • accountability, including the impact on remuneration for engagement partners and review partners for poor audit quality, often extending to firm leadership.

The initiatives in action plans should vary from firm to firm, taking into account the circumstances of each firm and its assessment of the underlying causes of any deficiencies in audit quality.

Similarly, action plan initiatives may also vary between offices in a national firm or network.

Plans that are too high level and general, without specific documented actions, responsibilities and timelines, are less likely to be effective.

Initiatives that appear to have improved audit quality

Initiatives undertaken by some firms that appear to have a positive impact on aspects of audit quality include:

  • forming specialist focus groups and risk panels on impairment of non-financial assets, substantive analytical procedures and other areas to develop the necessary expertise, support and coaching for audit teams
  • increasing partner time spent on engagements and with engagement teams
  • developing a strong culture focused on audit quality with accountability at all levels of partners and staff
  • proper project management of audits, including monitoring by the engagement team and by firm leadership of progress against key engagement specific milestones, and addressing issues early to minimise deadline pressures at the conclusion of the audit
  • greater education of directors and management of audited entities to improve financial reporting quality and support the audit process.

Table 2 provides some specific examples of other initiatives to improve and maintain audit quality that might appear in action plans.

Table 2: Examples of possible other initiatives to improve audit quality

Focus areas

Example actions

Firm culture
  • Strong, consistent and genuine messages from firm leadership and partners that professional scepticism and audit quality must not be compromised.
  • Promoting a culture of consultation with colleagues and specialists.
  • Conducting staff surveys to assess the culture of the firm and identify areas for improvement.
  • Providing dedicated partners to promote and support audit quality.
  • Obtaining feedback from audit team members at all levels to assess culture and quality on individual engagements.
Experience and expertise
  • Assigning partners and staff to audit engagements who have a strong understanding of the entity’s business, appropriate industry knowledge, appropriate experience and a sound understanding of financial reporting requirements.
  • Assigning partners and staff taking into account the nature of the audited entity, risk areas and any complexities, the level of professional judgement required, and the likely planned audit approach.
  • Assigning experts to audits in areas such as valuation of complex financial instruments.
  • Implementing processes to ensure that the firm only undertakes work that is adequately resourced and for which there is sufficient expertise.
  • Increasing partner involvement on engagements, and working with the audit team in the planning and execution of the audit engagement.
  • Reviewing the reasons for not retaining skilled and experienced staff.
  • Providing training, firm guidance and procedures, consultation processes and technical support.
  • Providing additional training and guidance on audit evidence, professional scepticism, and reliance on other auditors and the use of experts. Consider using real life case studies.
  • Training audit staff to better understand the work undertaken by specialist staff.
  • Training specialist staff who undertake audit work to understand the audit process and how their work will be used.
  • Giving partners and staff a sound knowledge of the accounting standards and framework to conduct an effective audit. Partners and staff should consider the substance of transactions and arrangements, alternative views, and the principles and intent of accounting standards.
  • Not relying on management's own expert, which could undermine the objective of an independent audit.
  • Using the firm's own experts where the auditor does not have the necessary skills, knowledge and experience.
  • Ensuring the basis and underlying information evaluated by experts are fully understood and tested by the auditor. 
  • Where audited entities grow, reviewing whether there is not a mismatch between the audited entity and the size or professional capacity of the auditor and the breadth of audit team experience.
Supervision and review
  • Encouraging earlier engagement quality control reviewer (EQCR) involvement to assess the understanding by partners and staff of the client’s business and associated risks.
  • Enhancing the role descriptions of EQCRs and specialists and assessment of their effectiveness.
  • Increasing partner time and depth of reviews by engagement partners and EQCRs.
  • Introducing coaching during the audit to challenge the audit team’s decisions in areas such as impairment testing and substantive analytical procedures.
  • Introducing or increasing real-time reviews by an expert external to the engagement team for key areas of the audit before the audit is finalised. 
Accountability
  • Linking a meaningful part of partner and manager remuneration to audit quality, as assessed through firm quality reviews and audit inspection findings. 
  • Giving staff at all levels specific accountability for audit quality and their performance is assessed accordingly.
  • Considering whether credit should be given to partners for accepting findings and addressing them on a timely basis.
Other matters
  • Increasing the use of, and reliance on, internal control reviews.
  • Re-evaluating decisions made in previous audits and regularly bringing fresh minds to bear.
  • Ensuring appropriate use of, and reliance on, other auditors. This can include directly reviewing their work.
  • Having appropriate training, guidance, support, systems and monitoring relating to audit independence.

Audit quality indicators

Firms should consider developing, or continuing to apply, measures to assist in monitoring and driving their implementation of initiatives to improve audit quality.

Information Sheet 184 Audit transparency reports (INFO 184) discusses the use of audit quality indicators in the context of public audit firm transparency reports. The focus in the information sheet is on ensuring that any indicators are not used in a potentially misleading manner.

Ongoing reviews of action plans

We encourage firms to critically review and evaluate their action plans regularly and update the plans with a focus on matters such as:

  • timely and effective implementation
  • how successful the action plan is in practice – through quality review results and other measures of audit quality
  • the need for new initiatives where earlier initiatives are not fully effective or become less effective over time.

Reviewing audit firm staff structure

Audit firms might consider reviewing their staff structure over time, to ensure the firm has access to resources with appropriate experience and expertise for audits involving increasingly complex client businesses, financial reporting and other requirements, audit judgements, and audit approaches. This includes the impact of technological change and the greater use of data analytics, robotics and machine learning systems.

The traditional pyramid structure – with a small number of experienced partners and a relatively large number of junior staff – may need to change. Audit staff with greater experience and expertise may be required.
Ensuring the necessary supply of auditors and other experts involves attracting people to the profession, upskilling them, and ensuring suitable levels of staff retention by audit firms. This requires the efforts of a number of parties, including firms, tertiary institutions and accounting bodies.
With markets and companies becoming increasingly global, there may be benefits in firm networks being able to move auditors and experts between jurisdictions to meet demand.

Where can I get more information?

Important notice

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases your particular circumstances may be taken into account when determining how the law applies to you.

This is Information Sheet 222 (INFO 222), issued on 29 June 2017. Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.

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Last updated: 11/04/2018 05:24