ASIC today issued a report on the results from its audit firm inspections for the 12 months to 30 June 2019, and a supplementary report of audit quality measures, indicators and other information.
ASIC Report 648 Audit inspection report for 2018-19 (REP 648) found that auditors did not, in our view, obtain reasonable assurance that the financial report was free from material misstatement in 26 per cent of the key audit areas that ASIC reviewed.
ASIC Commissioner John Price said, ‘While firm action plans to improve audit quality remain important, the continuing overall level of adverse findings from our audit files reviews needs to be addressed. ASIC will adopt a more intensive supervisory and regulatory approach in this regard.’
ASIC has already adopted a broader, more intensive supervisory and enforcement approach as regards audit. Our new regulatory initiatives include:
- implementing ASIC’s ‘why not litigate’ approach to auditor conduct matters
- an audit firm governance review looking at how conflicts of interest are managed within firms, firm culture and accountability mechanisms on audit quality, and firm talent for quality audits
- reviewing the analysis of root causes by large firms on selected material changes to financial reports identified from our financial reporting surveillances
- increased transparency by publishing the level of adverse findings for large audit firms, and
- publishing a broader group of audit quality measures and indicators.
Audit inspection findings
In REP 648, the 26 per cent figure relates to 207 key audit areas that ASIC reviewed across 58 audit files at 19 Australian audit firms of varying sizes. The largest numbers of adverse findings were in the audit of asset values, particularly impairment of non-financial assets and the audit of revenue. The results compare to 24 per cent of key audit areas in the 18 months to 30 June 2018 and 25 per cent in the 18 months to 31 December 2016.
Auditors are primarily responsible for audit quality. We believe that sustainable improvements in audit quality require a focus on governance, accountability, culture and talent by audit firms. In particular:
- all partners and staff should embrace the need to improve audit quality and the consistency of audit execution
- partners and staff should understand and be accountable for their roles in conducting quality audits, and
- firm leadership should give strong, genuine and consistent messages to partners and staff that audit quality is not negotiable, and this should be supported by holding engagement partners and other individuals to account for inadequate audit work.
Directors are primarily responsible for the quality of the financial report. Audit quality supports financial reporting quality and it is in the interests of directors and audit committees to support the audit process. Among other matters, directors and audit committees should consider:
- non-executive directors recommending audit firm appointments and setting audit fees
- reviewing the resouces devoted to the audit, including the amount of partner time
- assessing the level of professional scepticism exhibited by the auditor in challenging estimates and accounting policy choices, and
- ensuring independence of the auditor.
ASIC’s findings do not necessarily mean that the financial reports audited were materially misstated. Rather, in our view, the auditor may not have a sufficient basis to support their opinion on the financial report. Our inspections look at a limited number of files and focus on higher risk audit areas and so great caution is needed in generalising the results across the entire market.
Our audit inspection work complements our separate risk-based surveillance of the financial reports of public interest entities. This surveillance led to material changes to 4% to 5% of these financial reports reviewed for financial reporting periods ended 30 June 2018 and 31 December 2018.
Audit quality measures, indicators and other information
ASIC Report 649 Audit quality measures, indicators and other information: 2018-19 (REP 649) provides a broad group of audit quality measures, indicators and other information to supplement our audit inspection findings. This report is intended to promote:
- discussion on the measures and indicators that might be used by auditors and audit committees in monitoring initiatives to improve audit quality, and
- good behaviours by auditors and audit committees that support audit quality.
The measures and indicators presented in this report are likely to change in future years as:
- we reassess the relevance and usefulness of each measure and indicator, and
- more information to support new measures becomes available.
Changes and trends in the measures, indicators and other information over time may also provide useful additional information in the future.
Audit inspection process
We have also updated Information Sheet 224 ASIC audit inspections, which provides further information on our audit inspection process.
The objective of ASIC’s audit firm inspections is to promote the improvement and maintenance of audit quality. ASIC inspects audit firms that audit listed entities and significant public interest entities.
ASIC publishes its audit inspection reports to inform all audit firms, the investing public, companies, audit committees and other interested stakeholders in the financial reporting chain, of findings and areas of focus for auditors. Other ASIC activities to support audit quality include its financial reporting surveillance program, auditor surveillances not related to our inspections, investigations into corporate collapses and addressing matters from complaints and other intelligence. ASIC’s audit inspection reports do not count findings from these other activities.