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One in five audits by the six largest firms were defective - ASIC

Editorial Staff

The Australian Securities and Investment Commission (ASIC) conducted inspections at Australia's six largest audit firms and found that they performed a little better than the industry average but even so, a fifth of them lacked material information.

ASIC conducted a 347 point check on a handful of firms, of which the big six were a subset. A total of 98 files were examined. Across the industry 24% of the files demonstrated that the auditors had failed to "in our view, obtain reasonable assurance that the financial report was free from material misstatement." The big six failed in 20% of the files.

ASIC considers this not so bad.

"This compares to 23% in the previous 18-month period, ended 31 December 2016, and represents a welcome reduction in the level of findings," it said in a statement. To be clear, then, ASIC is pleased that it identified a problem 18 months ago, it told the industry to fix it, the industry made a marginal improvement in something that should be an absolute requirement before the auditor signs off and that marginal improvement is "welcome."

ASIC said "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." More clarity is needed so here it is: auditors are signing off without knowing everything they need to know to sign off correctly."

ASIC, like most government departments, is unwilling to challenge those with whom it is frequent bedfellows. And so, while there is a nod and a comment that they should try harder, there is no suggestion that if they continue to sign off on accounts without the necessary protections, disciplinary action will follow. ASIC says that it chose the big, difficult files to audit and without a hint of irony implies that the complexity justifies at least some level of failure.

Surely the opposite should be true and the more complex and difficult cases should be attended to with the most diligence. The value of audit is dubious at best and this shows it to be even less reliable than the industry's rules say it should be.

ASIC believes sustainable improvements in audit quality require a focus on culture and talent by 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 individuals to account for inadequate audit work.

Audit engagement partners should:

spend significant time at the audited entities to understand the business and risks, engage with directors and management, and involve themselves in risk areas of the audit on a timely and comprehensive basis;
work directly with the audit team on risk areas to ensure timely and quality audit work, apply their knowledge and experience throughout the audit process and upskill staff; and
undertake comprehensive reviews of the audit files at the premises of audited entities, focusing on possible risk areas.

While ASIC has seen some improvement in the level of findings in the audit of asset values and revenue, these areas continue to record the highest level of findings from our reviews and should continue to be a focus for firms to make sustainable improvements.


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