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IFIAR Report indicates some improvement in findings, although more still needs to be done

Last Updated Mar 2018

Johannesburg, 12 March 2018  - The International Forum of Independent Audit Regulators (IFIAR), of which the Independent Regulatory Board for Auditors (IRBA) in South Africa is a member, released its report Survey of Inspection Findings 2017 (the IFIAR Report) on 8 March 2018. This is IFIAR’s sixth annual survey of its members’ findings from inspections of audit firms in their jurisdictions.

“SAICA welcomes the IFIAR report and will use it together with other resources and information to inform our initiatives on how best to respond in terms of supporting our members,” says Botha. “The highest standard of audit quality is essential for the continued relevance and value of the external audit in enhancing the credibility of financial reporting, which in turn contributes to confidence in and the stability of financial markets. The IFIAR Report provides a transparent and useful context for discussions about areas for improvement in terms of achieving consistent high-quality audits.”

The IFIAR Report focuses on inspections conducted at the six largest global audit firm networks (i.e. the Global Public Policy Committee (GPPC) networks), namely: BDO, Deloitte, EY, Grant Thornton, KPMG and PwC. It provides information about two categories of inspection activities, namely: inspections performed on firm-wide systems of quality control and inspections of individual audit engagements.

At firm level, 32 audit regulators reported results of their inspections of 111 audit firms from the GPPC networks. Two of the firm-wide quality control inspections elements with high rates of inspection findings are: Engagement Performance; and Independence and Ethical Requirements. Although the IFIAR Report indicates that the inspection data at firm level viewed on average over a period of years (2013 to 2017), reflects no definitive trend in quality control findings, audit firms should reflect on their policies and procedures, and implementation in these areas, since deficiencies may adversely impact a firm’s overall environment for individual audit engagements or for internal monitoring and oversight of audit engagements.

In respect of inspections of individual audit engagements, 33 audit regulators reported results of their inspections of 918 audit engagements of listed public interest entities (listed PIEs) performed by 120 individual firms from the GPPC networks. The two audit engagement inspection areas with the highest rates of inspection findings are (percentage of audits inspected with at least one finding in the area concerned): Auditing of Accounting Estimates (29%) and Internal Control Testing (17%).

Overall, the 2017 survey results indicate that 40% of audit engagements inspected had at least one finding, which has decreased from 47% in 2014. Botha highlights: “While the numerical analysis of inspection findings is useful in certain respects, it should not be taken out of context. Inspection findings are by their nature entity-specific and audit-specific. Furthermore, because audit regulators apply a risk-based approach when selecting individual audit engagements for inspection, the numerical results cannot be extrapolated to the entire population of audits conducted.” Despite the decrease in findings, the IFIAR report states that the occurrence of findings remains too high. This deserves the attention of audit firms, audit regulators, standard-setters, professional accountancy organisations and others. “Every audit firm should reflect on what these findings mean for its system of quality control and the conduct of its engagement partners and engagement teams in performing audits of financial statements. SAICA encourages all audit firms to use the IFIAR Report as a reference point to enhance audit quality,” adds Botha.

A further observation from the 2017 survey results is that the progress in terms of addressing recurring deficiencies as reflected in inspection findings is not experienced in all jurisdictions at the same rate; in essence, there are inconsistencies across the jurisdictions in which the GPPC networks operate. Therefore, the focus of the GPPC networks should include the identification of inconsistencies between their member firms in different jurisdictions and taking further action to enhance audit quality throughout all of their member firms.

IFIAR also highlights various initiatives that it expects will in future have a positive effect on enhancing audit quality, including IFIAR’s dialogue with the GPPC networks focussing on how firms are managing their audit practices to promote audit quality, and IFIAR’s engagement with the International Standard Setting Boards regarding whether their projects address areas of frequent inspection findings and whether the standards’ requirements are sufficiently clear, drive consistent application by auditors and enhance the exercise of sufficient levels of professional scepticism.

Monitoring results, such as those in the form of findings from inspections conducted by audit regulators, is only one input in evaluating the consistent execution of high-quality audits by audit firms. There exists general recognition that a broad spectrum of so-called audit quality indicators have to be considered in combination to obtain a fuller picture of audit quality. For example, audit committees are increasingly focussing their attention on the use of various audit quality indicators when discharging their oversight responsibilities with respect to the external audit and in making decisions regarding the appointment or re-appointment of the entity’s external auditors.

Botha concludes: “SAICA will continue with its programme of proactive engagement with the IRBA Inspections Department and utilising our committees and structures to create a forum to inform members about matters relating to the inspections process and inspections findings (at firm level and at engagement level), and escalating inspections-related matters to the IRBA. This also informs our ongoing communication with members and provides input relating to the content and focus of our products and services to members, including certain seminars and events. Furthermore, SAICA participates in the international auditing and ethics related standard-setting processes through contributing to the outreach activities of the International Standard Setting Boards, raising awareness and soliciting input regarding ongoing projects locally and internationally, and submitting comments on proposed standards and other developments. Improving consistency in the execution of high-quality audits is an important focus area for us and we are committed to playing our part.”

The full IFIAR Report can be accessed via the IFIAR website.

The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 43 000 members and associates who are chartered accountants [CAs(SA)], as well as Associate General Accountants [AGAs(SA)] and Accounting Technicians [ATs(SA)], who hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in every sphere of commerce and industry, and who play a significant role in the nation’s highly dynamic business sector and economic development.

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