It’s a great life being an auditor. You visit your clients and can ask as many questions as you like.
After all, your job is to confirm the accounts are showing a “true and fair view” or to be more precise, your job according to “International Standard on Auditing (ISA) 700, Forming an Opinion and Reporting on Financial Statements”, is to “form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.”
So, that’s the job of the auditors.
Who checks the quality of the audits though?
In the UK, the Financial Reporting Council (FRC) undertakes annual quality inspections of the largest auditing firms in the UK including Deloitte, EY, KPMG, pwc and a number of mid tier firms.
The latest annual report has been released and whilst there has been an improvement in the performance compared to previous years with 67% of all audits inspected in 2014/15 being assessed as either good or only requiring limited improvements, 33% of the audits inspected fell below the highest standards set by the accounting regulator and were classified as either requiring improvements or significant improvements.
Let’s just pause there for a moment.
What this is saying is that one in every three audits undertaken by the leading accounting companies in the UK have been classified as needing improvements or even worse, needing significant improvements.
Three of the more common issues identified in the report were:
Insufficient scepticism in challenging the appropriateness of assumptions in key areas of audit judgement such as impairment testing and property valuations.
Insufficient or inappropriate procedures being performed. This is common to many areas including revenue recognition.
The failure to adequately identify the threats and related safeguards to auditor independence and to appropriately communicate these to audit committees.
The FRC do however appear to be trying to improve things and have introduced various initiatives.
For example, they now “require firms to develop action plans to address the weaknesses identified in individual audit engagements and firm-wide procedures”. In conjunction with the development of these action plans they now require firms to undertake a detailed rootcause analysis of the factors contributing to the issues arising from the inspections and those action plans together with the related analyses will then be subject to follow-up inspections.