CHRONIC DEFICIENCIES in key areas of public company audits have exposed the urgent need for firms to find new ways to dramatically improve audit quality.
That’s the view of the International Forum of Independent Audit Regulators (IFIAR), speaking at the launch of its 2014 Survey of Inspection Findings in London today.
It found the highest volume of audit inspection deficiencies to be in fair value measurement (20%), internal control testing (24%), and revenue recognition (14%) – all key areas of audited financial statements.
The findings are primarily based on inspections of work conducted by the six international networks of audit firms – BDO International, Deloitte Touche Tohmatsu, EY Global, Grant Thornton International, KPMG International, and PwC International.
Equally concerning are its findings for audits of systemically important financial institutions (SIFIs) such global banks and insurers. The highest number of deficiencies related to the auditing of allowance for loan losses and loan impairments, internal control testing, and auditing the valuation of investments and securities.
“We continue to see high levels of inspection deficiencies in vital areas of public company audits. This is a problem for investors and stakeholders around the world,” said Lewis Ferguson, IFIAR chair of the US Public Company Accounting Oversight Board (PCAOB).
The IFIAR’s report findings are based on the summaries of key inspection results submitted by 29 member countries from around the world. The body said they were ‘consistent’ with previous surveys.
The 29 countries inspected 948 public company audits and found deficiencies in almost half (47%). Of these, some 17 IFIAR member countries reported on 148 SIFIs and found 41% had deficiencies.
While almost a third (30%) of IFIAR members observed an overall improvement in audit quality in their jurisdictions, almost half found no significant overall change.
Among a long list of identified failings, audit engagements were found to have significant shortcomings in audit procedures, which are indicative that the audit firm did not obtain the appropriate audit evidence to support its opinion.
Other unfavourable findings include the auditor’s performance falling way below the expected level of diligence to satisfy the public interest requirements the audit is meant to fulfil, and that the audit ‘failed to provide the level of assurance about the financial statements that it purported to do and that is required by professional standards’.
IFIAR said it will “continue to discuss the findings with the networks and the individual member firms in pursuit of audit regulators’ mandates to improve audit quality”. In many cases, a regulator’s response to an inspection finding is to require the audit firm to perform additional procedures necessary to complete the audit satisfactorily.
The IFIAR – made up of 51 independent audit regulators from jurisdictions in Africa, the Americas, Asia, Europe, the Middle East and Oceania – says it in “dialogue with the largest international audit firms and has expanded all parties’ awareness of the need for deeper understanding of the causal factors of the underlying challenges to audit quality”.
Janine van Diggelen, IFIAR vice chair, and head of the audit and reporting quality division at the Netherlands Authority for the Financial Markets (AFM), said: “It is encouraging to see that root cause analysis is high on the agenda, both in the discussions at the global level between IFIAR and the networks comprising the global public policy committee, and within individual jurisdictions.”
The body believes that enhancing professional scepticism of practitioners “will contribute significantly to quality financial statement audits” and should be a high priority for audit firms, given the recurrence of audit deficiencies.
Some 163 IFIAR inspectors from 43 countries were in London for a three-day workshop.