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Auditors

Resources for auditors.

1 - The horizon for Auditors – January 2022

The horizon for auditors is driven by the desire to improve audit quality, resulting in the introduction and implementation of:

A challenging horizon ahead for auditors

The audit profession has come under significant pressure in recent years, having to audit new and complex accounting standards against a background of increasing criticism from regulators globally and an increasingly litigious environment.

The IAASB have released a series of revised auditing standards (ASA 540, ASA 500 and ASA 315) to improve audit quality, emphasizing the need for auditors to apply professional scepticism. Concurrently, the IAASB introduced a new standard in respect of quality management for audit firms (ISQM1).

The fundamental requirements of an audit, being to obtain sufficient appropriate audit evidence to opine whether the financial report is free of material misstatement, has not been changed or been enhanced. Nor has the requirement to understand the entity and the environment it operates in, so as to identify the risk of material misstatement through error or fraud. The revised auditing standards will however make it clearer for reviewers, regulators, and litigators to identify when the auditor has failed to properly identify risk and failed to obtain sufficient audit evidence.

Key amendments to auditing and ethical standards applicable to Australian auditors

The key amendments to auditing and ethical standards applicable to Australian auditors are:

2022 2023 2024
ISQM1 to be in place system by 15 December 2022 First year of implementing and quality under ISQM1 Review of ISQM1 application
Readiness for ASA 315 (revised) Identifying and Assessing the Risks of Material Misstatement First year of ISQM2 Review of ISQM2 application
First year of ASA 315 (revised) applying to the planning of 31 December 2022 year ends First year of ASA 315 (revised) applying to the planning of 30 June 2023 year
Amended APES 110 Code of Ethics for Professional Accountants to Promote the Role and Mindset Expected of Professional Accountants in place from 1 January 2022 First year of ASA 220 (revised) applying to half year reviews for 30 June 2023 and full year audits 31 December 2023 First year of ASA 220 (revised) applying to half year reviews for 31 December 2023 and full year audits 30 June 2024
Application of ASRS 4400 (revised), Agreed-Upon Procedures Engagements, applicable from 1 January 2022
Review of: ASA540(revised) application ASA 500(revised) application Review of: ASA540(revised) application ASA 500(revised) application Review of: ASA 220(revised) application ASA 315(revised) application ASA540(revised) application ASA 500(revised) application

2022 Another challenging year for auditors

2022 is the year in which an audit firm implements ISQM1, (this needs to be completed by 15 December 2022) and prepares to implement ASA 315 (revised). 2022 also sees the application of revisions to APES 110, which will implement both assurance and non-assurance arrangements, and the introduction of ASRS 4400 (revised) Agreed-Upon Procedures Engagements.

2022 will involve an audit firm implementing and applying:

2022 will involve an audit firm preparing to implement:

ISQM1 represents a fundamental change as to how Australian audit firms address quality management, Australian audit firms are required to implement an ISQM1 Quality Management process by 15 December 2022.

Practical implications

Audit firms need to determine as soon as possible, their plan and timeline for implementing ISQM1.

This plan must include:

The individual and team who are responsible for implementation.

A realistic time frame for implementation, considering peak audit workloads, staff turnover, training requirements and the need to rectify deficiencies.

The firm’s quality management plan will form the basis for future inspections by regulators and professional bodies. Therefore, a robust and well considered plan is crucial.

Amendments to APES 110 Code of Ethics for Professional Accountants to Promote the Role and Mindset Expected of Professional Accountants

The amendments to APES 110 are effective 1 January 2022.

The revisions to APES 110 promote the role and mindset expected of accountants and include a new requirement for accountants to have an inquiring mind when applying the conceptual framework of the Code of Ethics.

The amendments include:

  • Definition of professional judgement

  • Further explanation of the requirement to act in the public interest

  • Revisions to the five fundamental principles of ethics for accountants

  • Definition of what integrity involves

  • Guidance on compliance with the principle of objectivity

  • Requires an accountant to have an inquiring mind

  • Requirements to consider the source, relevance and sufficiency of information obtained

  • Definition and examples of bias

Key Requirements of APES 110 amendments

The revisions to APES 110 clarify that the mindset of Professional Accountants and auditors in Australia is to be impartial when performing:

  • An audit

  • Agreed upon procedures

  • Providing technical advice

  • Preparing financial statements

  • Providing taxation advice

  • Providing valuations

The key theme being that a Professional Accountant, when performing accounting services cannot simply provide their client with the advice or outcome their client desires, ignoring the interest of others or potential contradictory evidence.

The amendments to APES 110 set out that all Professional Accountants and auditors are required to:

  • consider not only the preferences or requirements of an individual client or employing organisation, but also the interests of other stakeholders when performing Professional Activities

  • to be straightforward and honest in all professional and business relationships

  • to exercise professional or business judgements without being compromised by undue influence of, or undue reliance on, individuals, organisations, technology or other factors

  • attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent Professional Activities, based on current technical and professional standards and relevant legislation

  • behave in a manner consistent with the profession’s responsibility to act in the public interest in all Professional Activities and business relationships

  • avoid any conduct that the Professional Accountant knows or should know might discredit the profession

  • have the strength of character to act appropriately, even when facing pressure to do otherwise or when doing so might create potential adverse personal or organisational consequences

  • have an enquiring mind

  • consider the source, relevance and sufficiency of information obtained, taking into account the nature, scope and outputs of the Professional Activity being undertaken

  • be open and alert to the need for further investigation or other action

  • consider whether the information or its source might be influenced by bias or self-interest

  • consider whether there is reason to be concerned that potentially relevant information might be missing from the facts and circumstances

  • consider whether there is an inconsistency between the known facts and circumstances and the Professional Accountant’s expectations

  • consider whether the information provides a reasonable basis on which to reach a conclusion

  • consider whether there might be other reasonable conclusions that could be reached from the information obtained

APES 110 amendments – Bias

APES 110 defines bias as:

Conscious or unconscious bias affects the exercise of professional judgement when identifying, evaluating and addressing threats to compliance with the fundamental principles.

APES 110 sets out the following examples of potential bias that Professional Accountants are required to be aware of when exercising professional judgement:

  • Anchoring bias, which is a tendency to use an initial piece of information as an anchor against which subsequent information is inadequately assessed.

  • Automation bias, which is a tendency to favour output generated from automated systems, even when human reasoning or contradictory information raises questions as to whether such output is reliable or fit for purpose.

  • Availability bias, which is a tendency to place more weight on events or experiences that immediately come to mind or are readily available than on those that are not.

  • Confirmation bias, which is a tendency to place more weight on information that corroborates an existing belief than information that contradicts or casts doubt on that belief.

  • Groupthink, which is a tendency for a group of individuals to discourage individual creativity and responsibility and as a result reach a decision without critical reasoning or consideration of alternatives.

  • Overconfidence bias, which is a tendency to overestimate one’s own ability to make accurate assessments of risk or other judgements or decisions.

  • Representation bias, which is a tendency to base an understanding on a pattern of experiences, events or beliefs that is assumed to be representative.

  • Selective perception, which is a tendency for a person’s expectations to influence how the person views a particular matter or person.

Practical Implications

The revisions to APES 110, potentially expose Professional Accountants and auditors to greater scrutiny and litigation than they have been subject to historically.

The amendments make it very difficult for Professional Accountants to produce reports or advice framed around assumptions they have been provided which are clearly incorrect, misleading or otherwise deficient.

ASRS 4400 (revised) Agreed-Upon Procedures Engagements

ASRS 4400 (revised) Agreed-Upon Procedures Engagements, has been revised to respond to the growing demand for these engagements, particularly in relation to the need for increased accountability around funding and grants.

The revised requirements and application material promote consistency in the performance of agreed-upon procedures engagements, and include enhancement relating to, among other matters:

  • the exercise of professional judgement

  • compliance with independence requirements

  • engagement acceptance and continuance considerations

  • using the work of a practitioner’s expert

  • greater clarity and transparency in the agreed-upon procedures report.

ISRS 4400 (revised) will be effective for agreed upon procedure (AUP) engagements for which the terms of engagement are agreed on or after 1 January 2022.

In addressing public interest issues relevant to AUP engagements, the revised standard intends to:

  • Respond to the needs of stakeholders―the scope of the revised standard has been broadened to meet the demand for AUP engagements on both financial and non-financial subject matters

  • Provide clarity in the AUP report

  • Enhance consistency in the performance of AUP engagements.

Key amendments to agreed upon procedures engagements

Key amendments include:

  • The scope now covers AUP engagements on both financial and non-financial subject matters

  • The term ‘factual findings’ has been replaced by the term ‘findings,’ which is defined as the factual results of agreed-upon procedures performed

  • Setting out that ‘findings’ exclude opinions or conclusions in any form as well as any recommendations

  • Setting out that findings are capable of being objectively verified

  • Requirement for the AUP report to include a statement on independence

  • Requirement for the practitioner to exercise professional judgment throughout the engagement, including in accepting, conducting and reporting on the AUP engagement, taking into account the circumstances of the engagement.

New requirements in relation to engagement acceptance and continuance considerations

The revised standard introduces new requirements in relation to engagement acceptance and continuance considerations, including:

  • The requirement to understand the purpose of the engagement, and the requirement to decline the engagement if the practitioner becomes aware of any facts or circumstances indicating that the procedures are inappropriate for the purpose of the engagement

  • Only accepting or continuing the engagement when certain conditions are met

  • Communicating with the firm if information is obtained that would have caused the firm to decline the engagement had that information been available earlier, so that necessary action can be taken.

Indications that the procedures the practitioner is asked to perform are inappropriate for the purpose of the agreed-upon procedures engagement

ASRS 4400 sets out the circumstances where it is inappropriate to accept or perform of the agreed-upon procedures engagement, these being:

  • The procedures are selected in a manner intended to bias the intended users’ decision-making

  • The subject matter on which the agreed-upon procedures are performed is unreliable

  • An assurance engagement or advisory service may better serve the needs of the engaging party or other intended users.

Considering the needs of the intended user

ASRS 4400 sets out that in certain circumstances it may only be appropriate to accept or continue the agreed upon procedure engagement if the practitioner requests the engaging party to:

  • Distribute a copy of the anticipated procedures and the form and content of the agreed-upon procedures report as set out in the terms of engagement to the intended user

  • Obtain acknowledgement from the intended user of the procedures to be performed

  • Discuss the procedures to be performed with appropriate representatives of the intended user.

In some circumstances it may only be appropriate to accept or continue the agreed upon procedure engagement if the practitioner reads correspondence between the engaging party and other intended user if the engaging party is not the only intended user.

Practical implications of ASRS 440 (revised)

The nature of an agreed upon procedure has historically meant this type of engagement as being viewed as the least risky type of engagement performed by an auditor, largely because as by definition the auditor provides no assurance and is not governed by the auditing standards.

ASRS 4400 (revised) together with the amendments to APES 110 will mean that auditors now need to consider the needs of users and ensure that their reported findings are not influenced by bias or self-interest.

2023 Another challenging year for auditor

2023 will see the audit firm:

  • test its quality management system for compliance with ISQM1

  • implement the revised ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information and the new standard ISQM2 Engagement Quality Reviews

  • Apply ASA315 to the audit of 30 June 2023 year ends

2024 Adjusting to the new norm

At present no new or revised auditing standards are applicable for 2024, this year will represent a period of audit firms being inspected against the new and revised suit of auditing standards and the revised quality standards.

New quality management standards

As part of the IAASB’s drive to improve audit quality, the IAASB introduced two revised quality management standards.

The challenge of implementing these new standards should not be underestimated, with the full impact being felt in 2023.

2023 will be the first full year audit firms apply ISQM1, which require audit firms to:

  • Continually monitor the appropriateness of the firm’s quality risk management for changing risks and conditions

  • Evaluate the performance of the audit firm’s leadership

  • Evaluate and conclude whether the system of quality management is achieving its objectives (to be performed annually)

  • Take further action if the conclusion on whether the system of quality management is achieving its objectives is unsatisfactory.

Practical implications

The ongoing compliance with ISQM1 should not be underestimated, audit firms are required to test their quality management system at least annually.

The audit firm will have clearly failed to comply with the requirements of ISQM1 if:

  • An annual review of the effectiveness of the audit firm’s quality management system is not performed

  • Appropriate actions are not taken for weaknesses identified in the annual review.

ISQM2 Engagement Quality Reviews

ISQM2 is effective for audit and review engagements of financial statements for periods beginning on or after 15 December 2022, applying to half year reviews for 30 June 2023 and full year audits 31 December 2023.

ISQM 2 Engagement Quality Reviews, addresses:

  • The appointment and eligibility of the engagement quality (EQ) reviewer

  • The EQ reviewer’s responsibilities relating to the performance and documentation of an EQ review.

The changes introduced in ISQM 2 are intended to:

  • Extend the scope of engagements subject to an EQ review (in addition to audits of financial statements of listed entities)

  • Strengthen the eligibility criteria for an individual to be appointed as an EQ reviewer

  • Enhance the EQ reviewer’s responsibilities relating to the performance (including the nature, timing and extent of procedures) and documentation of the EQ review.

ISQM2 requires an EQ review for:

  • Audits of financial statements of listed entities

  • Audits or other engagements for which an EQ review is required by law or regulation

  • Audits or other engagements for which the firm determines that an EQ review is an appropriate response to address one or more quality risk(s).

The EQ reviewer must have:

  • An understanding of professional standards, applicable legal and regulatory requirements and of the firm’s policies or procedures relevant to the engagement;

  • Knowledge of the entity’s industry

  • An understanding of, and experience relevant to, engagements of a similar nature and complexity

  • An understanding of the responsibilities of the engagement quality reviewer in performing and documenting the engagement quality review

  • Sufficient time

  • Appropriate authority

  • Comply with relevant ethical requirements, including threats to objectivity and independence

  • Comply with provisions of relevant laws and regulations.

Practical implications

The introduction goes hand in hand with application of ISQM1 and ASA220 revised. Audit firms will need to carefully determine whether their EQ reviewers:

  • Have the appropriate skills and experience for each engagement to which they are assigned

  • Have the appropriate authority

  • Are given sufficient time.

An interesting inclusion is that ISQM2 permits the use of suitably qualified external EQ reviewers and the use of assistants.

Revised Auditing Standards

The period 2022 to 2024 sees the introduction of two revised auditing standards, namely:

These revised auditing standards are part of the IAASB’s and AuASB’s continued drive to improve audit quality.

ASA 220 (revised) Quality Management for an Audit of Financial Statements

ASA 220 (revised) is effective for audit and review engagements of financial statements for periods beginning on or after 15 December 2022, applying to half year reviews for 30 June 2023 and full year audits 31 December 2023.

The revisions to ASA 220 continue the drive for quality set out in ASA 540 (revised) and ASA 315 (revised), emphasizing the importance of professional scepticism, and requiring enhanced documentation of the auditor’s judgments. It also is fully in line with ISQM1 and ISQM2.

ASA 220 (revised) makes it clear that it is the engagement partner’s overall responsibility to manage and achieve quality on the engagement and this is achieved through the engagement partner having sufficient and appropriate involvement throughout the audit engagement.

ASA 220 (revised)) sets out that the Engagement partner is responsible for:

  • managing and achieving quality at the engagement level

  • determining the nature, timing and extent of direction, supervision, and review.

The engagement partner is required to be satisfied that their involvement has been sufficient and appropriate to provide the basis for taking overall responsibility.

Practical implications

The revisions to ASA 220, require the audit partner to be appropriately involved in all phases of the audit and for there to be evidence of this. For those audit partner that typically have a “hands off” approach or are simply too stretched, delegating significant work to their senior managers, this revised standard together with ISQM1 requires a change to their business model.

ASA 315 (revised) Identifying and Assessing the Risks of Material Misstatement

2023 is the year to apply ASA 315 (revised)

ASA 315 (revised) is operative for financial reporting periods commencing on or after 15 December 2021, applicable to audits of 31 December 2022 and 30 June 2023 year ends.

The standard has been revised to respond to challenges and issues with the current ASA 315. The revised requirements focus on ‘what’ needs to be done, and the application material enhanced, modernized, and reorganized to describe ‘why’ and ‘how’ procedures are to be undertaken.

ASA 315 (revised) is very much aligned to the changes contained within ASA 540 (revised) and includes similar new concepts and definitions. ASA 315 (revised) sets out:

  • There is a spectrum of inherent risk

  • Inherent risk factors that must be considered by auditors

  • The requirement to perform separate assessments of inherent risk and control risk

  • Consideration of ‘significant classes of transactions, account balances and disclosures’ and ‘relevant assertions’

  • Introduces a new definition of ‘significant risk’ being those risks close to the upper end of the spectrum of risk

  • Requires the auditor to ‘stand-back’ to evaluate the completeness of significant classes of transactions, account balances and disclosures at the end of the risk assessment process

  • Where the auditor does not contemplate testing the operating effectiveness of controls, the risk of material misstatement is the same as the assessment of inherent risk.

Practical implications

Revisions to ASA 315 are in response to dissatisfaction by audit regulators as to how auditors identify and respond to risk. Whilst the basic objective of the audit has not changed, ASA 315 (revised) is very prescriptive as to how risk identification should take place, emphasizing the requirement to link risk to assertions and the need to apply an appropriate level of professional scepticism.

ASA 315 (revised) is very much in line with ASA 540 (revised) that came into force in 2021, so the key changes in respects of the risk of material misstatements arising from management’s accounting estimates should not come as a surprise to auditors in 2023.

IAASB work plan

Auditing standards applicable in Australia are driven by the activities of the IAASB. The activity of the IAASB has been impacted by the ongoing effects of the pandemic. In November 2021 the IAASB released its detailed Quarterly Work Plan Table for 2022‒2023.

As can be seen below this work plan does not envisage any new standards being issued till 2023.

Planned date for an exposure draft Planned date for final approval of a new or revised auditing standard
Audit Evidence September 2022 March 2024
Fraud June 2023 Not stipulated
Going Concern December 2022 December 2023
Audits of Less Complex Entities – Development of a Separate Standard July 2021 March 2023

Some good news for auditors

For auditors, although 2022 continues the new era of complexity and a drive for quality, the good news is that the accounting changes in 2022 are minimal which we will discuss in our article “2022 the horizon for Accountants”.

2 - 2021 The Auditor's year in review

The theme of 2021 for the Audit profession in Australia was, audit quality, audit quality and the consequences of not achieving the required level of audit quality!

Major changes that occurred to auditing standards in 2021

2021 saw two significantly revised auditing standards come into effect, namely:

These revised standards are directed to:

  • improve audit quality

  • places significant emphasis on applying professional scepticism

The standards should have seen Australian auditors make significant changes to their audit approach in respect of audit estimates, including:

  • Goodwill impairment

  • Impairment of non financial assets

  • Impairment of financial assets

  • Impairment of inventory

  • Impairment of deferred tax assets

  • Fair value estimates of non financial assets

  • Fair value of financial assets

  • Valuation of provisions

Accounting estimates are one of the key areas challenging auditors and have become even more problematic in recent years with the introduction of AASB 9 Financial Instruments, AASB 15 Revenue from Contracts with Customers and AASB 16 Leases. Accounting estimates in respect of goodwill impairment, net realizable value of inventory, bad debt provisions and revenue recognition are major areas of ASIC surveillance and restatement. Errors in accounting estimates commonly form the subject of litigation against directors and auditors.

The amendments centre on:

  • Identifying risk of material misstatement arising from accounting estimates

  • Distinguishes inherent risk from control risk in respect of accounting estimates

  • Sets out that inherent risk is impacted by complexity, subjectivity and estimation risk

  • Requires consideration as to how management have considered estimation risk

  • Requires auditor to “stand back” and to consider and evaluate evidence that both supports and contradicts management’s estimate

  • Emphasizes professional scepticism as a response to management bias

  • Emphasizes work required around disclosure of accounting estimates

  • Sets out that when testing how management has arrived at an accounting estimate an auditor needs to consider the method, assumptions, and data upon which the estimate is based.

Practical implications

Correct application of ASA 540 (revised) requires:

  • a change in the auditor’s mindset

  • a change in how the auditor performs and documents their risk analysis in respect of management estimates

  • a reconsideration as to what audit evidence they should obtain and how they interpret that evidence.

If the auditor determines risk arising from management estimates can be reduced by the controls that are in place to manage that risk, then auditors will have to identify those controls and perform work to obtain sufficient appropriate audit evidence that those controls are adequate to address the risk.

The standard is explicit in its requirement for the auditor to consider whether management have appropriately considered estimation risk, and if not, to request that management adjust their estimate. This will expose the auditor to greater scrutiny if it is determined by the regulator or litigator that the estimates in the financial statements did not reflect estimation risk.

ASA 540 (revised) explicitly requires the auditor to stand back and consider all audit evidence in respect of an accounting estimate, including evidence that contradicts management’s estimate. This may prove problematic for some auditors, who may have in the past focused their attention on obtaining audit evidence that corroborated managements estimate.

ASA 500 (revised) Audit Evidence

ASA 500 was revised as a result ASA 540 (revised) and introduces the definition of External Information Sources. An auditor is required to distinguish information from an External Information Source from that of a management expert and to evaluate whether External Information Sources is relevant and reliable for the purposes of audit evidence.

The revised standard explicitly requires consideration of whether the information was prepared for a wide range of users or for the client, and whether the client was in a position to influence the information provided from the external source.

Practical implications

Careful consideration will be required as to whether information from a third party to support a management estimate represents relevant and reliable audit evidence, and whether it can be concluded it is free from potential bias

A critical ASIC audit inspection report

In November 2021 ASIC released the results of the ASIC audit inspections, key findings being:

  • negative findings in 23% of areas inspected in the largest 6 Audit firms (BDO, Deloitte, EY, GT, KPMG, and PwC);

  • negative findings in 32 % of areas inspected across 16 Audit firms inspected (including the largest six firms);

  • negative findings in 59% of the key audit areas inspected for firms outside the largest six firms.

  • 9% of the audited entity’s Financial Reports subject to the ASIC inspection were materially misstated

ASIC set out:

The increased overall level of negative findings is of concern and warrants deliberate and concerted efforts by all firms to improve audit quality and reduce the overall level of findings.

Firms should carefully evaluate the effectiveness of their existing initiatives to improve audit quality and implement improvements and further initiatives. This includes:

  • promoting a strong culture focused on audit quality,

  • attracting and retaining the right talent for complex audits,

  • thorough supervision and review of audits; and

  • holding partners, managers and staff accountable for audit quality

AUASB’s Bulletin ‘Supporting Auditors in Enhancing Audit Quality’

In response to the ASIC Audit Inspection Report the Australian Auditing and Assurance Standards Board (AuASB) issued a bulletin titled ‘Supporting Auditors in Enhancing Audit Quality’

The AuASB set out that in recent years the largest number of ASIC’s inspection findings relate to audit work on asset values and impairment of non-financial assets. The AuASB set out that The following pronouncements and publications have been issued by the AUASB to assist auditors in the area of the audit of asset values and impairment of non-financial assets:

  • ASA 540 Auditing Accounting Estimates and Related Disclosures has been reissued with significantly enhanced requirements and application material.

  • Guidance Statement GS 005 Evaluating the Appropriateness of a Management’s Expert Work has been reissued to provide detailed guidance on practical implementation of ASA 500.

Auditing revenue and receivables

The AuASB acknowledge that the audit of revenue and receivables is the area with the second highest number of negative findings from ASIC inspections in recent years.

The AuASB set out that the following has been issued to enhance audit quality:

  • The revised ASA 540 which assists auditors in performing appropriate procedures in relation to the estimation of performance obligations, unearned revenue and expected credit losses under the accounting standards for Contract Revenue and Financial Instruments that have come into effect in recent years.

  • The IAASB illustrative examples of how to apply ISA 540 when auditing expected credit loss accounting estimates.

  • The IASB / AASB’s guidance on AASB 9 Financial Instruments, Application of IFRS 9 in the light of the Coronavirus uncertainty, and AASB 15 Revenue from Contracts with Customers (December 2018), which will assist both preparers and auditors.

  • The revised ASA 315 Identifying and Assessing the Risks of Material Misstatement, which has been enhanced to drive auditors to perform a more appropriate and robust risk assessment, and thereby a more focused response to those identified risks.

The AuASB also set out the following that should improve audit quality:

  • ASQM 1 which requires firms to design, implement and operate a system of quality management to manage the quality of engagements performed by the firm. ASQM 1 applies to all firms that perform audits or reviews of financial reports, or other assurance or related services engagements.

  • ASQM 210, which covers the appointment, eligibility, and responsibilities of the Engagement Quality Reviewer.

  • Revisions to ASA 220 which includes specific responsibilities of the auditor regarding quality management at the engagement level for an audit of a financial report, and the related responsibilities of the engagement partner.

Clearly there is a need for improve audit quality and the AuASB believe that the enhanced auditing standards, together with the improved Quality management standards should address the issues raised by ASIC.

In future inspections and litigation, clearly the auditor will be judged against complying with the revised auditing and quality management standards, auditors must realise that the bar has been significantly raised and that going forwards the lack of audit quality should be much easier to prove.

The conviction of the auditor of Halifax

2021 saw the first conviction of an auditor for failing to conduct audits in accordance with auditing standards.

In the case former auditors of Halifax Investment Services Pty Ltd (Halifax), Mr Robert James Evett and EC Audit Pty Ltd (formerly Bentleys NSW Audit Pty Ltd) were convicted and sentenced to pay a fine of $10,000 and $40,000 respectively for failing to conduct audits in accordance with auditing standards.

The breaches of the auditing standards included that:

  • EC Audit failed to understand Halifax’s business and failed to design appropriate tests to identify material misstatements in the accounts, and

  • Mr Evett failed to take responsibility for the overall conduct of the audits and failed to ensure that staff with appropriate skills were conducting the audits.

Mr Evett and EC Audit are the first auditors in Australia to face criminal charges and to be sentenced under section 989CA of the Corporations Act.

Current litigation against Australian auditors

Australian auditors should be aware of the significant number of legal cases currently in progress against the audit firms. These include:

Firm Company Accounting/ Audit Issue
Deloitte Hastie Asset impairments
Deloitte Freedom Foods Capitalisation of expenses Impairment of inventory
Ernst and Young Blue Sky Alternative Investments Limited Revenue recognition and valuation of assets
Ernst and Young LM First Mortgage Income Fund Impairment of financial assets
Ernst and Young Quintis Valuation of biological assets and revenue recognition
Ernst and Young Penrice Soda Holdings Valuation of inventory
KPMG Arrium Impairment
Pitcher Partners Slater and Gordon Impairment of goodwill
PricewaterhouseCoopers Axcesstoday Classification of liabilities and going concern
PricewaterhouseCoopers Cornerstone Revenue recognition

3 - Relevance of ASIC’s 2021 Audit Inspection Report

In November 2021 ASIC published the results of its 2021 audit inspections, in REP 709 ‘Audit inspection report: 1 July 2020 to 30 June 2021’. The report showed:

  • negative findings in 23% of areas inspected in the largest 6 Audit firms (BDO, Deloitte, EY, GT, KPMG, and PwC);

  • negative findings in 32 % of areas inspected across 16 Audit firms inspected (including the largest six firms);

  • negative findings in 59% of the key audit areas inspected for firms outside the largest six firms; and

  • 9% of the audited entity’s Financial Reports subject to the ASIC inspection were materially misstated.

The Inspection report should be considered by:

  • Audit Committee members when choosing their auditor;

  • Audit Committee and Board members when reviewing and approving their entity’s financial report;

  • Lawyers and litigators when considering the general competency and quality of Australian audit firms; and

  • Auditors in Australia.

ASIC Inspection Report 1 July 2020 to 30 June 2021

In its 2021 Audit Inspections, ASIC identified negative findings in 23% of the 115 key audit areas reviewed on a risk basis at the largest six audit firms (where most of ASIC’s inspection effort was directed). This compares to 24% of the 156 key audit areas reviewed at the largest six firms for the 12 months to 30 June 2020The equivalent findings for 149 key audit areas reviewed across 16 firms was 32% this year and 27% for the 179 key audit areas reviewed across 13 firms in 2020.

The largest number of negative findings continued to relate to the audit of:

  • asset values;
  • impairment of non-financial assets; and
  • revenue.

Other areas of ASIC findings included the audit of:

  • inventories;
  • investments;
  • financial instruments;
  • expenses and payables; and
  • provisions.

Improving audit quality

ASIC noted that the increased overall level of negative findings was of concern and warrants deliberate and concerted efforts by all firms to improve audit quality and reduce the overall level of findings. ASIC recommend that firms should carefully evaluate the effectiveness of their existing initiatives to improve audit quality and implement improvements and further initiatives. This includes:

  • promoting a strong culture focused on audit quality;

  • attracting and retaining the right talent for complex audits;

  • thorough supervision and review of audits; and

  • holding partners, managers, and staff accountable for audit quality.

Overview of ASIC 2021 Inspection Findings

Overall Results

There were negative findings in 32% of the 149 key audit areas we reviewed on a risk basis across 45 audit files at 16 firms (including the largest six firms) this year. This compares to 27% for the 179 key audit areas reviewed across 53 audit files at 13 firms in the 2020 inspection.

Results of the largest six firms

For the largest six firms (where ASIC directed most of their inspections) there were negative findings in 23% of the 115 key audit areas reviewed across 35 audit files this year. This compares to 24% of the 156 key audit areas across 46 audit files reviewed in the 2020 inspection.

Ranking of the largest six firms

The performance of the largest six firms was as follows:

Firm Rank 2021 Rank 2020 Negative Findings 2021 Negative Findings 2020
Ernst & Young 1 1 7% 14%
BDO 2 2 20% 20%
PricewaterhouseCoopers 3 3 25% 23%
Deloitte Touche Tohmatsu 4 6 29% 35%
KPMG 5 4 30% 26%
Grant Thornton 6 5 45% 27%

Results of Firms outside of the largest six firms

The level of negative findings based on the key audit areas reviewed in 2021 for firms outside the largest six firms was 59% compared to 48% for those reviewedin 2020. However, the findings percentages for firms outside the largest six firms are not directly comparable between periods as six of the 10 firms inspected this year were not inspected in 2020.

Audits reviewed where the financial report was materially misstated

ASIC identified a number of instances where negative findings were made during the audit inspection where the audited entities made material changes to net assets and profits in the relevant financial report or in a subsequent financial report, which ASIC believe related to concerns identified by ASIC in their audit inspection.

In total 9% of the audited entity’s Financial Reports subject to the ASIC inspection were materially misstated:

Percentage of Financial statements materially misstated
18 months to 30 June 2018 9%
12 months to 30 June 2019 2%
12 months to 30 June 2020 3%
12 months to 30 June 2021 9%

Adjustments to financial reports following ASIC Audit inspection

ASIC reported the following in respect of material adjustments made to to previously reported net assets and profits for listed entities as identified from:

  • notices lodged by auditors under section 311 of the Corporations Act 2001; and

  • material changes to net assets and profits resulting from ASIC financial reporting surveillances.

Section 311 notices ASIC surveillances
18 months to 30 June 2018 21 17
12 months to 30 June 2019 33 8
12 months to 30 June 2020 29 18
12 months to 30 June 2021 26 9
Total 109 52

These adjustments concern matters not identified or addressed during a previous audit. The matters may have been subsequently identified by the company or ASIC rather than the auditor.

Media Releases setting out restatements following the ASIC inspection

As part of the inspection report for the largest six firms inspected ASIC set out companies that had subsequently corrected their Financial Reports (albeit prospectively) following the ASIC inspection. These being:

Audit Firm Entity Year end Findings
BDO Mosaic Brands Limited 28 June 2020 The company increased its make good provision from $5.6 million to $8.3 million in its financial report for the year ended 27 June 2021 See Media Release (21-255MR) Mosaic Brands increases lease make good provision (22 September 2021).
Deloitte Elixinol Global Limited 31 December 2019 The company wrote down goodwill, inventories, and other assets by $60 million in its financial report for the half-year ended 30 June 2020 see Media Release (20-214MR).
KPMG Ainsworth Game Technology 30 June 2020 The company wrote down the non-financial assets of its Latin American business by $23.1 million and inventory by $3.4 million and increased its estimated expected credit losses on trade receivables by $6 million See Media Release (21-068MR) Ainsworth writes down assets (12 April 2021).
PwC Nitro Software Limited 30 June 2019 The company reduced both its contract assets and deferred revenue by $14.7 million in its financial report for the half-year ended 30 June 2020 See Media Release (20-214MR)ASIC notes reporting changes (17 September 2020).

Deficiencies identified by ASIC

Summary of negative Findings by Transaction Type

ASIC presented their findings by key audit areas. These findings set out by key audit areas were as follows:

Transaction / Balance sheet item Rank 2021 Number of errors identified in 2021 Inspection Number of errors identified in 2020 Inspection % errors in 2021 Inspection % errors in 2020 Inspection
Revenue/receivables 1 17 15 40% 29%
Impairment/ asset valuation 2 10 14 29% 26%
Inventories/ cost of sales 3 5 5 38% 28%
Expenses/payables 4 3 1 43% 43%
Investments/ financial instruments 5 2 7 20% 64%
Provisions 6 2 3 33% 43%
Taxation 6 2 1 40% 10%
Leases 8 1 3 13% 0%
Loans/borrowings 8 1 1 14% 20%
Acquisition accounting 8 1 1 33% 8%
Other 3 1 43% 0%

Deficiencies auditing revenue and receivables

ASIC identified a number of matters contributing to negative findings in relation to revenue and receivables. ASIC reviewed revenue and receivables in 43 key audit areas in the 2021 inspection and in 51 key audit areas in the 2020 inspection.

The matters contributing to the negative findings being:

  • Test of details;

  • Accounting estimates;

  • Substantive analytical procedures;

  • Internal controls;

  • Risk assessment; and

  • Accounting policies.

Tests of details, audit procedures on accounting estimates, and substantive analytical procedures contribute to about 70% of ASIC’s findings for revenue and receivables.

ASIC provided a detailed breakdown of the key factors contributing to revenue and receivables their negative findings in the 12 months to 30 June 2021 and the 12 months to 30 June 2020:

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
Tests of details:
procedures performed did not address the level of risk assessed 13 8
obtaining insufficient independent evidence for items selected 2 3
sample sizes and sampling techniques were inadequate 2 1
errors were not investigated or evaluated 1 2
source data used was not tested for completeness or accuracy 1 5
Accounting estimates:
not testing and/or challenging the relevance and reliability of data and assumptions used in expected credit loss models 13 5
insufficient testing of trade receivables 4 5
insufficient testing of significant assumptions to estimate unearned/deferred income 2 -
Substantive analytical procedures:
thresholds for investigating differences were too high and/or population not disaggregated 3 2
the relationship used was not plausible or did not consider key factors affecting the expectation 2 4
data used to develop the auditor’s expectation was not reliable or tested 2 3
differences between recorded amounts and the auditor’s expectation of those amounts that exceed the tolerable threshold were not identified or adequately investigated 2 1
Inappropriate reliance on internal controls 8 4
Risk assessment not performed appropriately, or no procedures performed for risks/assertions 5 9
Accounting policies:
inappropriate accounting policy for revenue recognition, or not checking for consistency with key contract terms 3 2
not obtaining an understanding of systems and controls relating to recognition of revenue 1 -
Other:
deficiencies in instructions to or communication with component auditors, insufficient involvement in the work of component auditors or evaluation and review of work performed 2 5
insufficient consideration of whether service providers met the definition of service organisations 1 -
relied on assessments and testing performed in previous years audit without explaining the basis of the continued reliance - 1

Deficiencies auditing impairment of non-financial assets

ASIC reviewed work on impairment and asset values in 40 key audit areas in their 2021 inspection and in 54 key audit areas in their 2020 Inspection.

Audit procedures over forecast cash flows, other key assumptions and expert or specialist work contribute to about 75% of ASIC’s findings for impairment of non-financial assets.

The matters contributing to the negative findings being audit failures with respect to:

  • Forecast cash flows;

  • Other key assumptions;

  • Expert or specialist work;

  • Sensitivity testing;

  • Impairment model testing;

  • Impairment indicators;

  • Fair value methodology; and

  • Valuation cross-checks.

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
Forecast cash flows:
cash flows, including capital expenditure, or terminal value not reasonable or were not adequately tested 10 8
not challenging forecasts where the entity has not met forecasts historically 1 5
Other key assumptions:
discount rate, exchange rate, commodity price or other key assumptions not appropriate or reasonable 6 13
insufficient testing of recoverability of resources or mining approvals 3 -
Issues with work performed by audit firm’s expert or specialist 3 3
Issues with sensitivity testing or no sensitivity testing performed 3 3
Impairment model not adequately tested, including:
mathematical accuracy 1 3
impact of the new lease standard 1 -
determination or calculation of cash-generating units - 2
Impairment indicators:
did not ask management to perform impairment testing where there were indicators of impairment or there was goodwill or other indefinite life intangible assets 1 2
impairment indicators were not assessed - 4
Other:
deficiencies in disclosures not identified or corrected 1 3
deficiencies in instructions to or communication with component auditors, insufficient involvement in the work of component auditors or evaluation and review of work performed 2 1
risks not appropriately assessed - 1
insufficient skills and expertise to adequately assess and conclude on impairment calculations - 1

Deficiencies auditing inventory

ASIC identified a number of negative findings in respect of the audit of inventory:

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
For inventory and cost of sales, ASIC found instances where auditors did not:
adequately test the accuracy and value of inventories, including provisions for stock obsolescence 8 -
evaluate the design and implementation of systems, processes and controls or test key controls 5 1
adequately test the existence and cut-off of inventories, including stocktake attendance by component auditors 3 6
appropriately scope and evaluate the work of the component auditor or management expert 1 6

Deficiencies auditing taxation

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
For taxation balances, ASIC found instances where auditors did not:
include all tax workpapers on file, adequately test the accuracy of tax workings, assess the tax treatment of material items, or review relevant transfer pricing documents 6 1
sufficiently test the entity’s compliance with relevant tax legislation 3 -
appropriately evaluate the work of management’s expert, or use their own expert 3 1
evaluate the design and implementation of systems, processes and controls or test key controls 1 -

Deficiencies auditing expenses and payables

ASIC identified a number of negative findings in respect of the audit of expenses and payables:

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
For expenses and payables, ASIC found instances where auditors did not:
test the relevance and reliability of data and assumptions used 5 -
adequately test the completeness and accuracy of expenses 2 1
test key controls or perform tests of detail using a representative sample 1 1
evaluate the design and implementation of systems, processes and controls - 1
sufficiently evidence work performed by the component auditor - 1

Deficiencies auditing financial instruments and investments

ASIC identified a number of negative findings in respect of the audit of financial instruments and investments:

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
For financial instruments and investments, ASIC found instances where auditors did not:
perform sufficient or appropriate tests of details over underlying assets, or use an adequate sample size for the assessed risk 3 6
consider whether an investment should have been equity accounted 1 1
test the relevance and reliability of data and assumptions used for valuations, including comparisons to market data - 8
appropriately evaluate the work and reports of their own or management’s expert, including resolving issues raised by the expert - 4
evaluate the design and implementation of systems, processes and controls or test key controls - 1
consider the requirements for a service organisation and whether reporting was appropriate in the circumstances - 1
consider whether a loan to a joint venture was part of the net investment and should have been written down for significant losses of the joint venture - 1

Deficiencies auditing provisions

ASIC identified a number of negative findings in respect of the audit of provisions:

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
For provisions, ASIC found instances where auditors did not:
adequately test the completeness and accuracy of provisions, or identify and investigate variances 2 6
assess the relevance, completeness and accuracy of the methods and source data used by experts 1 2
test the relevance and reliability of data and assumptions used - 1
use their own expert where the audit team did not have sufficient knowledge, experience or expertise - 1
evaluate whether the recognition criteria for a provision had been met under the accounting standard - 1

Deficiencies auditing loans and borrowings

ASIC identified a number of negative findings in respect of the audit of loans and borrowings:

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
For loans and borrowings, ASIC found instances where auditors did not:
obtain sufficient evidence over completeness of borrowings, including compliance with covenants 1 -
perform adequate procedures over management’s assessment of going concern and consider whether a material uncertainty existed - 1

Deficiencies auditing acquisitions

ASIC identified a number of negative findings in respect of the audit of acquisitions:

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
For acquisitions, ASIC found instances where auditors did not:
identify whether the acquisition treatment was incorrect 1 -
consider whether contingent consideration in a business combination should have been accounted for as remuneration rather than goodwill - 1

Deficiencies auditing leases

ASIC identified a number of negative findings in respect of the audit of leases:

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
For leases, ASIC found instances where auditors did not:
sufficiently assess whether make good provisions should have been recognised for leased premises 1 -

Deficiencies auditing cash

ASIC identified a number of negative findings in respect of the audit of cash:

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
For cash, ASIC found instances where auditors did not:
confirm cash held or bonds issued by foreign financial institutions 2 -

Deficiencies auditing disposal of operations

ASIC identified a number of negative findings in respect of the audit of disposal of operations:

Contributing factors 12 months to 30 June 2021 12 months to 30 June 2020
For disposal of operations, ASIC found instances where auditors did not:
obtain sufficient evidence that the disposal was highly probable at balance date 2 -

Issues identified in respect of experts and other auditors

ASIC identified negative findings when using experts and component auditors to review and audit:

  • impairment of non-financial assets;

  • values of investment properties and other assets;

  • revenues and receivables;

  • provisions; and

  • tax balances.

ASIC found cases where the auditor did not:

  • use their own expert where the audit team did not have sufficient knowledge and experience or relied on an expert’s review performed a number of years earlier without demonstrating or testing the continued relevance and reliability;

  • sufficiently use their own expert (e.g., to review all relevant aspects of the determination of the discount rate used in an impairment assessment);

  • appropriately scope, review and evaluate the work and reports of their own expert, consider the appropriateness of the work and/or resolve issues raised by the expert;

  • test the work of management’s expert such as obtaining evidence supporting and challenging assumptions and forecasts, re-performing calculations and reviewing any model used;

  • assess the relevance, completeness and accuracy of source data used by experts or assess the competence, capabilities, and objectivity of experts;

  • have sufficient group audit strategies and instructions to, or communication with, component auditors; and

  • sufficiently review and evaluate the work of component auditors.

Issues identified in respect of journal entries

ASIC identified deficiencies in journal entry testing in 7% of audit files reviewed in the 2021 inspection, compared to 4% of files reviewed in the 2020 inspection. Findings included instances where the auditor did not test journal entries and adjustments made at year end or did not evaluate whether journal entries and adjustments needed to be tested throughout the year.

ASIC inspection results by audit firm

BDO 2021 inspection report findings

ASIC concluded that BDO did not obtain reasonable assurance that the financial report was free of material misstatement (negative findings) in two of the 10 key audit areas (20%) reviewed across three audits by the firm in the 2021 inspection. This compares to two of the 10 key audit areas reviewed (20%) for the 12 months ending 30 June 2020.

Transaction / Balance sheet item Number of errors identified in 2021 Inspection Number of errors identified in 2020 Inspection % errors in 2021 Inspection % errors in 2020 Inspection
Revenue/ receivables - - 0% 0%
Impairment/ asset valuation 1 - 50% 0%
Inventories/ cost of sales - - 0% 0%
Expenses/ payables - - 0% 0%
Investments/ financial instruments - 2 0% 100%
Taxation - - - 0%
Leases 1 - 50% 0%
Loans/ borrowings - - 0% 0%

ASIC presented the following in respect of the negative findings identified in respect of BDO in the 2021 inspection that could give rise to a risk of material misstatement:

Entity Areas with findings Findings
Entity A 1 of 4 key audit areas reviewed Impairment testing — the auditor inappropriately concluded that there were no impairment indicators, and that impairment testing was not necessary
Entity B 1 of 3 key audit areas reviewed Lease make good provision — the auditor did not assess whether make good provisions should have been recognised for leased stores

ASIC’s 2021 inspection report for BDO is set out in REP 710 BDO firms in Australia: Audit inspection report—1 July 2020 to 30 June 2021

Financial report findings in respect of BDO

ASIC completed risk-based reviews of aspects of 8 financial reports of listed and other public interest entities audited by BDO in its 2021 inspection. Following ASIC’s inquiries, one entity, being Mosaic Brands Limited made material changes to net assets or profits:

Entity Year end Findings
Mosaic Brands Limited 28 June 2020 The company increased its make good provision from $5.6 million to $8.3 million in its financial report for the year ended 27 June 2021 See [Media Release (21-255MR)] (https://asic.gov.au/about-asic/news-centre/find-a-media-release/2021-releases/21-255mr-mosaic-brands-increases-lease-make-good-provision/) Mosaic Brands increases lease make good provision (22 September 2021)

Improving audit quality at BDO

ASIC set out the following in respect of Improving audit quality at BDO:

The continuing level of negative findings from our limited reviews warrants deliberate and concerted action by BDO. The firm needs to focus on identifying and addressing the root causes for the matters reported from our audit file reviews, financial reporting surveillances, and for findings from internal and global firm reviews. The firm should continue to evaluate the effectiveness of its current initiatives to improve audit quality and revise them or implement new and improved actions if they are not achieving appropriate outcomes.

Deloitte 2021 inspection report findings

ASIC concluded that Deloitte did not obtain reasonable assurance that the financial report was free of material misstatement (negative findings) in five of the 17 key audit areas reviewed (29%) across five audits by the firm in the 2021 inspection. This compares to nine of the 26 key audit areas reviewed (35%) for the 12 months ending 30 June 2020.

ASIC’s negative findings relate to

  • impairment testing;

  • the audit of revenue and receivables;

  • inventories and cost of sales;

  • expenses and payables; and

  • loans and borrowings.

Transaction / Balance sheet item Number of errors identified in 2021 Inspection Number of errors identified in 2020 Inspection % errors in 2021 Inspection % errors in 2020 Inspection
Revenue/receivables 5 12 29% 35%
Impairment/ asset valuation 1 2 20% 25%
Inventories/ cost of sales 1 2 50% 100%
Expenses/payables 1 - 100% 0%
Investments/ financial instruments 1 - 33% 0%
Taxation - - 0% 0%
Leases - - 0% 0%
Loans/borrowings 1 1 100% 0%
Acquisition accounting 1 - 33% 0%

ASIC presented the following in respect of the negative findings identified in respect of Deloitte in the 2021 inspection that could give rise to a risk of material misstatement:

Entity Areas with findings Findings
Entity A 1 of 4 key audit areas reviewed Royalty liability — the auditor did not evaluate the reasonableness of the discount rate and forecast commodity prices used in the calculation of the liability estimate or carry forward a prior year independent expert’s report to support management’s forecast production and sales volumes.
Entity B 2 of 5 key audit areas reviewed Loans and borrowings/ going concern — the auditor did not detect a material misstatement in loans and borrowings and in finance costs due to a deficiency in review of loan agreements. The auditor did not gather sufficient appropriate audit evidence to assess whether material uncertainty existed over the company’s ability to repay or reschedule loans and borrowings on their maturity in two to three years after year end or to find other sources to replace them. Inventories — the auditor did not test the cost of inventories for a major part of the business and did not test the elimination of profits in inventory relating to intragroup sales.
Entity C 1 of 3 key audit areas reviewed Revenue — the auditor did not set expectations that were sufficiently precise in a substantive analytical procedure (SAP) or demonstrate that prior year average revenue per customer was a sufficiently plausible relationship to predict current year revenue and did not perform specific substantive tests over revenue cut-off.
Entity D 1 of 2 key audit areas reviewed Processing plant impairment testing — the auditor did not obtain sufficient appropriate evidence and exercise an appropriate level of professional scepticism to evaluate a number of key assumptions, judgements and estimates used in the entity’s DCF model.

ASIC’s 2021 inspection report for Deloitte is set out in REP 711 Deloitte Touche Tohmatsu Australia: Audit inspection report—1 July 2020 to 30 June 2021

Financial report findings in respect of Deloitte

ASIC completed risk-based reviews of aspects of 43 financial reports of listed and other public interest entities audited by Deloitte in its 2021 inspection. Following ASIC’s inquiries, one entity, being Elixinol Global Limited made material changes to net assets or profits:

Entity Year end Findings
Elixinol Global Limited 31 December 2019 The company wrote down goodwill, inventories, and other assets by $60 million in its financial report for the half-year ended 30 June 2020 see MR20-214

Improving audit quality at Deloitte

ASIC set out the following in respect of Improving audit quality at Deloitte:

The level of negative findings from our limited reviews is of concern and warrants continued deliberate and concerted action by Deloitte. The firm needs to focus on identifying and addressing the root causes for the matters reported from our audit file reviews, financial reporting surveillances, and for findings from internal and global firm reviews. The firm should continue to evaluate the effectiveness of its current initiatives to improve audit quality and revise them or implement new and improved actions if they are not achieving appropriate outcomes.

Ernst and Young 2021 Inspection Report Findings

ASIC concluded that EY did not obtain reasonable assurance that the financial report was free of material misstatement (negative findings) in two of the 30 key audit areas reviewed (7%) across eight audits in the 2021 inspection This compares to five of the 35 key audit areas reviewed (14%) for the 12 months ending 30 June 2020.

ASIC’s negative findings relate to:

  • impairment testing; and

  • the audit of revenue and receivables.

Transaction / Balance sheet item Number of errors identified in 2021 Inspection Number of errors identified in 2020 Inspection % errors in 2021 Inspection % errors in 2020 Inspection
Revenue/receivables 1 1 10% 10%
Impairment/ asset valuation 1 2 13% 18%
Inventories/ cost of sales - - 0% 0%
Expenses/payables - - 0% 0%
Investments/ financial instruments - 1 0% 100%
Provisions - 1 0% 50%
Taxation - - 0% 0%
Leases - - 0% 0%
Loans/borrowings - - 0% 0%

ASIC presented the following in respect of the negative findings identified in respect of EY in the 2021 inspection that could give rise to a risk of material misstatement:

Entity Areas with findings Findings
Entity A 1 of 4 key audit areas reviewed Impairment testing — the auditor did not obtain sufficient evidence over the reasonableness of the quantum of resources included in the impairment testing model for a significant asset class.
Entity B 1 of 3 key audit areas reviewed Rental revenue — the auditor did not obtain sufficient evidence over the occurrence and accuracy of rental revenue, such as not testing key automated controls relied on by the auditor, not testing the accuracy of revenue and deferred revenue calculations against contracts and not testing contract terminations.

ASIC’s 2021 inspection report for EY is set out in REP 712 Ernst & Young Australia: Audit inspection report—1 July 2020 to 30 June 2021

Financial report findings in respect of Ernst and Young

ASIC completed risk-based reviews of aspects of 57 financial reports of listed and other public interest entities audited by the firm during the 2021 inspection. No material changes were made to net assets or profits.

Improving audit quality at Ernst and Young

ASIC set out the following in respect of Improving audit quality at EY:

The level of negative findings from our limited reviews has declined in recent years. However, the firm should continue to identify and address the root causes for the matters reported from our audit file reviews and for findings from internal and global firm reviews. The firm should also continue with its current initiatives to implement enhanced actions to maintain and sustain improved audit quality.

Grant Thornton 2021 Inspection Report Findings

ASIC concluded that GT did not obtain reasonable assurance that the financial report was free of material misstatement (negative findings) in five of the 11 key audit areas reviewed (45%) across three audits in the 2021 inspection This compares to three of the 11 key audit areas reviewed (27%) for the 12 months ending 30 June 2020.

ASIC’s negative findings relate to:

  • Revenue/receivables

  • impairment testing; and

  • Investments/ financial instruments

  • Taxation

Transaction / Balance sheet item Number of errors identified in 2021 Inspection Number of errors identified in 2020 Inspection % errors in 2021 Inspection % errors in 2020 Inspection
Revenue/receivables 2 1 67% 33%
Impairment/ asset valuation 1 2 25% 50%
Investments/ financial instruments 1 - 100% 0%
Taxation 1 - 100% 0%
Loans/borrowings - - 0% 0%
Acquisition accounting - - 0% 0%
Expenses payables - - 0% 0%

ASIC presented the following in respect of the negative findings identified in respect of Grant Thornton in the 2021 inspection that could give rise to a risk of material misstatement:

Entity Areas with findings Findings
Entity A 1 of 3 key audit areas reviewed Taxation — the auditor did not perform audit procedures over the group tax balances, failed to engage a specialist or expert in the audit of US tax balances and did not obtain sufficient evidence over transfer pricing.
Entity B 1 of 4 key audit areas reviewed Revenue from professional services and sales of hardware and software — the auditor did not obtain sufficient evidence over revenue recognition for professional services and sale of hardware and software.
Entity C 3 of 4 key audit areas reviewed Goodwill — the auditor did not adequately evaluate the nature and extent of audit procedures performed by the component auditor.
Revenue — the auditor did not adequately evaluate the nature and extent of audit procedures performed by the component auditor.
Investment in listed entity — the auditor did not consider the facts and circumstances of the entity’s relationship with the investee to conclude that the accounting treatment was appropriate.

ASIC also identified the following findings which did not involve a risk of material misstatement:

Entity Findings
Entity A Impairment testing of goodwill and other intangibles assets—the auditor should have included management’s impairment models on file and clearly evidenced the work done on forecast budgets to support the work done
Revenue—the auditor should have more clearly documented the audit procedures performed in testing revenue stream
Entity B Impairment testing of goodwill—despite the apparent headroom, the auditor should have considered the impairment assessment of goodwill for each CGU in more detail and documented all relevant supporting information on the engagement file

ASIC’s 2021 inspection report for GT is set out in REP 713 Grant Thornton Australia Limited: Audit inspection report—1 July 2020 to 30 June 2021

Financial report findings in respect of Grant Thornton

ASIC completed risk-based reviews of aspects of seven financial reports of listed and other public interest entities audited by the firm during the 2021 inspection. No material changes were made to net assets or profits.

Improving audit quality at Grant Thornton

ASIC set out the following in respect of Improving audit quality at Grant Thornton:

The level of negative findings from our limited reviews is of concern and warrants continued deliberate and concerted action by Grant Thornton. The firm needs to focus on identifying and addressing the root causes for the matters reported from our audit file reviews and for findings from internal and global firm reviews. The firm should continue to evaluate the effectiveness of its current initiatives to improve audit quality and revise them or implement new and improved actions if they are not achieving appropriate outcomes.

KPMG 2021 Inspection Report Findings

ASIC concluded that KPMG did not obtain reasonable assurance that the financial report was free of material misstatement (negative findings) in eight of the 27 key audit areas reviewed (30%) across eight audits by the firm in the 2021 inspection. This compares to 10 of the 39 key audit areas reviewed (26%) for the 12 months ending 30 June 2020.

ASIC’s negative findings relate to:

  • the audit of revenue and receivables; and

  • impairment testing.

Transaction / Balance sheet item Number of errors identified in 2021 Inspection Number of errors identified in 2020 Inspection % errors in 2021 Inspection % errors in 2020 Inspection
Revenue/ receivables 4 4 44% 36%
Impairment/ asset valuation 2 3 18% 27%
Inventories/ cost of sales 1 1 50% 25%
Expenses/payables - - 0% 0%
Investments/ financial instruments - - 0% 0%
Provisions - 2 0% 33%
Taxation - - 0% 0%
Leases - - 0% 0%
Loans/ borrowings 1 - 100% 0%
Acquisition accounting - - 0% 0%

ASIC presented the following in respect of the negative findings identified in respect of KPMG in the 2021 inspection that could give rise to a risk of material misstatement:

Entity Areas with findings Findings
Entity A 1 of 3 key audit areas reviewed Revenue—the auditor performed controls and substantive procedures. This included a substantive analytical procedure that was not sufficiently precise to detect a material misstatement and contained a calculation error not identified by the auditor resulting in a variance which was greater than the acceptable difference and performance materiality.
Entity C 2 of 4 key audit areas reviewed Asset impairment—the auditor did not adequately evaluate some key assumptions in the entity’s value in use model and the auditor’s sensitivity analysis did not sufficiently address changes to key assumptions › Assets held for sale—the auditor did not obtain sufficient evidence to support the key factors that indicate that the planned disposal of assets held for sale was highly probable.
Entity D 3 of 3 key audit areas reviewed Valuation of inventories—the auditor did not sufficiently test standard costs and variance adjustments used in the valuation of inventories at year end. Trade receivables — the auditor did not obtain sufficient evidence over impairment losses on receivables due to insufficient evaluation of impairment loss allowances including the COVID-19 impact on the expected credit loss allowance. Impairment — the auditor did not obtain sufficient evidence over revenue forecasts and the appropriateness of the WACC rate used in the assessment of the valuation of non-financial assets.
Entity E 1 of 3 key audit areas reviewed Revenue — the auditor did not obtain sufficient evidence over the accuracy of specific types of revenue as the auditor did not agree a sample of those revenue transactions to appropriate source documents.
Entity E 1 of 3 key audit areas reviewed Finance lease receivables — the auditor did not perform sufficient substantive procedures over the accuracy of finance lease receivables and the sample selected for controls testing was not a finance lease.

ASIC’s 2021 inspection report for KPMG is set out in REP 714 KPMG Australia: Audit inspection report—1 July 2020 to 30 June 2021

Financial report findings in respect of KPMG

ASIC completed risk-based reviews of aspects of 51 financial reports of listed and other public interest entities audited by KPMG in its 2021 inspection. Following ASIC’s inquiries, one entity, being Ainsworth Game Technology Limited made material changes to net assets or profits:

Entity Year end Findings
Ainsworth Game Technology 30 June 2020 The company wrote down the non-financial assets of its Latin American business by $23.1 million and inventory by $3.4 million and increased its estimated expected credit losses on trade receivables by $6 million See Media Release (21-068MR) [21-068MR Ainsworth writes down assets | ASIC - Australian Securities and Investments Commission Ainsworth writes down assets (12 April 2021

Improving audit quality at KPMG

ASIC set out the following in respect of Improving audit quality at KPMG:

The level of negative findings from our limited reviews is of concern and warrants continued deliberate and concerted action by KPMG. The firm needs to focus on identifying and addressing the root causes for the matters reported from our audit file reviews, financial reporting surveillances, and for findings from internal and global firm reviews. The firm should continue to evaluate the effectiveness of its current initiatives to improve audit quality and revise them or implement new and improved actions if they are not achieving appropriate outcomes.

PricewaterhouseCoopers 2021 Inspection Report Findings

ASIC concluded that PwC did not obtain reasonable assurance that the financial report was free of material misstatement (negative findings) in five of the 20 key audit areas reviewed (25%) across eight audits by the firm in the 2021 inspection. This compares to eight of the 35 key audit areas reviewed (23%) for the 12 months ending 30 June 2020.

The largest number of negative findings relate to the audit of revenue and receivables including expected credit loss models.

Transaction / Balance sheet item Number of errors identified in 2021 Inspection Number of errors identified in 2020 Inspection % errors in 2021 Inspection % errors in 2020 Inspection
Revenue/ receivables 4 2 44% 20%
Impairment/ asset valuation - 1 0% 13%
Inventories/ cost of sales - - 0% 0%
Expenses/ payables - - 0% 0%
Investments/ financial instruments - 2 0% 67%
Provisions - 1 0% 50%
Taxation - 1 0% 25%
Leases - - 0% 0%
Loans/ borrowings - - 0% 0%
Acquisition accounting - - 0% 0%

ASIC’s 2021 inspection report for PwC is set out in REP 715 PricewaterhouseCoopers Australia: Audit inspection report—1 July 2020 to 30 June 2021

Financial report findings in respect of PricewaterhouseCoopers

ASIC completed risk-based reviews of aspects of 61 financial reports of listed and other public interest entities audited by PwC in its 2021 inspection. Following ASIC’s inquiries, one entity, being Nitro Software Limited made material changes to net assets or profits:

Entity Year end Findings
Nitro Software Limited 30 June 2019 The company reduced both its contract assets and deferred revenue by $14.7 million in its financial report for the half-year ended 30 June 2020 See Media Release (20-214MR) https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-214mr-asic-notes-reporting-changes/ ASIC notes reporting changes (17 September 2020)

Improving audit quality at PricewaterhouseCoopers

ASIC set out the following in respect of Improving audit quality at PricewaterhouseCoopers:

The level of negative findings from our limited reviews is of concern and warrants continued deliberate and concerted action by PwC. The firm needs to focus on identifying and addressing the root causes for the matters reported from our audit file reviews, financial reporting surveillances, and for findings from internal and global firm reviews. The firm should continue to evaluate the effectiveness of its current initiatives to improve audit quality and revise them or implement new and improved actions if they are not achieving appropriate outcomes.

Audit quality culture

ASIC set out that firm leadership, partners, managers, and staff all have important roles in contributing to a culture focused on audit quality. ASIC set out the following examples of considerations in respect of audit quality culture:

Who Examples of considerations
Firm leadership Giving strong, genuine, consistent, and frequent messages to partners and staff that audit quality is not negotiable
Firm leadership Providing genuine support for partners and staff in challenging accounting policies, estimates and disclosures in individual audits, and making necessary calls to issue a modified audit report
Firm leadership Ensuring that the firm and assurance division have a prominent focus on audit quality, in comparison to other objectives such as selling other services to audited entities
Firm leadership Monitoring and assessing culture through means such as people surveys, 360-degree reviews of partners, interviews with the boards and audit committees of audited entities and interviews with staff
Firm leadership Ensuring that whistle blowers are protected and the matters they raise are appropriately actioned
Partners and staff Embracing the need to improve audit quality and the consistency of audit execution
Partners and staff Understanding and being accountable for their roles in conducting quality audits
Partners and staff Focusing on the information needs of, and potential harm to, investors and creditors

The role of directors, audit committees and management

ASIC set out that company directors, audit committees and management have roles in supporting quality audits. Among other matters, directors and audit committees should consider:

  • non-executive directors recommending audit firm appointments and setting audit fees;

  • assessing the commitment of the auditors to audit quality;

  • reviewing the resources devoted to the audit, including the amount of partner time, the need for the auditor to use experts and the appropriate use of other auditors;

  • accountability of the lead audit partner, the review partner, specialists and audit team members for audit quality;

  • facilitating the audit process, including support by entity management for the audit process;

  • two-way communication with the auditor on concerns and risk areas; and

  • assessing the auditor’s professional scepticism in challenging accounting treatments and estimates.

  • ensuring independence of the auditor; and

  • asking for the results of any ASIC review of the audit files and asking the auditor how they have responded to any ASIC findings.

ASIC set out that directors and audit committees should ensure the company’s internal governance and risk frameworks are robust and support the preparation of financial statements free of material misstatements.

4 - 2021 the Horizon for Auditors

Over the next four years significant changes are being made to Australian Auditing Standards.

The key amendments to Auditing and Ethical Standards applicable to Australian auditors are:

2021 2022 2023
First year application of ASA540 (revised) ISQM1 to be in place system by 15 December 2022 First year of implementing and quality under ISQM1
First year application of ASA 500 (revised) Readiness for ASA 315 (revised) First year of ISQM2
ASRE 2410 (revised) First year of ASA 200 (revised)
APES 305 (revised) First year of ASA 315 (revised)

A challenging horizon ahead for auditors

The audit profession has come under significant pressure in recent years, having to audit new and complex accounting standards against a background of increasing criticism from regulators globally and an increasingly litigious environment.

The IAASB have released a series of revised auditing standards (ASA 540, ASA 500 and ASA 315) to improve audit quality, emphasizing the need for auditors to apply professional skepticism. Concurrently, the IAASB has introduced a new standard in respect of quality management for audit firms (ISQM1).

The fundamental requirements of an audit, being to obtain sufficient appropriate audit evidence to opine whether the financial report is free of material misstatement, has not been changed or been enhanced. Nor has the requirement to understand the entity and the environment it operates in, so as to identify the risk of material misstatement through error or fraud. The revised auditing standards will however make it clearer for reviewers, regulators, and litigators to identify when the auditor has failed to properly identify risk and failed to obtain sufficient audit evidence.

Auditing and ethical standard changes applicable for 2021

The following new and revised pronouncements have application to annual financial reporters with a year-ending on or after 31 December 2020:

The IAASB and AUASB have issued a revised version of ASA 540.

Accounting estimates are one of the key areas challenging auditors and have become even more problematic in recent years with the introduction of AASB 9, 15 and 16. Accounting estimates in respect of goodwill impairment, net realizable value of inventory, bad debt provisions and revenue recognition are major areas of ASIC surveillance and restatement. Errors in accounting estimates commonly form the subject of litigation against directors and auditors.

The amendments center on:

  • Identifying risk of material misstatement arising from accounting estimates
  • Distinguishes inherent risk from control risk in respect of accounting estimates
  • Sets out that inherent risk is impacted by complexity, subjectivity and estimation risk
  • Requires consideration as to how management have considered estimation risk
  • Requires auditor to “stand back” and to consider and evaluate evidence that both supports and contradicts management’s estimate
  • Emphasizes professional skepticism as a response to management bias
  • Emphasizes work required around disclosure of accounting estimates
  • Sets out that when testing how management has arrived at an accounting estimate an auditor needs to consider the method, assumptions, and data upon which the estimate is based.

Practical implications

Correctly applying ASA 540 (revised) requires a change in the auditor’s mindset, how they perform and document their risk analysis in respect of management estimates, what audit evidence they obtain and how they interpret that evidence.

If the auditor determines risk arising from management estimates can be reduced by the controls that are in place to manage that risk, then auditors will have to identify those controls and perform work to obtain sufficient appropriate audit evidence that those controls are adequate to address the risk.

The standard is explicit in its requirement for the auditor to consider whether management have appropriately considered estimation risk, and if not, to request that management adjust their estimate. This will in turn, expose the auditor to greater scrutiny if it is determined by the regulator or litigator that the estimates in the financial statements did not reflect estimation risk.

ASA 540 (revised) explicitly requires the auditor to stand back and consider all audit evidence in respect of an accounting estimate, including evidence that contradicts management’s estimate. This may prove problematic for some auditors, who may have in the past focused their attention on obtaining audit evidence that corroborated managements estimate.

ASA 500 (revised) Audit Evidence

ASA 500 was revised as a result ASA 540 (revised) and Introduces the definition of External Information Sources. An auditor is required to distinguish information from an External Information Source from that of a management expert and to evaluate whether External Information Sources is relevant and reliable for the purposes of audit evidence.

The revised standard explicitly requires consideration of whether the information was prepared for a wide range of users or for the client, and whether the client was in a position to influence the information provided from the external source.

Practical implications

Careful consideration will be required as to whether information from a third party to support a management estimate represents relevant and reliable audit evidence, and whether it can be concluded it is free from potential bias.

ASRE 2410 (revised) Review of a Financial Report Performed by the Independent Auditor of the Entity

The auditor’s review report has been reordered so that the conclusion comes first, followed by a basis for conclusion. The auditor is required to report a material uncertainty related to going concern under the heading “Material Uncertainty Related to Going Concern” instead of an “Emphasis of Matter”.

Practical implications

The review conclusion has changed! Auditors that issue a review opinion in the old format will be clearly signaling that they are not up to date with current auditing standards.

APES 305 (revised) Terms of Engagement

The. revised standard is effective for engagements commencing on or after 1 July 2021 with early adoption permitted. The revisions require specific considerations and communications where the auditor will outsource elements of the audit.

Practical implications

It is becoming increasingly common for audit firms to outsource elements of their audit, including set up of audit files, completion of disclosure checklists etc. These arrangements will have to be fully disclosed to the client. Such disclosure may raise questions from the client around data and cyber security arrangements with the outsource provider.

ISQM1 was issued by the IAASB in December 2020 and requires that auditors implement a quality management system by 15 December 2022.

The objective of ISQM1 is for the audit firm to have reasonable assurance that:

  • The firm and its staff have fulfilled their responsibilities in accordance auditing and ethical standards and in accordance with other professional and legal requirements; and
  • Reports issued by the firm are appropriate.

The audit firm is required to design and implement a risk assessment process to establish quality objectives, identify and assess quality risks and to design and implement responses to address identified risks.

ISQM1 sets out that an audit firm’s system of quality management must address the following eight components:

  1. The firm’s risk assessment process;
  2. Governance and leadership;
  3. Relevant ethical requirements;
  4. Acceptance and continuance of client relationships and specific engagements;
  5. Engagement performance;
  6. Resources;
  7. Information and communication; and
  8. The monitoring and remediation process.

Practical implications

Auditors need to start the design of their quality management system as early as possible, it is not something that should be left to the second half of 2022!

ISQM1 if implemented properly, will in many cases highlight deficiencies in an audit firm’s quality management, including failures to:

  • Demonstrate how the firm is committed to quality in respect of its partners and staff;
  • Demonstrate how the firm ensures its partners and staff possess the appropriate technical knowledge to perform an audit of the required quality;
  • Demonstrate how partners and staff have access to appropriate accounting and auditing technical resources; and
  • Demonstrate how the firm has effectively handled breaches in audit quality.

2022 Another challenging year on the horizon

2022 will involve an audit firm implementing ISQM1 by 15 December 2022 and preparing to implement ASA 315 (revised).

ISQM1 will need to be implemented by 15 December 2022.

Practical implications

Audit firms need to determine as soon as possible, their plan and timeline for implementing ISQM1.

This plan must include:

  • The individual and team who are responsible for implementation;
  • A realistic time frame for implementation, considering peak audit workloads, staff turnover, training requirements and the need to rectify deficiencies.

The firm’s quality management plan will form the basis for future inspections by regulators and professional bodies. Therefore, a robust and well considered plan is crucial.

2023 The year you test your quality management system

2023 will see the audit firm test its quality management system for compliance with ISQM1 and implement the revised ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information and the new standard ISQM2 Engagement Quality Reviews.

2023 will be the first full year audit firms apply ISQM1, which require audit firms to:

  • Continually monitor the appropriateness of the firm’s quality risk management for changing risks and conditions;
  • Evaluate the performance of the audit firm’s leadership;
  • Evaluate and conclude whether the system of quality management is achieving its objectives (to be performed annually); and
  • Take further action if the conclusion on whether the system of quality management is achieving its objectives is unsatisfactory.

Practical implications

The ongoing compliance with ISQM1 should not be underestimated, audit firm’s are required to test their quality management system at least annually.

The audit firm will have clearly failed to comply with the requirements of ISQM1 if:

  • An annual review of the effectiveness of the audit firm’s quality management system is not performed; and
  • Appropriate actions are not taken for weaknesses identified in the annual review.

ISQM2 Engagement Quality Reviews

ISQM2 is effective for audit and review engagements of financial statements for periods beginning on or after 15 December 2022, applying to half year reviews for 30 June 2023 and full year audits 31 December 2023.

ISQM 2, Engagement Quality Reviews, addresses:

  • The appointment and eligibility of the EQ reviewer; and
  • The EQ reviewer’s responsibilities relating to the performance and documentation of an EQ review.

The changes introduced in ISQM 2 are intended to:

  • Extend the scope of engagements subject to an engagement quality (EQ) review (in addition to audits of financial statements of listed entities);
  • Strengthen the eligibility criteria for an individual to be appointed as an EQ reviewer; and
  • Enhance the EQ reviewer’s responsibilities relating to the performance (including the nature, timing and extent of procedures) and documentation of the EQ review.

ISQM2 requires an EQ review for:

  • Audits of financial statements of listed entities;
  • Audits or other engagements for which an EQ review is required by law or regulation; and
  • Audits or other engagements for which the firm determines that an EQ review is an appropriate response to address one or more quality risk(s).

The EQ reviewer must have:

  • An understanding of professional standards, applicable legal and regulatory requirements and of the firm’s policies or procedures relevant to the engagement;
  • Knowledge of the entity’s industry;
  • An understanding of, and experience relevant to, engagements of a similar nature and complexity;
  • An understanding of the responsibilities of the engagement quality reviewer in performing and documenting the engagement quality review;
  • Sufficient time;
  • Appropriate authority;
  • Comply with relevant ethical requirements, including threats to objectivity and independence; and
  • Comply with provisions of relevant laws and regulations.

Practical Implications

The introduction goes hand in hand with application of ISQM1 and ASA220 revised. Audit firms will need to carefully determine whether their EQ reviewers:

  • Have the appropriate skills and experience for each engagement to which they are assigned;
  • Have the appropriate authority; and
  • Are given sufficient time.

An interesting inclusion is that ISQM2 permits the use of suitably qualified external EQ reviewers and the use of assistants.

ASA 220 (revised) Quality Management for an Audit of Financial Statements

ASA 220 (revised) is effective for audit and review engagements of financial statements for periods beginning on or after 15 December 2022, applying to half year reviews for 30 June 2023 and full year audits 31 December 2023.

The revisions to ASA 220 continue the drive for quality set out in ASA 540 (revised) and ASA 315 (revised), emphasizing the importance of professional skepticism, and requiring enhanced documentation of the auditor’s judgments. It also is fully in line with ISQM1 and ISQM2.

ASA 220 (revised) makes it clear that it is the engagement partner’s overall responsibility to manage and achieve quality on the engagement and this is achieved through the engagement partner having sufficient and appropriate involvement throughout the audit engagement.

ASA 220 (revised)) sets out that the Engagement partner is responsible for:

  • managing and achieving quality at the engagement level; and
  • determining the nature, timing and extent of direction, supervision, and review.

The engagement partner is required to be satisfied that their involvement has been sufficient and appropriate to provide the basis for taking overall responsibility.

Practical implications

The revisions to ASA 220, require the audit partner to be appropriately involved in all phases of the audit and for there to be evidence of this. For those audit partner that typically have a “hands off” approach or are simply too stretched, delegating significant work to their senior managers, this revised standard together with ISQM1 requires a change to their business model.

2023 The Year to apply ASA 315 (revised) Identifying and Assessing the Risks of Material Misstatement

ASA 315 (revised) is operative for financial reporting periods commencing on or after 15 December 2021, applicable to audits of 31 December 2022 and 30 June 2023 year ends.

The standard has been revised to respond to challenges and issues with the current ASA 315. The revised requirements focus on ‘what’ needs to be done, and the application material enhanced, modernized, and reorganized to describe ‘why’ and ‘how’ procedures are to be undertaken.

ASA 315 (revised) is very much aligned to the changes contained within ASA 540 (revised) and includes similar new concepts and definitions. ASA 315 (revised) sets out:

  • There is a spectrum of inherent risk;
  • Inherent risk factors that must be considered by auditors;
  • The requirement to perform separate assessments of inherent risk and control risk;
  • Consideration of ‘significant classes of transactions, account balances and disclosures’ and ‘relevant assertions’;
  • Introduces a new definition of ‘significant risk’ being those risks close to the upper end of the spectrum of risk;
  • Requires the auditor to ‘stand-back’ to evaluate the completeness of significant classes of transactions, account balances and disclosures at the end of the risk assessment process; and
  • Where the auditor does not contemplate testing the operating effectiveness of controls, the risk of material misstatement is the same as the assessment of inherent risk.

Practical implications

Revisions to ASA 315 are in response to dissatisfaction by audit regulators as to how auditors identify and address risk. Whilst the basic objective of the audit has not changed, ASA 315 (revised) is very prescriptive as to how risk identification should take place, emphasizing the requirement to link risk to assertions and the need to apply an appropriate level of professional skepticism.

ASA 315 (revised) is very much in line with ASA 540 (revised) that came into force in 2021, so the key changes in respects of the risk of material arising from management’s accounting estimates should not come as a surprise to auditors in 2023.

Some good news for Auditors

For Auditors, although 2021 heralds a new era of complexity and a drive for quality, the good news is that the accounting changes in 2021 are minimal which we discuss in our article “2021 the horizon for Accountants”.