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:
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negative findings in 23% of areas inspected in the largest 6 Audit firms (BDO, Deloitte, EY, GT, KPMG, and PwC);
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negative findings in 32 % of areas inspected across 16 Audit firms inspected (including the largest six firms);
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negative findings in 59% of the key audit areas inspected for firms outside the largest six firms; and
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9% of the audited entity’s Financial Reports subject to the ASIC inspection were materially misstated.
The Inspection report should be considered by:
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Audit Committee members when choosing their auditor;
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Audit Committee and Board members when reviewing and approving their entity’s financial report;
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Lawyers and litigators when considering the general competency and quality of Australian audit firms; and
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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:
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promoting a strong culture focused on audit quality;
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attracting and retaining the right talent for complex audits;
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thorough supervision and review of audits; and
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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:
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notices lodged by auditors under section 311 of the Corporations Act 2001; and
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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:
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Test of details;
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Accounting estimates;
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Substantive analytical procedures;
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Internal controls;
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Risk assessment; and
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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:
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Forecast cash flows;
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Other key assumptions;
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Expert or specialist work;
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Sensitivity testing;
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Impairment model testing;
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Impairment indicators;
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Fair value methodology; and
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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:
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impairment of non-financial assets;
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values of investment properties and other assets;
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revenues and receivables;
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provisions; and
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tax balances.
ASIC found cases where the auditor did not:
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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;
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sufficiently use their own expert (e.g., to review all relevant aspects of the determination of the discount rate used in an impairment assessment);
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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;
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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;
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assess the relevance, completeness and accuracy of source data used by experts or assess the competence, capabilities, and objectivity of experts;
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have sufficient group audit strategies and instructions to, or communication with, component auditors; and
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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
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impairment testing;
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the audit of revenue and receivables;
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inventories and cost of sales;
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expenses and payables; and
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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:
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impairment testing; and
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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:
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Revenue/receivables
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impairment testing; and
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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:
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the audit of revenue and receivables; and
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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:
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non-executive directors recommending audit firm appointments and setting audit fees;
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assessing the commitment of the auditors to audit quality;
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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;
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accountability of the lead audit partner, the review partner, specialists and audit team members for audit quality;
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facilitating the audit process, including support by entity management for the audit process;
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two-way communication with the auditor on concerns and risk areas; and
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assessing the auditor’s professional scepticism in challenging accounting treatments and estimates.
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ensuring independence of the auditor; and
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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.