The Quality Assurance Department “QAD” is the ICAEW body that, inter alia, monitors compliance with auditing standards. It has issued its report on its findings from inspections carried out in 2010.
The report points out that the Companies Act 2006 requires recognised supervisory bodies such as the ICAEW to license and monitor statutory audit, and that they currently register just under 4,000 audit firms. There are currently approx 30 audit reviewers and they aim to visit around 750 audit firms each year, reviewing over 1,500 audits. The QAD say that they focus on the most risky and difficult areas of an audit so that they can thoroughly assess the quality of the important audit judgements.
The results from the 755 visits during 2010 were as follows:
| Visits closed without follow-up action | 543 | 72% |
| Further information requested from firm | 132 | 17% |
| Detailed report to Audit Registration Committee | 80 | 11% |
| Total | 755 |
Visits closed without follow-up action are those where the firms produce good quality audit work and, if the QAD identify areas for improvement, they are confident the firm can address them easily.
Visits where further information is requested are where some follow-up action is needed to monitor progress and where firms have offered to provide the relevant information. Examples might be the results of subsequent audit compliance reviews, a plan for future training courses or updated audit procedures to address one or more elements of ISQC1.
If the QAD identify serious issues, they write a detailed report for the Audit Registration Committee so that it can consider what action to take. Their detailed reports are not always because of poor audit work; they may also include issues relating to the firm’s eligibility to be a registered auditor, and control of an audit firm.
The report indicates that the following action was taken by the Audit Registration Committee during 2010 resulting from visits carried out in 2009 and 2010:
| Registration withdrawn | 25 |
| Conditions and restrictions imposed | 35 |
| Conditions imposed | 19 |
| Voluntary withdrawal accepted | 10 |
In the report the QAD say that to improve audit quality there are some key areas on which audit firms should focus. The report comments on the following:
Make careful judgements and document them. This section gives examples of common but potentially difficult judgements where the QAD say they cannot always understand the conclusions on the audit file:
- Assessment of going concern
- Conclusions on impairment
- Reliance on other auditors in group audits
Assess risk. Under this heading the QAD say that their review of the financial statements sometimes highlights potential risk areas that the firm has not clearly identified and addressed in the audit, for example:
- Warranty provisions
- Material business acquisitions
- The use of restricted funds in a charity
Gather the right audit evidence and record it. The QAD say that sometimes the audit work on file does not provide enough evidence to support the view that account balances are materially correct. These are the kinds of thing they say that they see.
- Design of audit tests. Evidence of the existence of fixed assets is obtained through testing of additions and disposals but without testing any items brought forward from the previous year.
- Population of transactions used for sampling. The audit firm only selects items sold post year end to test net realisable value of stock.
- Weakness in substantive analytical procedures. Audit work relies on substantive analytical procedures where it is not possible to develop sufficiently precise expectations or balances are simply compared to prior year and significant variances are discussed with management without corroboration.
- Assessment of experts. Although audit evidence may include reports from experts, there is sometimes little indication that the audit team has considered the qualifications of the expert, the scope of the report, key assumptions and underlying data.
- Incomplete documentation. Good audit documentation is a challenge. Firms can often provide additional explanations to show us they have obtained appropriate audit evidence, but the very fact that we need to ask the question often means that the work is not documented well enough. It may also indicate that the firm’s review processes have not been as effective as they should have been; especially the final engagement partner review.
The report suggests that firms should properly evaluate the findings from their annual cold file reviews and implement an action plan to address weaknesses quickly. Firms that grade the results of their file reviews may find it easier to monitor their progress year on year. SWATUK can provide audit file reviews from as little as £160+VAT an hour*.
Finally the report notes that regular audit training is essential. Training on proprietary audit systems is also important. Firms sometimes struggle when they switch audit systems, particularly to a computer-based system, without proper training.
SWATUK can provide a range of training to help ensure your audit files are compliant with the new Clarity ISAs.
For further details email membership@the2020group.com.
*Price for audit file review valid until 31 December 2011.
