Auditors need more 'scepticism'

AIU says accountants could do more to protect independence

Pat Sweet

Audit quality has been maintained during the past year, but there is a need for greater professional scepticism, according to the Audit Inspection Unit’s (AIU) annual report.

The report, which provides an overview of the activities and findings of the AIU, says its inspection results for 2010/11 are ‘as good as, or even slightly better than, those of the last year’.

The AIU highlights the reduction in the number of FTSE 350 audits assessed as requiring significant improvement, although it says that the proportion of audits assessed as requiring significant improvement, particularly at smaller firms, ‘remains of concern’.

It calls for firms to exercise ‘appropriate professional scepticism’ in respect of key areas of judgment such as the valuation of assets and the impairment of goodwill and other intangible assets, in order to improve audit quality further.

The AIU says firms must recognise the importance of the proper identification and assessment of threats and safeguards in maintaining auditor independence at a time when the need for more specific prohibitions is being debated. It is concerned that this may be compromised by what it terms as ‘an inappropriate focus on selling non-audit services to audited entities’.

AIU also wants all firms, and especially smaller firms, to consider carefully whether they have the appropriate resources, expertise and involvement to undertake audits of multi-national groups to the required standard.

The report says: ‘When performing the audit of a UK subsidiary of a large overseas group where the audit approach is designed for the group as a whole, firms must ensure that they obtain sufficient audit evidence to support their statutory audit opinion on the UK subsidiary. This issue is particularly relevant to the audits of UK components of international financial institutions.’

According to the AIU’s findings, firms have not made sufficient use so far of engagement quality control reviewers as a way of improving audit quality and ensuring that management’s assertions are appropriately challenged.

The AIU also wants greater attention to be paid to the audit of the disclosures in financial statements, notably those in respect of key areas of judgment, to ensure that sufficient appropriate disclosures to meet the needs of users have been made.

John Kellas, interim chairman of the Professional Oversight Board said: ‘I am pleased to report that the AIU’s inspection activities in the current year have again found improvements in audit quality. However, further improvements are still required. We believe that having a wider range of specific actions, such as proportionate sanctions, available to the FRC would assist in promoting audit quality.’