Audit
firms’ systems for monitoring the quality of the audits they carry out
are not up to scratch, according to the Financial Reporting Council
As a result,
the regulator says in its report on the principal findings of the first
thematic review on audit quality monitoring, most firms only identify a
relatively small proportion of audits requiring significant improvement
compared to the number that the FRC’s inspectors come up with.
“Where we are able
to make direct comparisons, we do find instances where our monitoring
has identified required improvements that have not been identified by
the firm’s reviews or have been treated as less significant,” it says.
Part of the problem
is that while firms allocate substantial resources to their monitoring
of the quality of audits, they don’t spend the same on their monitoring
of those quality controls that support the consistency of quality of
audit work performed across the firm.
The findings are
based on visits by the FRC to nine of the UK’s top 20 firms – including
BDO, Crowe Clark Whitehill, Deloitte, EY, Grant Thornton, KPMG, Mazars,
PwC and RSM UK.
The FRC reveals that
it selected six specific areas to assess to what extent monitoring of
the firms’ quality controls had been monitored. Out of the nine firms,
only three had tested all of them.
Of the others, three
took a rotational approach so that some of the areas were not tested in
a year while the remaining three had not tested one or more of the
quality control areas.
The variations arose
because the firms interpreted the audit regulation requirements
differently. However, the FRC’s view was that they should review whether
their annual monitoring is “appropriate” to meet regulatory
requirements.
There were also significant variations in sample sizes used to test the firms’ quality controls.
The FRC also found
in five firms, that staff undertaking the monitoring of the quality
controls were given inadequate training and guidance. In some cases,
monitoring of the controls was actually carried out by the individuals
responsible for operating them.
Other criticisms
included a procedural checklist approach to reviewing audits,
predictability in audit selection so individuals knew when their work
would be monitored, firms interpreting weaknesses as less important than
they should have been, and less than robust challenging when weaknesses
were uncovered.
Commenting on the
thematic review’s findings, FRC executive director of conduct Paul
George said, “We welcome audit firms’ commitment to audit quality and
ensuring that their quality control systems for audit are effective.
“Given the
importance of these control systems to deliver high quality audits, we
would expect firms to challenge individual audit engagement teams more
rigorously and apply a consistently equivalent level of resources to
monitoring the effectiveness of the firms’ overall controls.”
The FRC believes
that audit committees play an “essential role” in reviewing and
monitoring the effectiveness of the audit process.
It suggests that, in
order to enhance their oversight, they should ask their auditors on an
annual basis for the latest results of the firm’s monitoring, and
discuss whether their audit was reviewed, the findings and any remedial
action taken.
- See more at:
http://economia.icaew.com/news/january-2016/audit-firms-monitoring-systems-not-robust-enough#sthash.ktb6LuEJ.dpuf