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Blog Article

Responding to the credibility challenge

Thursday 26 August 2021

In recent years, the auditing profession has been increasingly included in the list of parties responsible in the spate of corporate governance and financial reporting failures that have been exposed globally. While there are many reasons attributable to these failures, the changing landscape of data and fair value accounting has certainly contributed to the complexity of judgments and estimates in financial reporting and have created opportunities for management to allow bias and fraudulent financial reporting to go undetected or unchallenged. In the last year, the global Coronavirus pandemic has brought more uncertainties to management to cite in their reporting in lieu of making actual negative adjustments to reported results; delaying having to make downward adjustments to earnings or give shareholders and investors factually bad news.

The International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IEBSA) have both responded to the increased risks that these changes and challenges have brought to the auditing profession, and a much-needed "revamp" of some International Auditing Standards, the standards on quality management and the Code of Ethics for Professional Accountants have been published by these Boards.

Audit Regulators have also responded to the ongoing scrutiny of the profession by increasing the number of engagement file selections for quality reviews, by introducing risk-based focused review areas and by strengthening their oversight processes of the root cause analysis and remedial action requirements.

Year after year, regulators and professional bodies report that audit estimates form the largest contributor to audit quality findings. The causes of these findings vary but consistently fall into either skill and competence, i.e. the technical ability to understand and audit the accounting, or to ethics and practice management issues, such as failure to address threats to fundamental principles (such as intimidation threats), and insufficient resources, time or fees to perform audits.

In many remedial action plans in response to root cause analyses, auditors promise that additional training and guidance will be implemented to audit team members. However, given that these findings on audit quality have been consistently reported for years, the question must be asked about whether the training being provided effectively equips attendees to implement the knowledge gained in practice. Training staff on the requirements of IAS 36 Impairment of Assets or IFRS 9 Financial Instruments does not assist staff in understanding how to effectively implement the requirements of ISA540(R) Auditing Accounting Estimates and Related Disclosures. This is because the training seldom incorporates and integrates the accounting transactions and related risk identification specific to the accounting, a discussion of the implications of the other auditing standards (for example fraud, the use of experts, communications with those charged with management), of the expectation of audit quality in documentation requirements for sufficient appropriate audit evidence, and how to identify and assess threats to independence that an audit team member may experience on a day to day basis, such as feeling unable to challenge management on their use of certain data, methodologies, inputs etc. in the financial reporting. In other words, an integrated approach to the subject matter.

The IAASB’s new suite of Quality Management Standards has refreshingly revised the approach to quality from quality control to quality management, changing the focus to a proactive one, with an increased emphasis on resources (amongst other items). This presents an ideal opportunity for audit firms to rethink their approach to training as a quality management tool, proactively addressing quality risks through training on an integrated basis, ensuring that their staff are trained on the requirements of new standards in advance, and that this training is practical and integrates all aspects of audit, including ethical and quality management, audit documentation, financial reporting requirements, proper risk identification and efficient and effective audit risk response.

Our upcoming audit courses do just that. They present a new standard in a practical manner that will equip practitioners to implement the standards in their practices proactively and to understand the benefit of proper implementation and documentation of the standard.

On a personal note, possibly with the exception of the Big 4 and very large global networks that have the resources to dedicate full time staff members to audit technical and quality roles, I have found it to be a common belief and frustration among auditing practitioners that proper implementation of all the auditing and ethical requirements at the quality expected by the regulators (and, therefore, the public) is a time consuming, expensive, risky and usually unsuccessful process, and is seen increasingly as a reason to stop auditing. It is my belief that with well planned resource management and proactive training, quality management can make practice management much more efficient, and restore both the attractiveness, as well as the credibility, of the auditing profession again.

Upcoming courses relating to auditing and ethics

ISAs (International Standards on Auditing) Fundamentals (Virtual Classroom)

4th – 13th October 2021

ISAE3000(R) - International Standard on Assurance Engagements 3000 (Revised) - Comprehensive Workshop (Virtual Classroom)

9th – 10th November 2021

International Standards on Quality Management - Workshop (Virtual Classroom)

16th November 2021

International Standards on Auditing 315 (Revised) - Identifying and Assessing the Risk of Material Misstatement - Workshop (Virtual Classroom)

17th November 2021

Annual Accounting Professional Ethics Update (Virtual Classroom)

18th November 2021

If you are interested in attending any of our courses let us know. There’s a “Keep Me Updated” button on each course page – click that and fill out the form to let us know of your interest and we can keep you updated about the arrangements for the course and answer any questions you may have.

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