ASIC’s recent inspection of 45 audit files for the 12 months to 30 June 2021 has shown an overall increase in the percentage of key audit areas where auditors did not obtain reasonable assurance that the financial reports were free from material misstatement. The overall results for the six largest firms were consistent with last year.
The inspections covered financial reports for years ended from 31 December 2019 to 31 December 2020.
ASIC Commssioner Sean Hughes said, ‘ASIC recognises the impact of COVID-19 conditions on audit firms and the entities they audit, requiring them to adapt to remote work arrangements, global, national and local travel restrictions and other impacts.
‘To assist preparers and auditors of financial reports operating under these COVID 19-related challenges, ASIC extended the deadlines for lodging audited financial reports for both listed and unlisted entities by one month for certain balance dates.
‘Noting the overall increase in findings, ASIC calls on audit firms to continue to evaluate the effectiveness of their current initiatives to improve audit quality and revise them or implement new and improved actions if they are not achieving appropriate outcomes.
‘This includes promoting a strong culture focused on audit quality, attracting the right talent for complex audits, effective supervision and review of audits and accountability of partners, managers and staff for audit quality and effective root cause analysis of negative findings’ Mr Hughes said.
Audit inspection findings
In 23 per cent of the 115 key audit areas reviewed across 35 audit files of the six largest audit firms, the auditors did not obtain reasonable assurance that the financial reports were free from material misstatement (negative findings). This compares to 24 per cent of the 156 key audit areas reviewed in 46 audit files at the largest six firms for the 12 months to 30 June 2020.
The equivalent negative findings across all 16 audit firms inspected was 32 per cent of the 149 key audit areas reviewed across 45 files this year and 27 per cent for the 179 key audit areas reviewed across 53 files at 13 audit firms last year.
The largest number of negative findings continued to relate to the audit of asset values and impairment of non-financial assets and the audit of revenue. Other areas of our findings included audit of inventories, investments and financial instruments, expenses and payables, and provisions.
ASIC’s findings do not necessarily mean that the financial reports audited were materially misstated. Rather, in our view, the auditor may not have a sufficient basis to support their opinion on the financial report.
ASIC’s separate risk-based reviews covering financial reports of listed and other public interest entities conducted this year led to material changes to net assets and profits for 3% of financial reports reviewed.
Mr Hughes said, ‘While our audit inspections purposefully target higher risk key audits, the level of negative findings is of concern and warrants deliberate and continued concerted efforts by all firms to improve audit quality and reduce the overall levels of negative findings.
‘The need to properly inform the market and investors through financial reports continues to be important in the context of COVID-19 conditions and requires auditors to respond to potentially more difficult judgements on asset values, liabilities, solvency, going concern and disclosures, as well as challenges from remote working arrangements.
‘ASIC’s ongoing regulatory activities will include reviewing our programs for regulating auditors and financial reporting, consulting on routine reporting of audit findings to directors and continuing our focus on enforcement actions for deficient audits’, Mr Hughes said.
Individual firm reports
The largest six audit firms, where most of our inspection effort is directed, audit 93% of ASX-listed entities based on market capitalisation.
Since 2019 we have reported the individual findings percentages for these firms and in 2020, we began publishing their individual firm reports.
Below are the individual firm reports for this year:
- REP710 BDO firms in Australia: Audit inspection report-1 July 2020 to 30 June 2021
- REP711 Deloitte Touche Tohmatsu Australia: Audit inspection report-1 July 2020 to 30 June 2021
- REP712 Ernst & Young Australia: Audit inspection report-1 July 2020 to 30 June 2021
- REP713 Grant Thornton Australia Limited: Audit inspection report-1 July 2020 to 30 June 2021
- REP714 KPMG Australia: Audit inspection report-1 July 2020 to 30 June 2021
- REP715 PricewaterhouseCoopers Australia: Audit inspection report-1 July 2020 to 30 June 2021
ASIC’s audit inspections aim to promote improved audit quality. ASIC’s reviews focus on audits of listed entities and significant public interest entities.
ASIC notes that a limited number of audit files are selected for review applying a risk-based approach, meaning ASIC would not expect these negative findings to be replicated in all audit files across the entire market.
Audit inspections are one of our activities directed at promoting high-quality financial reports. Other ASIC activities to support audit quality include its financial reporting surveillance program, auditor surveillances and enforcement actions separate to our inspections, investigations into corporate collapses and addressing matters from complaints and other intelligence. ASIC’s audit inspection reports do not incorporate findings from these other activities.
Supplementary information supporting our audit inspection programme can be found in the following publications:
- COVID-19 implications for financial reporting and audit: Frequently asked questions (FAQs)
- Information Sheet 196 Audit quality: The role of directors and audit committees
- Information Sheet 222 Improving and maintaining audit quality
- Information Sheet 223 Audit quality – The role of others
- Information Sheet 224 ASIC audit inspections