ASIC Demands Better Practices to Improve Audit Quality

ASIC is currently considering or progressing enforcement action for auditor misconduct in twelve cases, as part of efforts to improve audit quality.

ASIC (Australian Securities and Investments Commission) has said audit firms need to do more to improve audit quality, particularly in relation to asset values disclosed in financial reports.

In a 22 December report, ASIC presents the findings of a review of audit files for the period 1 July 2019 to 30 June 2020, as well as recommendations from reviews regarding conflicts of interest, governance and accountability at the larger audit firms.

ASIC found that auditors did not obtain reasonable assurance that the financial reports were free from material misstatement in 27 percent of the 179 key audit areas. The adverse findings were most prominent in the audit of asset values, particularly impairment of non-financial assets and the audit of revenue.

“Audit firms need to work on improving audit quality and significantly reducing the number of instances where auditors do not obtain reasonable assurance that a financial report is free of material misstatement,” said ASIC Commissioner Cathie Armour.

While the financial reports ASIC reviewed may not necessarily have contained material misstatements, ASIC says auditors may not have sufficient basis to support their opinions in the financial reports.

According to Armour, audit firms need to strengthen their initiatives to improve audit quality, including through enhancing culture, the experience and expertise of partners and others, supervision and review of audits, and accountability of partners and others for audit quality.

ASIC is currently considering or progressing enforcement action against auditor misconduct in twelve cases.

The report, available here, includes better practice recommendations and focus areas for audits under Covid-19 conditions, while also detailing ASIC’s further regulatory initiatives to improve audit quality.

While the report does not reflect the impact of Covid-19, ASIC says the pandemic has raised the need to properly keep the market and investors informed through financial reports.

“There can be more difficult judgements on asset values, liabilities, solvency, going concern and disclosures, as well as challenges from remote working arrangements,” ASIC said. “Auditors need to respond to these conditions in their audits.”

On 15 December, ASIC released guidance highlighting the key focus areas for financial reporting by companies for years ending 31 December 2020, particularly where asset values, assumptions and disclosures may be significantly affected by developments or ongoing conditions as a result of the pandemic.

On 17 December, the regulator also released a review of the financial reports of 170 listed entities for the year ended 30 June 2020, in which it highlighted issues relating to impairment of non-financial assets, reporting of asset values, and the disclosure of assumptions used to estimate future cashflows.


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