International warning on audit deficiencies

There remain significant deficiencies in the audits of public companies identified by regulators in many jurisdictions around the world, according to analysis from the International Forum of Independent Audit Regulators (IFIAR) which says more needs to be done to improve audit quality and consistency of audit execution across audit firms worldwide.

IFIAR’s 2014 Survey of Inspection Findings found that 24% of inspections of audits internationally identified the need for improvements to the testing of internal controls, while 20% identified problems with fair value measurement. In addition, 14% of inspections of audits called for improvements in revenue recognition.

Lewis Ferguson, IFIAR chair and board member of the US Public Company Accounting Oversight Board (PCAOB) said: ‘We continue to see high levels of inspection deficiencies in vital areas of public company audits. This is a problem for investors and stakeholders around the world.’

The survey examined audit inspections from 29 IFIAR members, including the Financial Reporting Council (FRC), which together inspected 948 public company audits and found deficiencies in 47%. There were inspection findings on audits of systemically important financial institutions from 17 IFIAR member countries, looking at a total of 148 financial institution audits, of which 41% had deficiencies.

For audits of financial institutions including global banks and insurers, the survey found the highest number of areas needing improvement around the audit of allowance for loan losses and loan impairments, internal control testing, and auditing the valuation of investments and securities.

Audit firms' own quality control systems had the highest number of inspection findings in the areas of engagement performance; independence and ethics requirements; and human resources.

The findings discussed in the survey are primarily from inspections of audit firms affiliated with the six largest international audit firm networks: BDO International, Deloitte Touche Tohmatsu, Ernst & Young Global, Grant Thornton International, KPMG International Cooperative, and PricewaterhouseCoopers International.

IFIAR members also reported their impression as to whether audit quality in their jurisdictions had changed. While almost 30% observed overall improvement, almost half of the respondents noted no significant overall changes, and the remainder made mixed observations.

IFIAR said current findings are in line with those of its previous two reports, and the forum is calling on audit firms to undertake a robust root cause analysis to understand the factors behind the deficiencies identified and take remedial action. 

It wants audit firms to consider initiatives to improve audit quality and the consistency of audit execution across their national firms and international audit firm network, and says this should include reviewing staffing structures to ensure that sufficient and appropriate expertise and experience is available for increasingly complex entities and audits that require significant judgments.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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