During 2015–16, the FRC considered that the current Australian audit quality framework continued to be robust and that it was not necessary to propose changes to the Minister at this time.

Australia has comprehensive legislative and professional requirements concerning audit with the main legislative requirements set out in the Corporations Act 2001 (Corporations Act). ASIC is the key regulator under the Corporations Act and has responsibility for the surveillance, investigation and enforcement of the financial reporting requirements of the Corporations Act, including the regulation of audit requirements.

The Corporations Act also gives legal effect to the auditing standards developed by the AUASB. The auditing standards require that auditors adhere to the relevant ethical standards as issued by the Accounting Professional and Ethical Standards Board (APESB). The professional accounting bodies enforce professional standards and comprise: Chartered Accountants Australia and New Zealand (Chartered Accountants ANZ); CPA Australia; and the Institute of Public Accountants (IPA).

Under the ASIC Act, the FRC is to provide strategic policy advice and reports to the Minister and professional accounting bodies in relation to the quality of audits conducted by Australian auditors. This advice may include: matters relating to the effectiveness of Corporations Act provisions relevant to audit; the review processes undertaken by the professional bodies to ensure that auditor skills and processes remain at a high level; and disciplinary processes.

The FRC continued to actively monitor international developments in audit quality processes and assessed their potential impact on, and usefulness for, Australian practitioners and the financial reporting industry.

The FRC was supported by the FRC Audit Quality Committee in this process.

Stakeholder initiatives

Stakeholders, particularly ASIC and the professional accounting bodies, undertake a range of activities throughout the year with the objective of contributing to audit quality improvement.

Some notable initiatives during 2015–16:

  • ASIC released a revised Regulatory Guide 180 ‘Auditor Registration’ which simplifies and improves the regulation process for prospective auditors, including approval of a new competency standard or satisfying practical expertise requirements.
  • ASIC issued Information Sheet 196 ‘Audit quality: The role of directors and audit committees’ to assist directors and audit committees in their role in supporting the quality of the external audit.
  • Chartered Accountants ANZ issued updated guidance on ‘Audit and Review Requirements for Australian Entities’.
  • Chartered Accountants ANZ and CPA Australia both issued updated guidance on auditing small entities, and auditing Self Managed Superannuation Funds (SMSFs).
  • CPA Australia issued a revised guide for Companies Limited by Guarantee and Incorporated Associations reporting and audit/review obligations.

Review processes

Australia’s auditor regulatory regime involves cooperation between ASIC and the professional accounting bodies. Each organisation runs an inspection or review program which encompasses audit engagements. Each of the programs are different and complementary to manage different risks, participants and types of engagement and to maintain a focus on audit quality. Accordingly, statistics gathered by each organisation may not be comparable.

ASIC Audit Inspection Program

In December 2015 ASIC issued Report 461 ‘Audit Inspection Program Report for 2014–15’ outlining the findings from its inspections of 21 Australian audit firms undertaken in the 18 months to 30 June 2015, covering financial reports for the years ended 30 June 2013 to 31 December 2014. ASIC’s inspections focus on audits of financial reports of public interest entities under the Corporations Act.

In ASIC’s view, in 19 per cent of the total 463 key audit areas that ASIC reviewed across 111 audit files at firms of different sizes, auditors did not obtain reasonable assurance that the financial report as a whole was free of material misstatement.

This compares to 20 per cent of 454 key audit areas in the previous 18-month period ended 31 December 2013.

The level and nature of ASIC’s findings are consistent with those of audit regulators in other jurisdictions, as reflected in the inspection findings survey results published by the International Forum of Independent Audit Regulators (IFIAR) on 3 March 2016.

ASIC Report 461 stated that some, mostly smaller, audit firms inspected by ASIC need to further improve their quality control systems. For larger firms, ASIC’s findings generally related to adherence to existing quality control processes.

ASIC’s audit inspection work complements its separate risk-based surveillance of the financial reports of public interest entities. This financial reporting surveillance has led to material changes to four per cent of the financial reports of public interest entities reviewed by ASIC.

ASIC’s inspections suggest that the following three broad areas continue to require improvement by audit firms:

  • the sufficiency and appropriateness of audit evidence obtained by the auditor
  • the level of professional scepticism exercised by auditors
  • appropriate use of the work of experts and other auditors.

Many of ASIC’s findings related to accounting estimates (including impairment of assets) and accounting policy choices.

Chartered Accountants ANZ Quality Review Program

The Chartered Accountants ANZ Quality Review Program is designed to assess whether Australian members who hold a Certificate of Public Practice have implemented appropriate quality control policies and procedures in their practices.

The overall results from the Chartered Accountants ANZ Quality Review Program for the reviewed practices are summarised in the table below:

  2014/15 2015/16
No departures from professional standards 3% 3%
Departures from professional standards,
not classified as significant — issues to be addressed
80% 78%
Significant departures from professional standards
— re-review required in 12 months
17% 19%

During the year, Chartered Accountants ANZ reviewed 1,233 engagement files across all practice areas (2014/2015: 1,414).

The 2016 reviews revealed that the majority of reviewed practices had adequate quality controls in place. The majority of re-reviews were a result of inadequate quality control or insufficient documentation of audit evidence, or a combination of both.

CPA Australia Quality Review Program

CPA Australia members who hold a Public Practice Certificate are subject to the CPA Australia Quality Review Program.

CPA Australia expected, in the 2016 calendar year, to review over 1125 members in the Quality Review Program and a further 78 ‘Follow-up’ reviews.

The results from CPA Australia Quality Review Program for the past four years are summarised in the table on page 21.

These statistics are showing a positive trend over the past few years, with the percentage of ‘Follow-up’ reviews required, due to multiple departures or beaches of standards, falling over 8 per cent in 4 years.

The improvement was matched primarily by increases in ‘Accept’ reports, where no departures were identified.

The overall results from CPA Australia Quality Review Program are summarised in the table below:

  2013 2014 2015 2016
‘Accept’ reports —
no departures identified
18.92% 26.6% 27.1% 30.3%
‘Minor departure’ reports —
no serious departures identified
65.44% 56.8% 62.4% 62.3%
'Follow-up' reviews —
multiple departures
15.64% 16.6% 10.5% 7.4%

Whilst CPA Australia welcomes improvements in audit quality, it will be necessary to observe the trend over a longer period before drawing any conclusions as there have been some procedural changes which may have impacted the statistics reported.

The majority of all auditing breaches identified by the CPA Australia Quality Review Program relate to audits of SMSFs. Further education has been provided to members about the importance of perceived and actual independence, particularly with compilation and audit engagements, for SMSFs.

IPA Quality Review Program

The IPA requires all members who are issued with a Certificate of Public Practice to undertake a Public Practice Quality Assurance review every three to five years. In the last financial year, the IPA undertook a review of over 600 members in public practice.

Results were:

  • 94 per cent of members reviewed met all professional standards and requirements and may have had minor non-compliance issues however they were resolved before the review was finalised. This is an improvement on last year’s results.
  • 6 per cent of members reviewed showed a level of non-compliance where follow up action was required.

FRC overall view

During 2015–16, the FRC considered that the current Australian audit quality framework continued to be robust and that it was not necessary to propose changes to the Minister at this time.

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