The International Forum of Independent Audit Regulators released a new report Tuesday showing continuing high levels of significant deficiencies in the audits of public companies by auditing firms around the world.

The recurrence of high levels of deficiencies in key areas of public company audits across the world demonstrates the need for audit firms to pursue initiatives to improve audit quality and the consistency of audit execution, according to the report.

IFIAR’s 2014 Survey of Inspection Findings found the highest number of audit inspection deficiencies in the areas of fair value measurement, internal control, and revenue, which count among the core building blocks of audited financial statements. The rate of deficiencies in these audited areas, measured as the percentage of all inspected audits for these areas, also is high:

• Internal control testing, 24 percent
• Fair value measurement, 20 percent
• Revenue recognition, 14 percent

For audits of systemically important financial institutions, including global banks and insurers, the survey found the highest number of deficiencies related to auditing of allowance for loan losses and loan impairments, internal control testing, and auditing the valuation of investments and securities.

“We continue to see high levels of inspection deficiencies in vital areas of public company audits,” said IFIAR chair Lewis H. Ferguson, a board member of the U.S. Public Company Accounting Oversight Board. “This is a problem for investors and stakeholders around the world.”

IFIAR’s Report on 2014 Inspection Findings Survey summarized a number of key inspection results from audits of public companies, including systemically important financial institutions, submitted by 29 IFIAR members from around the world.

The results came from inspection reports issued during the members’ most recent annual reporting periods that ended by July 2014.

The report found that 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.

Most of these findings are consistent with the results of IFIAR’s prior surveys, although the survey does not provide an adequate basis for year-over-year trend analysis of the quality of audit performance.

Inspection findings related to audit engagements found deficiencies in audit procedures indicating that the audit firm did not obtain sufficient appropriate audit evidence to support its opinion.

The findings identified areas where the auditor’s performance fell below the expected level of diligence to satisfy the public interest role the audit is meant to fulfill, and that the audit failed to provide the level of assurance about the financial statements that it purported to do and that is required by professional standards.

The 29 IFIAR member countries reporting 2014 inspection findings inspected 948 public company audits and found deficiencies in 47 percent. Seventeen IFIAR member countries reported 2014 inspection findings on audits of systemically important financial institutions. Those members inspected 148 financial institution audits, of which 41 percent had deficiencies.

IFIAR members also reported their impression as to whether audit quality in their jurisdictions had changed. While it is encouraging that almost 30 percent of the respondents observed overall improvement, IFIAR noted that this is offset by almost half of the respondents noting no significant overall changes, and by mixed observations by the other respondents. This underscores that further efforts are needed.

Consistency in execution of high quality audit is a priority of IFIAR members, as many audits today involve practitioners from network member firms in a number of countries. The audit of a multinational company may involve significant work performed by many, legally separate audit firms that operate as a network, often with a common name. Through IFIAR, audit regulators seek to coordinate their understanding and assessments of trends in and challenges to audit quality. Still, it is important to keep in mind that the level of deficiencies among individual regulators’ jurisdictions can differ significantly.

The findings discussed in the survey primarily come from inspections of audit firms affiliated with the six largest international audit firm networks, which are BDO International Limited, Deloitte Touche Tohmatsu Limited, Ernst & Young Global Limited, Grant Thornton International Limited, KPMG International Cooperative, and PricewaterhouseCoopers International Limited. IFIAR and its members will continue to discuss the findings with the networks and the individual member firms in pursuit of audit regulators’ mandates to improve audit quality.

In many cases, a regulator’s response to an inspection finding is to require the audit firm to perform additional procedures necessary to complete the audit satisfactorily.

Root-Cause Analysis Needed
IFIAR’s dialogue with the largest international audit firms has expanded all parties’ awareness of the need for deeper understanding of the causal factors of the underlying challenges to audit quality. This requires root cause analysis and responsive action.

“It is encouraging to see that root cause analysis is high on the agenda, both in the discussions at the global level between IFIAR and the networks comprising the Global Public Policy Committee, and within individual jurisdictions. I hope that the effects of the analysis of causal factors and the measures taken by networks and member firms in response to those causal factors will increasingly become observable in future surveys,” said IFIAR Vice Chair, Janine van Diggelen, Head of the Audit & Reporting Quality Division at the Netherlands Authority for the Financial Markets.

IFIAR believes that enhancing the professional skepticism of practitioners contributes significantly to quality financial statement audits and should be a high priority for audit firms, given the recurrence of audit deficiencies.

IFIAR is encouraging audit firms to consider initiatives to improve audit quality and the consistency of audit execution across their national firms and international audit firm networks. This includes reviewing staffing structures to ensure that sufficient and appropriate expertise and experience is available for increasingly complex entities and audits that require significant judgments.

Knowledge Sharing to Improve Audit Quality
IFIAR’s report is published as 163 inspectors from 43 of IFIAR’s members meet in London for a three-day workshop. The annual IFIAR workshop is a platform for knowledge sharing and collaboration in pursuit of its members’ shared objective of high quality audit performance. 

The workshops give audit inspectors the opportunity to address recurring, common findings and themes identified by the survey. The workshops help to create awareness among participants of common issues, for consideration in IFIAR members’ annual work programs and inspection approaches.

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