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Deloitte fared worst in the commission’s 2021–22 report while EY came out at the top — again.
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ASIC finds rise in audit issues focused on revenue, assets
01 November 2022
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ASIC has blamed problems with audits of revenue and asset valuations for an increase in negative findings in its inspection report for 2021-22.
Negative findings rose to 36 per cent from 32 last year and ASIC called on the sector to focus on improving audit quality by examining best practice case studies in the report.
“Audit inspections are designed to promote audit quality and high-quality financial reports,” said ASIC commissioner Sean Hughes.
“ASIC encourages audit firms to continue to focus on improving audit quality, which will in time improve the overall level of findings.”
The case studies run through correct practice in areas that ASIC determined as the source for most negative findings.
“For the first time our report includes two case studies of good practice in the areas of the audit of revenue and the audit of asset values and impairment of non-financial assets,” said Mr Hughes.
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“These are areas where we have historically had large numbers of negative findings.”
“We expect these case studies will help auditors to improve their audit processes in these areas.”
Most relevant to its concerns over the audit of asset values and impairment of non-financial assets were forecast cash flows, 38 per cent, other key assumptions, 21 per cent, and expense capitalisation, 17 per cent.
For the audit of revenue the matters which contributed to the high levels of negative findings were tests of details at 37 per cent, internal controls work at 20 per cent, and risk assessment procedures at 19 per cent.
Of the six largest audit firms Deloitte had the highest proportion of negative findings from reviews of key audit areas at 50 per cent.
KPMG and Grant Thornton were close behind at 48 and 44 per cent respectively, while the best of the six were EY, PwC, and BDO with 15, 17, and 20 per cent negative findings from reviews of key audit areas.
EY came out top for the second year in a row although its performance declined following just 7 per cent negative findings for 2020–21.
ASIC said despite the increase in negative findings it took some of the blame for the rise.
“The increase in negative findings is potentially due to our focus on a small number of high-risk audits and higher risk key audit areas within these audits, inclusion of audits of large unlisted entities and the impact of COVID-19 conditions,” said the report.
To improve the quality of audits ASIC said in its report that it expected audit firms to:
- Identify root causes of negative findings from effective internal quality reviews of audits, its audit inspections, and material changes to audited financial reports
- Develop and implement action plans to address the identified root causes
- Monitor and revise action plans to ensure they are effective
The commission also confirmed that effective December it will require all audit firms to perform root cause analysis.
For the report, ASIC reviewed 146 key audit areas across 45 audit files at 14 firms in the 12 months leading up to 30 June 2022.
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