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QAD publish report on audit monitoring 2011

The Quality Assurance Department has recently published its second annual QAD report on audit monitoring activities.

During 2011, through visits, roadshows and conference calls, we had contact with over 1,000 of the 3,800 ICAEW registered audit firms. Although 69% of our 716 audit visits were closed without further action, our report highlights common areas of weakness we see in the audit files we review.

The most challenging audits tend to be those where the most important areas are not clear-cut and which involve considerable judgement. A good auditor will quickly identify these risks to their audit opinion, dealing with them through detailed audit work and robust challenge of their client. This is where professional scepticism is key; the objective challenge of assumptions and circumstances encountered during the audit is the foundation of the auditor’s role.

Substantive analytical review is one of the areas we focus on because it highlights the importance of professional scepticism. Substantive analytical review is difficult to do well; sometimes because it's not the most appropriate strategy, but also because the corroborative enquiries made to investigate variances need to reflect a high level of professional scepticism. Audit teams may obtain and document what appear to be reasonable explanations from management, but they sometimes appear to accept them at face value without doing further work to corroborate them.

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Audit Monitoring 2011.

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We found that our firms and the training providers were well prepared for the challenges of clarified ISAs when we started to review these audits in 2011. There are some common points that we raise – particularly on related parties and accounting estimates. Nevertheless, these are not fundamental weaknesses and we don't usually have doubts over the quality of otherwise sound audit work.

Firms need to have their own arrangements in place to monitor their compliance; effective cold file reviews are the first line of defence! We recommend that all firms consider whether external reviews would strengthen their quality control procedures.

For more on professional scepticism, clarified ISAs, and our audit quality project, read the full report, Audit Monitoring 2011.