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How to avoid a hot review of all your audits

With a quarter of audits reviewed by ICAEW requiring further action, and nearly one in 10 in need of significant improvement, Julia Penny sets out where the common pitfalls lie.

"JuliaPenny"
Julia Penny

August 2018

ICAEW issued its latest audit monitoring report in June. While 76% of the reviews needed no regulatory action, that means that 24% of the reviews did require further action and of these 8% of the audits reviewed required significant improvement.

Careful consideration of the ICAEW report can help to ensure you don’t find yourself among the list of firms having to get a hot review of every audit you do, or other enhanced monitoring measures, so let’s look at a brief summary of the findings.

Audit shortcomings

The areas of audit work in which particular problems were found were with regard to:

  • ISA 500 audit evidence;
  • ISA 230 audit documentation; and
  • ISA 315 Identifying and assessing the risk of material misstatements through understanding the entity and its environment.

This is no surprise, as of course these are the standards that have the most significant impact on every audit. However, drilling down a little further, audit evidence problems were regularly around:

  • Completeness of revenue;
  • Ownership;
  • Rights and obligations relating to fixed assets; 
  • Stock/Work In Progress valuation; and
  • Areas of professional judgment, such as goodwill and intangibles.

Mistakes are also still found with the use of sampling, for example taking a sample from only a restricted population, such as looking at old debtors to consider a doubtful debt provision, rather than all debtors.

A lack of consideration of going concern, or sufficient robustness of this, was also sometimes a problem. The auditor must be able to demonstrate that it has challenged management’s forecasts especially when the assumptions contradict other evidence, such as recent losses not being expected in the future.

Ethics

While it was too early to look fully at the implementation of the new ethical standard, some issues were identified and there were still problems seen in complying with the previous rules. These centred around trustee ownership, where a partner for example, holds shares in an audit client through a trust. Careful consideration of the precise situation must be made, as often there will be no independence of the firm where this happens.

Do read the rest of the report though.

Julia Penny FCA is London ICAEW Council Member and Technical Director at SWAT UK @JSPenny

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