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Audit monitoring: telling the story

Author: Professional Standards Department

Published: 23 Feb 2022

ICAEW’s audit monitoring report for 2020/21 shows most firms reached a good standard. But it also flags areas for improvement, highlights how root cause analysis can boost performance, and urges firms to tell an audit story.

As a Recognised Supervisory Body for audit, ICAEW monitors the work of firms of all sizes, from sole practitioners to the Big Four. The Quality Assurance Department’s (QAD) latest report covers monitoring reviews carried out during the 15 months to 31 March 2021, which includes the first year of the COVID-19 pandemic.

“ICAEW quality assurance reviewers continued to see many examples of robust audit work, with 76% of audits satisfactory or generally acceptable,” says Rama Krishnan, Chair of ICAEW’s Audit Registration Committee (ARC).

“We’ve now seen a some of the work that auditors were doing during the pandemic,” adds Nick Reynolds, Senior Manager Quality Assurance, ICAEW. “And so far we’ve found that audit quality has remained stable, which is very positive, given the challenges that firms have faced.”

“There also seems to be some indication of a continuation of a longer term trend where the number of files where we consider that significant improvement is required is falling.”

Areas for improvement

The report identified three areas where audits could be improved:

  • Evidence
  • Documentation
  • Identification and assessment of risk

In some cases, there was not enough evidence shown to support the conclusions of auditors, or sufficient documentation to explain complex information. In other cases, firms did not properly consider whether circumstances could arise which would present a risk to audit quality.

“The most common issues we find during reviews remain similar year on year,” says Reynolds. “And this is unsurprising in that these three – evidence, documentation and risk assessment – are the cornerstones of every audit.”

Cases referred to the ARC show that some audit firms need to improve how they explain the rationale behind their thinking. “One frequent issue we see is where firms prepare audit files which lack any, or sufficient, evidence to support key judgements made by management in the financial statements,” says Krishnan.

Good practice in this area typically tells the story of an aspect of the audit. “There is some really good practice out there when it comes to documenting complex matters and judgments,” explains Reynolds. “It’s about telling the story of how the auditor has gone about assessing those judgments, and documenting whether, how and why they've done things.”

This approach doesn’t fit well into a standard audit checklist, and therefore usually requires a separate record on the file. “But when firms take that approach, they're really giving themselves the best chance to show how well they've done the audit,” stresses Reynolds. The audit partner or manager, and any later external audit file reviewer, will have less need to ask questions about the work completed or assessment of evidence.

Root cause analysis

The latest monitoring report also highlights the role of root cause analysis (RCA) – drilling down and asking in-depth questions about why things went wrong – to improve the identification and correction of problems, and ultimately stop them happening again.

“While root cause analysis is still a relatively new concept for all except the largest accountancy firms, it provides the ARC, and the firms themselves, with an important insight into where things are going wrong and where improvements need to be made,” says Krishnan.

“RCA is a really important thing for all firms to start to get familiar with because it's going to become an integrated part of firms’ implementation of International Standard on Quality Management 1 (ISQM1) in 2022,” emphasises Reynolds.

This doesn’t represent a radical new approach, but rather formalises what many firms are already doing. There is no prescribed format for RCA. For a sole practitioner or small firm, it might be as simple as asking a few targeted questions.

“It needn’t be daunting for smaller firms,” says Reynolds. “If they give themselves the time, they should be capable of doing that sort of RCA and looking back objectively, thinking about what went wrong and talking to their team.”

“The 2020/21 report includes four case studies of RCAs of what firms found when they looked into the factors behind a number of audits that hadn't been done as well as they should have been,” he adds. “These should help inspire some firms that have been unsure about RCA to look at what other firms are doing and what they found.”

Digging deeper

When reviewers looked at a sample of RCAs carried out by firms on audits that required improvement or significant improvement in 2020, they found the root causes for the main failings were remarkably similarly. The most common were a lack of knowledge, either of what was required by the International Standards on Auditing or by accounting standards; flaws in the design of audit tests; and inadequate review by the manager or audit partner.

“One of the root causes that we fairly often see, and which comes up in one of the case studies, is that the firm didn't have enough knowledge and hadn't done enough CPD in a certain area,” says Reynolds. “When this is the case, the firm probably needs to delve further and look at why there hasn't been enough CPD, and why no one recognised this failing before it was discovered by our reviewers.”

Firms should be picking up topic areas that are important in their audits, and ensuring their training is effective. “It's easy to go on courses,” says Reynolds. “What’s important is whether the outcome is what you expect and whether the training and knowledge people come away with is effective.”

Virtuous circle

Since early 2020, QAD has asked firms to build an element of RCA into their responses to visit findings. Firms might not always come up with the right (or complete) answer to their RCA every time but as the process becomes part of the ongoing system of quality management from December 2022, they will be expected to use it to support audit quality.

“We expect it to develop over the years, so that ultimately it becomes a virtuous circle of continuous improvement,” says Reynolds.

This year’s monitoring report should prompt firms to challenge themselves on whether some of the risks to audit quality identified might be present in any of their audits. It also provides some good practice pointers and a useful starting point for firms to learn more about RCA.

“We’re pleased that quality remained consistent in a climate where auditors had to find new and innovative ways of working because of the pandemic,” concludes Krishan. “But there is still work to be done for audit quality to increase in some cases, and we want to see firms focus on professional scepticism and their use of documentation to drive improvement.”


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