In this article, we analyse the results of the IRBA’s Public Inspections Report 2019 against those reported in previous years, as well as against the International Forum of Independent Audit Regulators’ (IFIAR) Survey of Inspections Findings 2019. We also highlight success factors or recommended practices to be applied by firms in order to ensure the performance of high-quality audit.
SAICA welcomes the release of the Independent Regulatory Board of Auditors’ (IRBA) Public Inspections Report 2019 as we believe that the Inspections Report intends to enhance both audit quality and transparency in the auditing profession. The Inspections Report summarises the findings from 14 firm reviews and 102 engagement file reviews performed by the IRBA’s Inspections Department and reported on from April 2018 to March 2019. The Inspections
Report focuses on key deficiencies identified and reported on by the IRBA through its inspections process.
The IRBA performs two types of inspections: inspections of firm-wide systems of quality management and inspections of individual assurance engagement files. The objective of a firm-wide inspection is to monitor the firm’s compliance with the current standard of quality control, International Standard on Quality Control 1 (ISQC 1), Quality control for firms that perform audits and reviews of financial statements, and other assurance and related services engagements. An engagement file inspection is conducted to monitor individual auditors’ compliance with applicable professional standards, the Code of Professional Conduct and legislation in the performance of assurance work.
A pleasing addition to the Inspections Report is the IRBA’s observations in terms of success factors implemented at certain firms to overcome common inspections findings, following a firm’s robust remedial action process with the IRBA.
Review of the findings
The IRBA’s seventh inspections cycle introduced a new way of reporting inspection results. Previously, an inspection yielded a ‘satisfactory’, ‘unsatisfactory’, ‘referral’ (for investigation) or ‘conditional’ result, based on certain specified actions that the practitioner and/or firm needed to implement. The new method of reporting includes the following outcomes:
- No further action required – this is similar to the previous ‘satisfactory’ result
- Some improvement required – similar to the previous ‘conditional satisfactory’ result
- Significant improvement required – similar to the previous ‘unsatisfactory’ result
- Referral for investigation, with significant improvement required – remains unchanged, and
- Pending, to allow for additional information to be obtained by inspectors before determining a final result
The sections below include a five-year trend analysis of the inspections results at both firm level and engagement level.
The Inspections Report shows an increase in the ‘significant improvement required’ (previously ‘unsatisfactory’ result) outcome compared to 2017/18. The Inspections Report also reported a decline in the number of firms referred for investigation. The graph in figure 1 depicts the firm-wide quality management inspection results over a five-year period.
In the 2018/19 period, there has been a 55% decrease in the number of firm-wide inspections with an outcome of ‘satisfactory’ result. The only other period recording worse results is the 2015/16 period where only 15% (2018/19: 29%) of the firm-wide inspections conducted had a ‘satisfactory’ result.
At firm level, most of the deficiencies identified relate to the engagement performance component of ISQC 1. This is consistent with the IFIAR Survey where the engagement performance theme had the highest proportion of findings. 43% of the firms reported on in the IFIAR Survey had at least one finding in this component.
Engagement file inspection findings
There has been an increase in the number of engagement files with deficiencies at engagement level in the Inspections Report. This is contrary to the positive trend that has been identified in the IFIAR Survey where there was an improvement in the number of listed public interest entities (PIEs) with findings.
This signifies that there are significant improvements that the firms still have to make in order to improve quality at the engagement level. Also, given that the engagement performance theme has the highest proportion of findings at firm level, this could point to systemic issues that need to be addressed at firm level and then filtered down to engagement level. It is therefore crucial that firms scrutinise their policies and procedures at firm level to ensure that these deficiencies are addressed appropriately. In this regard, we urge firms to look at the success factors or recommended practices included in the Inspections Report as these could assist firms in addressing some of the deficiencies.
The graph in figure 2 depicts the engagement file inspection results over a five-year period.
It is concerning that 41% (2017/2018: 32%) of the engagement files inspected were identified as requiring significant improvement (previously unsatisfactory result). What is also concerning is that 22% (2018:14%) of the engagements inspected were referred for investigation. This seems to suggest that the quality of audits being performed is deteriorating. Contrary to the Inspections Report, the IFIAR Survey paints a positive picture in reporting a decrease in the number of engagement file inspections findings identified.
Table 1 shows the percentage of audit engagements with at least one finding as reported in the IFIAR Surveys since 20143.
There has been a significant improvement in the IFIAR findings since the results were first analysed in 2014 – from 47% in 2014 to 33% in the 2019 survey.