THE IRBA REPORTS ON AUDIT INSPECTIONS FOR 2014/2015

THE IRBA REPORTS ON AUDIT INSPECTIONS FOR 2014/2015

The inspections process of audit regulators and oversight bodies, internationally, are an essential element in terms of monitoring, maintaining and improving audit quality. In South Africa, inspections of audit firms and audit engagements are performed by the Independent Regulatory Board of Auditors (IRBA) as part of discharging its statutory responsibilities in terms of the Auditing Profession Act.

The IRBA’s latest Public Inspections Report 2014/2015: Striving for Consistent, Sustainable High Audit Quality was released in December 2015. It documents inspection findings identified during the financial year concerned and acknowledges that audit quality requires improvement in identified areas.

Imre Nagy, IRBA Director – Inspections, provided the following overview and perspectives regarding the reported inspection results.

The IRBA Inspection Committee reported on 37 audit firm and 375 audit engagements inspections for the year. Most firms showed one or more deficiencies, including in the areas of ethics (independence), engagement performance and monitoring (EQCR and engagement monitoring reviews) which require improvement. A significant number of individual audit engagement files also showed deficiencies that need attention. A total of 16% of firms and 6% of engagement partners were referred to the Investigating Committee of the IRBA due to fundamental or continued noncompliance with international auditing and financial reporting standards, professional codes and legislative requirements. The report also emphasises the need for audit firms to address ethics and independence matters, in particular ensuring compliance with Section 90(2) of the Companies Act (for additional guidance auditors should refer to the join IRBA/SAICA Guide on the provision of non-audit services by the auditor of the company – Section 90 of the Companies Act, No. 71 of 2008, issued on 17 March 2015).

The IRBA adopted a risk-based inspection method that is biased towards higher-risk audit areas and specific risk indicators. This means any deficiency in these areas could potentially create risks to the public, if not appropriately responded to by the auditor. The risk-based approach also assists the IRBA to focus on those identified areas where deficiencies are likely. An assessment that an audit is unsatisfactory does not necessarily mean that an inappropriate audit opinion was expressed, the financial statements were misstated, or there has been misconduct on the part of the firm or registered auditor.

The IRBA has implemented a Remedial Action Process that is aimed at assisting those firms and practitioners who have shown deficiencies in their firm’s quality control policies and procedures or audit files. During this process, the IRBA remains aware of its independence. The Remedial Action Process is part of the IRBA’s commitment to promote consistent sustainable high audit quality by ensuring that audit firms and practitioners promptly address the root causes of significant inspection deficiencies that have been raised during an inspection. Through this more formal process, practitioners and firms are required to submit a root cause analysis and an action plan now on how they will address reported deficiencies and improve their audit quality. In addition, they have to submit a written undertaking that acknowledges that they will address all significant audit quality deficiencies that were reported to them.

The IRBA’s aim is to encourage appropriate corrective action by communicating and engaging more with affected firms and practitioners, providing them with an opportunity for the best possible outcome during their re-inspection. Those firms that identified the root causes and implemented appropriate remedial action plans were found more likely to be satisfactory upon re-inspection.

High-quality auditing and accounting are not only essential for reliable financial reporting, but are also critical in protecting the public interest and boosting investor confidence. In fact, compliance with auditing standards, ethics, financial reporting standards and legislative requirements is fundamental in ensuring a reliable profession that can effectively compete internationally.

To some extent, the role that the IRBA plays in, not only regulating the industry, but also constantly improving the standards, is the reason South African was ranked first in the world out of 140 countries for the strength of its auditing and reporting standards, for six consecutive years, in the World Economic Forum’s Global Competitiveness Report 2015 – 2016 rankings.

The auditing profession is one of the few professions that are inspected on a regular basis. Inspections and regulation are not only critical to ensure that the highest standards are maintained in a profession, but also to provide the public and investors with the confidence that they can rely on the work of auditors. Confidence stimulates investment, and investment creates employment and growth.

Reference:

SAICA Small and Medium Practice Newsletter – First Quarter 2016