The findings in ICAEW’s annual Audit Monitoring Report always provide opportunities for firms to improve audit quality and the report on the 2020-21 review cycle carried out by ICAEW Quality Assurance (QAD) is no exception.

The Audit Monitoring Report 2020/21 identifies areas where audits can be improved, examines root causes of issues that were identified by QAD during file reviews and shares some insightful and informative case studies, along with other material, to help firms target areas of weakness and adopt best practices.

Areas of weakness

The main areas where QAD reviews most commonly find weaknesses tend to be consistent from year to year. They are: evidence; documentation; and identification and assessment of risk. “This is only to be expected, as these three areas are central to every audit engagement,” says Trevor Smith, QAD Director, and in order to properly address these areas of weakness on audits, firms need to understand why they occur.

“Dealing with the symptom alone may address the immediate issue, such as a review finding,” says Smith, “but identifying and addressing the underlying or root cause is likely to be a far more effective way to reduce future recurrence and bring lasting improvements.”

This latest audit monitoring report digs deep. After reviewing a sample of root cause analysis (RCA) conducted by firms, QAD analysed this with a focus on audits that required improvement or significant improvement in:

• risk assessments at the planning stage of the audit;
• the extent of audit evidence obtained;
• the level of documentation; and
• the degree of disclosure within the financial statements.

Root causes

“Firms cited similar root causes for these failings,” says Smith, with the most common being:

• lack of knowledge of relevant auditing and accounting standards;
• flawed design of audit tests; and
• lack of review by senior members of audit engagement teams.

The number of disclosure errors caused by a lack of knowledge of the UK Financial Reporting Standard (FRS) 102, or by failing to use disclosure checklists regularly, was a concern for QAD and it should concern audit firms too.

The report from QAD includes four RCA case studies focusing on: lack of knowledge in an audit engagement team; flawed design of audit tests; inadequate review; and lack of knowledge of accounting standards.

There are some key points for all firms from the RCA findings that QAD reviewed:

• Risk assess your audit portfolio – do you and your staff have the necessary training and knowledge to deal with more complex audits, including group audit situations and contract accounting?
• Ensure sufficient resources for effective manager and partner review – the manager and partner should bring a depth of experience and eye for detail to identify errors and mistakes that even the most experienced staff will make from time to time. It is much easier to identify issues if you have not been involved in the detail of the work performed.
• Review procedures and ‘things that you do’ to assess whether they are effective in addressing potential quality risks. It may not be necessary to complete an accounts disclosure checklist annually, but you certainly need to do so when transactions or developments at your client result in new disclosure requirements.

Although there is nothing new about RCA, its use across audit firms is not as widespread as some other sectors and many auditors will not be familiar with the practice – yet. This is going to change over the next year or so, as RCA will be a component of all firms’ implementation of the new International Standards on Quality Management.

As well as getting an introduction to RCA and its potential through the Audit Monitoring Report 2020/21 and its case studies, auditors can access specialist resources from the faculty.

Good practices

Aspects of the quality monitoring report that focus on weaknesses can be used by firms to challenge themselves about whether the same factors may present a risk to audit quality on some of their audits. But QAD also shares insights from its audit quality review findings that offer a more positive route to improvements in audit quality.

“Increasingly, we are able to highlight and share good practice examples with the audit firms that we review,” says Smith. “Examples of good practice on particular audits can be used by the firm as a case study or example of how to approach or document a particular area of the audit, for others in similar circumstances,” he explains, while emphasising that good practice examples are not necessarily templates to be used on other audits.

Just as documentation can reveal areas of weakness in an audit, it can also reveal examples of good practice. “In our role reviewing audit files, many good practice points are identified through the quality of the audit documentation,” Smith explains. For example, it is often the case that work that represents good practice typically tells the story of an aspect of the audit. Typically, in such instances the auditor clearly explains:

• the identified audit risks;
• how and why the auditor approached the audit issue as they did;
• what they discussed with management;
• what alternative circumstances they challenged management with;
• the evidence that they identified and evaluated to support or contradict the position; and
• their reasoning behind the final conclusion.

This is not something that can easily be achieved with a ‘tick box’ approach to audit. “This kind of best-practice documentation seldom fits into a standard audit checklist and requires some separate record on the audit file,” says Smith. But it repays the effort. “If it is done well, the audit partner and manager, and any later external audit file reviewer, will have no need to ask questions about the work completed, assessment of evidence or challenge of management.”

Pointers on good practices in documentation can be found by looking back at QAD’s earlier annual monitoring reports, too. The Audit Monitoring Report 2020, for example, offers examples of good practices that can enhance documentation and the quality of audit files. They include:

• a highlights summary for each key section of the audit file;
• summary working papers identifying relevant assertions with links to detailed audit work;
• detailed step-by-step templates to drive consideration of all relevant factors in complex areas;
• clear cross-referencing from programmes and checklists to the underlying audit work;
• memoranda covering areas of judgement, including evaluation of contradictory or conflicting evidence, detailed evidence of challenge of management, and a clear trail to support the conclusion; and
• use of freeform planning documents to supplement standard planning templates and checklists.

Audit Monitoring Reports can be found along with other resources, such as Audit Regulations and Guidance.

Education, education, education

The Audit Monitoring Report 2020/21 reveals a lack of knowledge of relevant auditing and accounting standards as a “root cause” of some of the commonest weaknesses in audit, and reminds firms of the importance of training and continuing professional development (CPD) as the foundation of good audit work.

ICAEW audit firms have a responsibility under the Audit Regulations to train and develop their staff, applying ICAEW professional development guidelines including the ‘reflect’, ‘act’, ‘impact’ approach.

The QAD report also reminds audit partners of the need to plan their CPD activities in line with International Education Standard 8 as did an Audit & Beyond article.