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ICAEW Audit Monitoring Report 2021/22

19 Jan 2023

The ICAEW’s Quality Assurance Department (QAD) have recently published their Audit Monitoring Report giving feedback on the audit file reviews they conducted in the year to March 2022. If we pick over the bones, we can see that out of 555 visits;

  • 80% were closed without follow-up action,
  • 14% required some ‘follow-up action’, and
  • 6% were referred to the ARC (Audit Registration Committee).

‘Follow-up actions’ include mandatory external hot reviews on all audits, prohibition from accepting new audit appointments and, in the extreme, possible sanctions on the firm / individuals and/or regulatory (financial) penalties.

The monitoring report identifies the following areas for improvement. These are based on the most significant issues raised on audit monitoring visits, categorised into areas that contribute to audit quality risks or identified weaknesses in audit quality.

Noted area for improvement (QAD)

20:20 Innovation viewpoint

Audit planning and risk assessment (conduct of work)

Limited knowledge about the client and its activities, processes and controls can result in firms not adequately addressing the risk of fraud arising from management override of controls and audit procedures being poorly designed and sometimes inappropriate. A lack of consideration of risk can also result in over-auditing in some areas.This is very topical in view of the new ISA (UK) 240 and ISA (UK) 315 Standards effective for periods commencing on or after 15 December 2021.

Audit evidence (conduct of work)

A range of issues arise including: · The QAD being presented with an accounts’ preparation file with virtually no evidence of audit work; · A lack of consideration of (often material) asset valuations and existence – whether freehold property or an investment in a subsidiary; · Insufficient procedures over income and expenditure; and · A lack of consideration of the use of service organisations by the audited entity. The report notes that evidence may come from: · Assessment of a third-party valuer and the assumptions applied; · Recent similar transactions or a subsequent sale of the asset in question; or · The auditor’s development of their own estimate of valuation to compare to that of the entity.Audit work needs to evidence sufficient scepticism and challenge of the client. Corroborating client representation / evidence and crucially documenting this corroboration will help raise the quality of audit work.

Going concern (conduct of work)

Recent changes to ISA 570 require a positive statement on the appropriateness of the going concern basis in every audit report. The QAD see firms that have done insufficient work to evaluate and challenge material uncertainties over audited entities’ forecasts and assumptions underlying going concern. The judgements and complexity of this aspect of auditing will continue to be challenging for all firms, as audited entities are now grappling with difficult economic factors including increasing inflation, interest rates and energy costs.This is a critical and wide-ranging area. Regulatory problems arise where there is a lack of alignment between the audit report, accounts disclosure and audit file! For example, we see cases where the audit report includes a ‘material uncertainty related to going concern paragraph’ which is supported by the evidence on the audit file, yet the accounts do not adequately disclose the material uncertainty.

FRC Ethical Standard

The monitoring report notes that significant ethical issues are rare but, when they occur, they are of critical importance in the assessment of audit quality as they can call into question the fundamental independence of the audit firm and those working on the audit engagement.Complacency when planning audits can and does lead to oversight. Diligent completion of checklists with sufficient detail recorded will guard against such oversight, along with a consistent approach towards recording and communicating ethical matters at planning. Note that ethical breaches must be reported to the firm’s regulatory body on a biannual basis!

Whole firm procedures

The monitoring report notes that as firms grow, they are increasingly dependent on strong whole-firm procedures to monitor and control the quality of audit work across multiple audit teams and locations. Even the smallest firms will require some key policies and procedures to ensure that their audit practice remains up to date. CPD is important for all those involved in audit work. Cases continue to be reported where little or no CPD has been undertaken by the RI over a number of years and/or no monitoring of CPD completed by sub-contractors and staff involved in audit. These gaps go hand-in-hand with poor quality audit work.This is a high priority area in view of the mandatory implementation of the new International Standard on Quality Management (ISQM) as of the 15 December 2022 – see below ‘what to expect in 2023’! We will also see enhancements to the ICAEW’s CPD policy from 1 November 2023. This will include a mandatory ethics requirement and, in some cases, minimum verifiable hours requirements.

What to expect in 2023

International Standard on Quality Management 1 (ISQM1)

  • Firms should have designed and implemented their system of quality management (SoQM) by 15 December 2022;
  • The implementation should not be seen as a one-off exercise, but rather an iterative process (therefore scope for improvement over time);
  • Firms must perform an evaluation of the SoQM by the 15 December 2023;

It is confirmed that all ICAEW monitoring visits from January 2023 will include a review of the implementation of ISQM 1. The review will consider how the firm approach the risk assessment process, the proposed responses to both mandatory quality objectives and broader identified risks and how the firm has updated its policies and procedures and communicated these!

How we support you at 20:20 Innovation

CPD and Training – Our 2023 webinar programme has been carefully planned with the above in mind, with devoted ‘Auditing and Accounting’ and ‘Ethical Considerations’ sections. Our membership model and pricing helps our clients deliver quality training to their entire team while keeping their costs low.

File Reviews – We are now building our internal technical team and able to support your firm with a broad range of compliance activities including audit cold and hot file reviews, ISQM support and Engagement Quality Reviews. Find out more here.

  • Tip – We’ve currently got good availability for this Spring, but diaries are filling up quickly. Our flexible cancellation policies (no commitment until 1 month before the file review date) make it a no brainer to pencil time in with us for all of your 2023 support now.

In-house training – Talk to us about running a short session for your audit team on the key issues above, along with practical steps to take to ensure compliance, audit quality and efficiency.