Audit quality improves but inconsistencies persist - FMA report

Media release
MR No. 2019 – 58
18 November 2019

Audit quality has broadly improved again but auditors continue to apply standards inconsistently, the FMA’s annual Audit Quality Report 2019 has found.

The annual review is part of a three-year monitoring cycle of licensed auditors. Each of the audit firms reviewed for this report have been reviewed previously and the FMA found most auditors had made improvements.

The improvements noted and most of the recurring issues were consistent across firms - there were no significant differences in audit quality between firms.

The FMA also noted several issues from previous years re-emerging this year: auditor independence, related party transactions and the way auditors reviewed the disclosure of accounting estimates.

One of the key purposes of an audit, under the relevant standards, is to provide an independent view of whether financial statements are prepared in accordance with the accounting standards. 

The FMA continues to raise issues with independence. Following two previous referrals to the disciplinary body of New Zealand Institute of Chartered Accounts (NZICA), one independence breach investigation has been concluded and one matter is still being considered.

The auditing standards require auditors to obtain sufficient evidence regarding the accuracy and completeness of disclosure of related parties and related party transactions in the financial statements.

“There was little evidence of professional scepticism being applied when reviewing these types of transactions and, in particular, little challenging of management assertions that the transaction has been made at arm's length,” the report said.

With accounting estimates, in some cases, auditors did not sufficiently challenge the methods and assumptions used by third-party experts to estimate a company’s financial outlook.

Other areas requiring attention included company directors’ fulfilling their responsibilities in the context of the audit, auditors’ response to fraud risk, and the auditing of credit unions.

Rob Everett, FMA Chief Executive, said: “While the incremental improvement in overall audit quality is positive and is important to recognise, the issues we’ve seen — within and outside the sample in this annual review — tend to repeat. FMA surveys and a range of international reviews demonstrate that the industry needs to work hard to build confidence amongst the users of audit work both as to audit quality and to the independence of audit.

“The audit industry has come under intense scrutiny recently, both internationally and in New Zealand, following several high-profile company failures or surprising announcements to the market. While these cases were not part of our sample in this year’s audit quality review, we’re watching how the audit industry is responding to these issues.

“Directors and company management also need to step up, as they are responsible for maintaining good accounting records, providing auditors with high-quality information and ensuring audit is given sufficient time and resources to do an effective job.”

To coincide with the release of the report the FMA has published an investor guide to show how good quality audit helps provide better financial reporting information.

The FMA director’s guide to Audit Quality has also been updated.

ENDS

Notes:

Under the Auditor Regulation Act, the FMA’s role overseeing auditor quality is restricted to examining the audit files of Financial Markets Conduct Act reporting entities, such as companies listed on the NZX and managed investment funds.

The FMA reviewed six registered firms and 27 audit files for this year’s report. The files were from audits of nine listed companies and 18 FMC Act companies and were chosen on a risk-basis.

• The majority of the 27 files had no substantial errors and met audit standards.
• For 9 files we found issues in certain areas that meant the files were non-compliant.
• Of these 9 files, 2 resulted in material misstatements where financial statements had to be restated.
• Four resulted in further work for the audit firm.
• None of the file reviews resulted in referrals to CAANZ for further investigations.

Media contact:

Campbell Gibson
021 945 323
[email protected]

Related

Reports and papers: Audit Quality Monitoring Report

Guidance library: Audit quality - a director's guide

Resources: Investors’ guide to auditing