I have written extensively over the years on the challenges currently faced by the auditing profession, largely because confidence in audit has been eroded due to the high-profile corporate collapses that have occurred in the last decade. Regulators such as the Financial Reporting Council (FRC) are taking steps to restore confidence in the profession and strengthen the standards to which auditors must work. But is this having the desired effect?
I've frequently commented that auditors often find the International Standards on Auditing (ISAs) difficult to work with in some respects -- especially auditors of companies at the smaller end of the scale (i.e. small to medium-sized entities). This is usually because of the 'think big first' approach to developing the ISAs as opposed to a 'think small first' approach. To a certain extent, the International Auditing and Assurance Standards Board (IAASB) has addressed this key challenge through the introduction of the International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (known as the ISA for LCE) which was published on 6 December 2023.
The ISA for LCE is unlikely to be adopted in countries such as the United Kingdom because the FRC have acknowledged they have an audit exemption threshold for small entities (it should be noted, however, that a 'small' entity does not necessarily mean it is a less complex entity). I suspect that the ISA for LCE will be a popular standard in countries which it is adopted, and I will be writing on this standard in the coming months.
This year will see me publish a book on the subject of auditing financial statements. Most authors of a book will claim that their book is 'no ordinary book' on whatever subject they are writing on. However, I can confidently state that this is 'no ordinary book on auditing'. Unlike traditional books on auditing and accounting, it contains real-life interviews with auditing practitioners which explore the challenges that they face when auditing financial statements. When I analysed the responses of the 60+ practitioners I interviewed, a common theme in the responses was that the ISAs (UK) are complex and not very 'user-friendly'. This can (and often does) result in auditors approaching an audit using standard audit programmes in a 'tick-box' fashion -- an approach that often results in audit work becoming deficient.
Today's challenges
Today's challenges are unsurprising in audit. Regulators and professional bodies frequently cite the following areas as being deficient:
- A lack of management challenge, particularly in areas of the financial statements that rely on significant accounting estimates and judgements.
- A lack of professional scepticism by the audit engagement team -- this is often linked to the point above where the audit team will simply accept explanations and documentation at face value.
- A lack of documentation in key areas of the audit file and a lack of explanation as to the rationale behind certain conclusions (e.g. on materiality considerations).
- Inappropriate sample sizes or the devising of samples with no apparent explanation as to how they have been arrived at.
- Technical errors in the auditor's report, such as including reference to material uncertainties relating to going concern within an Emphasis of Matter paragraph rather than a Material Uncertainty Related to Going Concern paragraph.
- Incorrect starting points for substantive procedures over income completeness. For example, using the sales invoice rather than the source document from outside of the accounting system (e.g. a customer order).
- Lack of challenge when experts have been used, particularly over valuations of properties and financial instruments.
- Inadequate going concern procedures including sufficient audit procedures over the information underpinning documents such as cash flow forecasts and budgets.
The above list is just some of the issues that are frequently flagged up in reports by professional bodies and regulators as causing concern when reviews of audit quality are carried out. There are a lot more issues which will be covered for accountingCPD.net during 2024.
Conclusion
Auditing is a complex profession and I suspect this complexity will increase in the coming years as regulators aim to restore confidence in the audit market. This will invariably include more work on the part of the auditor to ensure the financial statements of an audit client are credible and that the users of the financial statements can place reliance on the work of the auditor.
Steve Collings is an author for accountingcpd. To see his courses, click here.
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