ASIC speaks on Improving and Maintaining Audit Quality & The Role of Others

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1 CPA Australia Podcast - Episode 16 - Transcript ASIC speaks on Improving and Maintaining Audit Quality & The Role of Others INTRO: Hello and welcome to the CPA Australia Podcast your source for business, leadership and public practice accounting information. CLAIRE: Welcome to this podcast on the Australian Securities and Investment Commissions view on how the auditors and entities can improve audit quality. I'm Claire Grayston CPA Australia's Policy adviser on audited assurance and with me is Doug Niven ASIC's senior executive leader for financial reporting and audit to explain how audit quality can be improved. ASIC have just released new information sheets one on improving and maintaining audit quality directed at the auditors and a second information sheet entitled audit quality: the role of others. We will discuss today with Doug ASIC's recommendations to auditors for the way that audit quality can be improved and how companies can support audit quality as well as others. So firstly Doug could you talk us through what the role of directors and audit committees is in improving Audit quality. DOUG: Thank you Claire. The information sheets put a bit of context around this. The starting point obviously is that companies and directors have a responsibility for the financial report and that's supported obviously by audit quality in terms of the quality of the audit though the primary responsibility of course as we know lies with the auditors. Having said that there are opportunities for directors, audit committees and others to support the quality of the audits as well. And so we thought it was important to discuss what sorts of opportunities there are there to assist with the process and as a director you might start by thinking well the audits as I say is a primary responsibility of the auditor "It's not my concern" but many directors do actually recognise that while it's an independent audit and therefore the directors aren't actually relying on the external auditors. Nevertheless it's important in terms of the company itself the information the market the confidence in that information because of the quality of the independent audit. And so we put out this information sheet that you mentioned audit quality the role of others and we touch on the role of audit committees and directors there as well as management preparer's and others. By the way we should just say a starting point. The title sounds a little bit odd doesn't it?. Audit Quality: The role of others. And it actually makes it a little bit more sense when you look at our website because it actually does follow pre-existing information sheet which is entitled Audit Quality: The role of directors and audit committee, so this new one gives a brief overview in terms of directors and audit committee. But it's also worthwhile looking at the earlier one and very much the themes there are about firstly supporting the whole reporting and audit process to making sure that there's appropriate financial reporting processes certainly but also documentation analysis around the judgments and proper records and all of those sorts of things. Now in terms of directors obviously in certainly the larger entities their role is in a sense an oversight process. I'm sure that's not the right word legal people would use, I'm an accountant but I think you know what I mean. And so it's very much they do delegate to management. But nevertheless they can very much support the audit process. Obviously there can be potential conflicts I'm not saying this always occurs in terms of management you know looking for reducing costs and all sorts of different incentives potentially in terms of how they view the audit process, directors should be therefore thinking about how they how their role comes in. There's a range of things I won't go through everything but even from the appointment of auditors

2 because while that's actually the role of the members of a company the directors can play a key role in audit committees in terms of recommendations, having a look at the appropriateness of firms in terms of... all sorts of things that they should also be considering an ongoing basis. You know it's partly about does the auditor have appropriate experience and expertise and bring that to the engagement. It's about do they have appropriate professional skepticism?. Are they challenging things?. There's a whole range of matters that they can question in terms of the audit firm itself. It's also about how they work with management to ensure that everything is dealt with on a timely basis and not pressure from undue pressure on the whole reporting process but also the audit process. You know as mentioned before the documentation's there it even comes to things like well.. a little bit I shouldn't use this term but pay peanuts you get monkeys. And so while we would say to auditors irrespective of what you're paid you've obviously got an obligation in terms of audit and audit quality. Directors need to be mindful of that question you can't just treat it as another overhead you need to think about it in terms of that particular audit product itself. And so therefore ensuring that reasonable fees are being paid as a part of that process as well. We even focus directors on thinking about asking for potentially what results come out of our own audit inspections. If we've looked at a file relating to the auditor for the company and how they can you know work with the auditors in terms of any improvements that might be appropriate there. So I could probably go through all the detail of the 2 information sheets but that sort of gives you a little bit of a flavour for this sorts of things there. CLAIRE: So you've mentioned of course directors and audit committee oversee management and so could you explain the role that you see management and preparer's can play in supporting audit quality?. DOUG: Yeah definitely. And part of it comes back to the financial reporting quality itself and not to forget that the CEO and CFO of a listed company particularly are required to give their own opinion about proper books and records and also compliance with accounting standards true and fair view but it is very much management there making sure that obligations on statute for a company are actually complied with and that does partly come down to those proper books and records. So firstly the companies need to have appropriate experience expertise to be able to deal with complex areas accounting estimates, impairment, accounting policy choices and so on. And that then enables the auditor to focus on what they should be doing. Interesting dividing lines which we could talk about many examples of about auditor independence. But obviously if the company hasn't done what they should be doing there certainly will be instances where the auditor then has to do more work as a part of the audit process. And that can lead to inefficiencies. It also might detract everyone from focusing on the real issues that need to be dealt with and judgment areas and so forth. It is about project management making sure that everything is delivered on a timely basis. If there are issues around potential issues around a major new transaction or accounting treatment that's dealt with well before balance date. So I think there are a number of important things that management and preparer's of financial reports can do and that's sort of a bit of an overview of some of these things. CLAIRE: And what role do the standard setters play?. And do you have recommendations for the standard setters and international regulators in supporting audit quality?. DOUG: Yeah definitely. As I say the reporting process and the audit process it's a chain of a whole lot of players who contribute to the process and the confidence in financial reports and making sure the investors get appropriate information. And so clearly audit standard setters play a role in that because they're setting firstly the requirements in terms of what auditors should do but also

3 guidance in these areas and ensuring consistency in the audit process as well. So we very much value their role both the local standard setters of course particularly the auditing assurance standards board and if we're talking about the audit side also the Australian professional ethical standards board. But also internationally because our standards are based on international standards as well. And so we do interact with the standard setters. We certainly provide feedback in terms of their exposure graphs but also we try to be proactive. Our own inspections of audit...yes we're looking for circumstances where there's working constructively with auditors where they can improve particularly around compliance with auditing standards and also the independent standards. But we also do from time to time identify opportunities to improve the standards. Now that's not to say that the standards are broken because fundamentally they're principles based but often additional guidance can be helpful for ensuring consistency and that auditors are approaching the standards in an appropriate way and understand what they're required to do. So I won't go through all the details or sorts of things we might recommend but I think that's a very helpful process and we very much value the relationship with the standard setters. You did touch on the international regulators as well. And we are operating in global markets. Companies are obviously operating across borders in many cases. Obviously global economic influences we're all sort of impacted by many common things happening in different markets. But as I mentioned we do have common international standards and not 100 percent global but across quite a number of jurisdictions both accounting and also the auditing and ethical standards and a lot of the firms are in networks to operate across borders as well. So that's a long introduction and way of saying it's important we work with other regulators as well to ensure we're consistent but also leverage off each other in terms what are we finding that might be relevant to others and sharing that sort of information. Some of things we've been doing in the international form of independent audit regulators as well as being a securities regulator we are an audit regulator probably gathered from what I'm saying before. So we very much work with them and we have some good interactions there. With the largest six firms global side of things on audit and that's important as well because while as a national regulator we're very much focused on what auditors here are doing. The interactions between what's happening internationally and those sorts of things they're doing in terms of guidance quality reviews and everything else are relevant in terms of the Australian firms as well. And won't spend too much time on it but earlier this year we did actually sign a memorandum of understanding with other audit oversight regulators to facilitate information sharing partly in terms of quality but also makes it easier for auditors. Regulators can share rather than all asking the same questions. I shouldn't... mind if I throw in one other group I shouldn't ignore the professional accounting bodies. They clearly do play a very important role in this and we again very much value what is done in that space and it s a whole range of things again. The obvious ones that come to mind around education their support for obviously standards setting process as well and the quality review programs they undertake and I'm sure Claire you can probably think of a few other's I've left out soon. CLAIRE: Thank you Doug. So they're the areas that others around the audit can play in supporting audit quality. So now let's get to what the auditors can do and clearly coming out of the inspection findings. It's one thing to say what might not have gone well in the past but constructive areas for improvement, areas that can be addressed by firms that have been inspected and also those that haven't. Smaller firms that may never be inspected can learn I'm sure from your inspection findings. So looking at the other information sheet on improving and maintaining audit quality perhaps you could talk firstly about how you would describe a quality audit and what that looks like?

4 DOUG: Yeah definitely. And you're quite right. It's very easy to focus on areas for improvement but it's also good... partly to give credit for the good things that are done but also think constructively about how things can be done to support and continue to improve the processes. So fundamentally we're thinking about audit in the context of audits for financial reports and the confidence in the capital markets. And so therefore we fundamentally concerned about are the audits giving reasonable assurance that the financial report is free of material misstatements. That's a starting point and obviously the risk is if companies don't have appropriate processes and auditors aren't picking up the things that they should and companies aren't reporting the right results then what wrong investment decisions might be made or worse. You know people might not realise that company is not performing as well as it should be. But certainly we've tried to think here about some of the things that firms overall can focus on. And so we've had some continuing themes and sort of build on that. So if I start just running through those certainly starts with them appropriate culture within a firm, a strong culture focused on quality audit and also professional skepticism. It's about making sure that the firm and the audits, you've got appropriate resources, appropriate experience, appropriate expertise brought to those audits. Certainly supervision and review is incredibly important both on the job with the engagement quality control review and after the fact quality reviews as well. And you always want to have appropriate accountability mechanisms. People should be judged on the quality of the work that they're doing as well as many other factors as well. In addition to that we want to make sure that auditors are identifying and addressing risks on a timely basis. And we did throw in the last one because obviously sort of getting to the findings side there are findings from internal quality reviews and inspections and making sure that there are appropriate processes to deal with those and learn from those and move forward. So that's sort of an overall sort of snapshot of some of the key themes that we've got there. CLAIRE: So are there some initiatives that ASIC have been able to identify that that firms can actually address? DOUG: Yes absolutely. And I won't go through the whole information sheet and the sorts of things there. But certainly there are some things that we've seen done really well within some firms to improve audit quality and the consistency of execution of those audits. Now part of it is that the overall process of learning from findings and so much more, we're seeing firms move towards not only remediating the findings on individual engagements which is important might be going back and doing additional work and certainly thinking about audit processes going forward for individual engagements. But thinking about these findings from internal reviews and audit inspections and performing what we call root cause analysis which is thinking about what caused those findings and not just a superficial sort of go down one level really trying to go down to the why of the why. And also thinking about whether there are themes that can be drawn out and this particular process if done well does require a little bit of rigour. Obviously you want independent people from particular audit engagement teams doing it who have got the appropriate experience and expertise. But going through an interview process with various people and not in a negative way it should be in a constructive way of course and trying to figure out what can be done. You know was it that we perhaps didn't allocate the right resources to the engagement?. Was it that perhaps something else going on conflicting, you know, the key part of the audit? It could be anything really. Sometimes there's a tendency to go to training and guidance and that's important but there are other things that need to be thought about as part of that process would be industry expertise use of other experts as a part of the process. So there's a range of matters that may need to be considered there. Now out of the root cause analysis I guess in terms of a process that can feed into action plans having appropriate accountability as to how whatever it is that has been identified is addressed and

5 monitoring that in appropriate ways. But interesting enough some of the areas that I think we might just touch on because I'm conscious you could do a big long shopping list of ideas that may or may not be relevant to particular firms. But if I just go back to this idea of what are some of the good things that seem to have worked. Certainly we touched on that bit about the culture and accountability earlier. There's also setting up focus groups or risk panels where they have a particular focus on some of the thematic areas where perhaps audits can be better done where there is impairment, revenue recognition, taxation or whatever. People who develop a particular expertise can share that with engagement teams not just training and guidance but it may be coaching actually live during the audit process. So we've found when that's well done that's very effective in terms of sharing also information about particular risk areas and whether it's been you know potentially areas for improvement in the past. I sort of touched on project management but that's very important in terms of audits that there are processes there setting milestones for the audit. Making sure that things are done on a timely basis. Critical issues addressed early so you don't end up with those deadline pressures. And we've seen that can be done really well and not just within the audit team. Firms are now developing processes through electronic working paper systems where others I don't know who it might be - head of assurance or someone else in a firm - can actually monitor across engagements. Which ones are tracking and perhaps ask questions where appropriate. Interesting one which we sort of did call out is firms actually educating directors and management about how they can in a sense improve the quality of their processes but also support the audit process which comes back to some of this timeliness question and as well. So there are a few but obviously worthwhile looking at the information sheet as well. CLAIRE: Yes. So as you say more detail in ASIC's information sheets both on audit quality: the role of others and improving and maintaining audit quality. So thank you very much Doug for sharing that with us today. DOUG: Thank you Claire. OUTRO: Thanks for listening to the CPA Australia Podcast. Don't miss an episode by subscribing on itunes or Stitcher. To download a transcript and find more information on today's episode visit