Improving the quality of group auditing

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David Wood.jpg By David Wood, Senior Policy Director, ICAS

10 May 2019

David Wood assesses the benefits of using academic research to provide evidence for the development of ICAS

ICAS teamed up with the International Association for Accounting Education and Research (IAAER) and the International Auditing and Assurance Standards Board (IAASB) to commission research on global group audits.

The IAASB was seeking evidence to direct its work on group audits, to inform improvements in relevant auditing standards.

The research was undertaken in response to concerns from regulators over the quality of group audits, as a result of deficiencies found in audit inspections. Such deficiencies included the failure of auditors to test controls over revenue and to test the existence and valuation of assets.

Previous research had been done from the perspective of the group auditor, but the new research focused on the perspective of the component (subsidiary) auditor.

Regulators had identified the following potential root causes of problems:

  • Lack of involvement and co-ordination by the group auditor.
  • The group auditor’s insufficient application of materiality and assessment of component audit risk, consideration of component auditor competence and review of the component audit work.
  • Lack of effective and robust communication between group and component auditors.
  • Inconsistent application of auditing standards.
  • Complexity of group audits arising from cultural and language barriers, legal and regulatory differences.
  • Insufficient work effort by component auditors.

Through surveying 111 experienced component auditors in Australia, the Netherlands and India, this project was designed to help identify root causes of low audit quality within group audits from the component auditor perspective, and thereby confirm, reject or better inform the preliminary views of the regulators.

Because of problems identifying and selecting component auditors, the sample used was smaller than intended. Therefore, while the research has produced interesting and indicative results relating to member firms of larger networks, it should not necessarily be regarded as statistically representative. For this reason, a full research report has not been published, but the abbreviated report is available online (see note at the end of this article).

Key results

Results from the feedback of component auditors are analysed from five perspectives, as follows. In considering these, it should be remembered that these are from the perspective of the component auditors and do not reflect any input from group auditors.

Staffing

  • Component auditors feel they often receive limited direction and input to guide component audit staffing, so that component audits tend to be staffed based on availability rather than specified experience and expertise. This can be exacerbated by the lateness of instructions from the group auditor.
  • Where component auditors can take greater ownership over staffing, this is felt to lead to better audit outcomes.

Planning

  • Group auditor involvement and co-ordination of the planning phases is seen as important to component audit quality.
  • The component audit is improved when the group auditor provides timely and tailored instructions and specifies their forthcoming involvement and interactions with the component audit team.
  • Component auditors want group auditor direction, including on areas on which to focus the component audit, the application of materiality and the group auditor’s assessment of component audit risk.
  • Component auditors sometimes make adaptations to the component audit where they feel the group auditor doesn’t properly understand the component audit environment and local audit client.

Fieldwork

  • Better audit outcomes occur when component auditors share information with the group auditor and where spontaneous communication between the two is possible.
  • Any lack of understanding of the component from the group auditor can generate extra work and negatively affect the effectiveness and efficiency of the component audit.

Review

  • It is important for the group auditor to undertake a careful review of the component audit work. This is especially the case where co-ordination or communication has been lacking.
  • Less than half of the component auditors involved in the research received any review comments from the group auditor.
  • The lack of review, or the lack of feedback, may inhibit learning and prevent improvements in the component audit engagement in future.

Barriers

  • Relatively limited cultural and language barriers were experienced by component auditors during their engagements and interactions with the group auditor.
  • One barrier identified by component auditors is the low budget set by the group auditor for completion of the component audit.

Possible Policy Implications/ Suggestions

The report does not make policy recommendations. However, a number of suggestions are explicitly included in the report and further tentative suggestions might be inferred from the above results:

  • Group auditors should strive to better understand the component environment and any local factors which might affect the component audit client.
  • Component auditors should take ownership of component audit staffing and communicating specific needs back to the group auditor.
  • Group auditors should strive to improve their communication with the component auditor. In particular:
  1. The group auditor should issue tailored instructions and requirements to guide and direct the component audit;
  2. The group auditor should communicate the staffing requirements for the component audit well in advance so as to obtain the most appropriate staff;
  3. The group auditor should communicate the importance of the component audit to the group audit, and should recognise the importance of the component audit for local purposes;
  4. The group auditor should provide detailed upfront communication on the fee structure and how any overruns in the component audit would be dealt with;
  5. Group and component auditors should strive for open, spontaneous and responsive communication during the audit.
  • Group auditors should consider greater involvement in component audits, including component audit visits.
  • Group auditors should undertake a proper assessment of the competence of component auditors.
  • Group auditors should review component audit work and provide evidence to the component auditor that they have done so – including review notes of issues for follow-up and points from which to improve the component audit in subsequent years.
  • There should be a greater focus by regulators and standard setters on component auditor needs and behaviours in improving group audit quality.

Topics

  • CA Magazine

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