AUDIT QUALITY: FINDINGS AND INITIATIVES FOR IMPROVEMENT

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By CPA Susannie Kyamanywa

Before I talk about the state of audit quality, I want to provide a quick snapshot of the Institute of Certified Public Accountants of Uganda (ICPAU). ICPAU has the function of regulating and maintaining the standard of accountancy in Uganda; and prescribing and regulating the conduct of accountants and practising accountants in Uganda.

The quality assurance team of ICPAU, comprised of independent and qualified full-time staff, monitors all accounting firms which are registered with ICPAU. The audit monitoring is conducted in three-year cycles. The first cycle was completed in February 2010. The second cycle completed in March 2014 and the third in May 2017. The fourth cycle is ongoing and we expect to conclude it in December 2020.

Audit Monitoring Reviews (hereafter referred to as reviews) are performed with a purpose of serving the public interest by ensuring that the audits, performed by ICPAU members, are conducted with high quality and in accordance with the applicable professional standards, legal and other regulatory requirements. 

This article is intended to point out the findings and initiatives to address the issues around audit quality in the firms.

Where do we get the Mandate to Conduct Reviews?

The Accountants Act, 2013 puts in place a Quality Assurance Board charged with monitoring the compliance with professional quality assurance standards published by the Council.

Regulation 6(1) of the Accountants Practice Regulations, 2019 empowers the Quality Assurance Board to conduct audit monitoring of each practising accountant atleast once every three years.

IFAC’s ‘Statement of Membership Obligations 1: Quality Assurance’ requires member bodies to ensure that a mandatory quality assurance review programme is in place for their members (firms) performing audits of financial statements of public interest entities.

The State of Audit quality

As at 15 June 2020, 78% of the accounting firms authorised by ICPAU had undergone a review in the cycle. It should be noted that this is in addition to the mandatory annual inspection of accounting firms, which is conducted under a seperate programme.

Our findings indicate that 54% of the reviewed firms require significant improvements and only 4% are satisfactory. The foregoing notwithstanding, we have seen a number of firms dedicate significant resources toward remediating deficiencies and improving quality control systems.

Currently, the challenge for many firms seems to be consistency of execution across teams, documentation of audit procedures and inadequate tone at the top.

In the period 2018 to 2019, a large numbers of firms were referred to the Quality Assurance Board due their poor audit quality. As at June 2020, there are still a number of practising accountants scheduled for questioning by the Board for their poor review results.

Our reviews are conducted at two levels: review of firm-wide systems of quality management and reviews of individual assurance engagement files. The objective of a firm-wide review is to monitor the firm’s compliance with current standards of quality control. An engagement file review is conducted to monitor individual auditors’ compliance with applicable professional standards, the Code of ethics and legislation in the performance of assurance work.

We follow a cycle and risk-based approach when selecting firms and engagements for inspection, and this is in line with international best practice. The risk-based approach is also applied to determine the scope of the review and the areas to be inspected in an engagement file.

A firm yields a satisfactory (Grade 1), generally acceptable (Grade 2A), major improvements required (Grade 2B) or an unsatisfactory (Grade 3) result at the end of the firm-wide and engagement file review.

Firm-wide reviews

The objective of a firm-wide review is to inspect the design and implementation of a firm’s quality control and management system, in accordance with the International Standard on Quality Control (ISQC) 1 (soon to be replaced by International Standard on Quality Management (ISQM) 1 & 2). The firm-wide review also prompts remedial action on any identified deficiencies. Various elements of the firm’s quality management system are monitored during a firm inspection. In general, there have been findings across the entire spectrum of ISQC 1 elements and the most common findings include; inadequate leadership tone at the top; non-compliance with the requirement to monitor the firm’s quality control systems; not complying with mandatory ethics training for audit staff; and lack of an avenue for reporting unethical conduct of the firm personnel.

On a postive note, we have noted that over 76% of the firms partly met the requirement to maintain human resource policies and procedures to ensure appropriate competence and capabilities of their staff.

The inadequate leadership tone speaks directly to the inadequate establishment and implementation of policies and procedures designed to promote an internal culture that recognises quality as essential when performing audit engagements.

During firm-wide inspections, we also test the effectiveness of the firm’s internal reviews. Common findings from these inspections include a firm’s failure to perform engagement quality control review (EQCR) on files that meet the criteria as per the firm policy.

The requirement to monitor the firm’s quality control system is paramount and firm sare reminded that they are required to establish a monitoring process designed to provide the firm with reasonable assurance that the policies and procedures relating to the system of quality control are relevant, adequate and operating effectively. Moreover, although most of the firms had these policies in place, 88% of the firms did not implement monitoring of their quality control systems.

There has been a concerning trend where previously reported deficiencies at firm level had not been effectively remediated by many firms, despite developing and following a remedial action process. This trend may force the Quality Assurance Board to impose more stringent corrective measures against such firms. Practising accountants are reminded that a sound system of quality control, as outlined in ISQC 1, is not only a fundamental requirement of performing engagements in accordance with international standards, but it also represents the foundation upon which a firm is reliant on to perform audits and deliver assurance services of a consistent high quality.

We have continued to observe that failure to monitor the firm’s quality control system and engagement performance-related deficiencies remain the highest component of all the deficiencies reported at firm level.

The recurring firm-wide deficiencies ultimately translate into systemic deficiencies at the engagement performance level.

Reviews of individual assurance engagement files

We have also found significant deficiencies at the engagement file level. These findings have a direct bearing on leadership’s tone at the top in driving a culture of consistent and sustainable high audit quality within the firm.

Firms are reminded that they are required to establish policies and procedures designed to provide reasonable assurance that assurance engagements are performed in accordance with professional standards as well as applicable legal and regulatory requirements; that the firm’s engagement partners issue reports that are appropriate in the circumstances; and audits are performed at a consistent high level of quality and comply with applicable standards, laws and regulation.

Our Observations

Some of our key observations during engagement file reviews include the following:

  • The practitioner being unable to produce an audit file to support the audit opinion that was issued. This is especially common among sole practitioner firms whose client base consists majorly of Small and Medium-sized Entities some of whom do not maintain books of accounts. All audit opinions must be supported by appropriate evidence and documentation. Failure to prepare to an audit file results in referral of such practising accountants for disciplinary action.
  • Another area is failure to comply with the relevant International Standards on Auditing. We observed that compliance was lowest for the following standards: ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements; ISA 250 (Revised) Consideration of Laws and Regulations in an Audit of Financial Statements; ISA 520 Analytical Procedures; ISA 530 Audit sampling; ISA 550 Related Parties; ISA 560 Subsequent Events; and ISA 570 Going Concern.
  • Another area that we scrutinize closely is the practising accountants’ compliance with International Education Standard 8 Professional Competence For Engagement Partners Responsible For Audits Of Financial Statements (Revised) (IES 8).  IES 8 requires engagement partners to undertake CPD that develops and maintains the professional competence required for their role. The major findings here included, that practising accountants did not maintain a record of their CPD and some practising accountants were undertaking trainings that would not be directly mapped to their roles.

The quality assurance team has been studying root causes of poor-quality audits and has identified the following:

  • Lack of engagement partner input;
  • Limited appreciation of technical and documentation requirements;
  • Insufficient time and attention devoted to planning and documentation of audits;
  • Lack of standardized audit programmes which leads to inconsistencies;
  • Inappropriateness of staffing in accounting firms; and     
  • Staff turnover as well as poor quality control measures at both firm and engagement levels.

Initiatives to Improve Audit Quality

As part of the actions to address the undesirable review results, ICPAU has adopted several key initiatives to address audit quality. These initiatives include:

  • Restriction from auditing or continuing to audit publicly accountable entities for all firms rated class 3;
  • Requirement to attend the Model Audit File training for all firms rated class 2B and 3;
  • Requirement for all firms rated class 3 to undergo mentorship for a period of 18 months;
  • Requirement for all firms rated class 3 to conduct an annual internal monitoring and inspection of engagement files.

The other proactive measures we have taken to address the negative inspection outcomes include; development of sample manuals including Quality Control, Human resource, Information Technology and Anti-Money Laundering policies to guide practising accountants as they develop their own policies. We have also developed illustrative financial statements and guidance papers. All these have been uploaded on the ICPAU website for free download. To that end, having these essential policies in place is a mandatory requirement for all firms at inspection and licensing.

Firms are required to ensure, as part of their processes of continuous improvement and remediation, that all deficiencies identified during a firm or an engagement file review are promptly addressed throughout the entire firm. Firms that fail to improve may be referred to the Quality Assurance Board any further disciplinary action might be considered in order to protect the public interest.

We have observed some success stories, at certain firms, following a robust remedial action process implemented by their practising accountants. Our experience has shown that there is an undeniable link between positive firm culture and attitude vis a vis high audit quality. We have also seen overall improvements across all firms in relation to their staff training and education. These improvements give us hope that audit quality deficiencies may reduce going forward.

CPA Susannie Kyamanywa is Manager Quality Assurance and Regulation at ICPAU

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