03 March 2015

FRC: IFIAR’s 2014 Survey of Inspection Findings

IFAIR members reported that the recurrence of high levels of deficiencies in key areas of public company audits around the world demonstrates the need for audit firms to pursue initiatives to improve audit quality.

IFIAR’s 2014 Survey of Inspection Findings found the highest number of audit inspection deficiencies in the areas of fair value measurement, internal control, and revenue – topics among the core building blocks of audited financial statements.  The rate of deficiencies in these audited areas, measured as the percentage of all inspected audits for these areas, also is high: Internal control testing, 24 percent; Fair value measurement, 20 percent; and Revenue recognition, 14 percent.

For audits of systemically important financial institutions, or SIFIs, including global banks and insurers, the survey found the highest number of deficiencies related to auditing of allowance for loan losses and loan impairments, internal control testing, and auditing the valuation of investments and securities.

Report on 2014 Inspection Findings

IFIAR’s Report on 2014 Inspection Findings Survey summarizes key inspection results from audits of public companies, including systemically important financial institutions, submitted by 29 IFIAR members from around the world.
 
These results came from inspection reports issued during the members’ most recent annual reporting periods that ended by July 2014.  
 

• The areas with most deficiencies in inspected audits of listed public interest entities, or public companies, relate to auditing fair value measurements; internal control testing; and revenue recognition
• The areas with most deficiencies in audits of systemically important financial institutions, including global systemically important banks and insurers, relate to auditing of allowance for loan losses and loan impairments; internal control testing; and auditing of the valuation of investments and securities
• Audit firms' own quality control systems had the highest number of inspection findings in the areas of engagement performance; independence and ethics requirements; and human resources 

Inspection findings related to audit engagements are deficiencies in audit procedures that indicate that the audit firm did not obtain sufficient appropriate audit evidence to support its opinion.  Findings identify areas where the auditor’s performance fell below the expected level of diligence to satisfy the public interest role the audit is meant to fulfill, and that the audit failed to provide the level of assurance about the financial statements that it purported to do and that is required by professional standards. 
 
The 29 IFIAR member countries reporting 2014 inspection findings inspected 948 public company audits and found deficiencies in 47 percent. Seventeen IFIAR member countries reported 2014 inspection findings on audits of systemically important financial institutions. Those members inspected 148 financial institution audits, of which 41 percent had deficiencies. 
 
IFIAR members also reported their impression as to whether audit quality in their jurisdictions had changed. Although it is encouraging that almost 30 percent of the respondents observed overall improvement, this is offset by almost half of the respondents noting no significant overall changes, and by mixed observations by the other respondents.  This underscores that further efforts are needed.
 
Consistency in execution of high quality audit is a priority of IFIAR members, as many audits today involve practitioners from network member firms in a number of countries. The audit of a multinational company may involve significant work performed by many, legally separate audit firms that operate as a network, often with a common name.  Through IFIAR, audit regulators seek to coordinate their understanding and assessments of trends in and challenges to audit quality. Still, it is important to keep in mind that the level of deficiencies among individual regulators’ jurisdictions can differ significantly. 
 
The findings discussed in the survey are primarily from inspections of audit firms affiliated with the six largest international audit firm networks, which are BDO International Limited, Deloitte Touche Tohmatsu Limited, Ernst & Young Global Limited, Grant Thornton International Limited, KPMG International Cooperative, and PricewaterhouseCoopers International Limited.  IFIAR and its members will continue to discuss the findings with the networks and the individual member firms in pursuit of audit regulators’ mandates to improve audit quality.
 
In many cases, a regulator’s response to an inspection finding is to require the audit firm to perform additional procedures necessary to complete the audit satisfactorily.

Press release

IFIAR’s 2014 Survey of Inspection Findings

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