Restoring Trust: IRBA Inspection Report 2023
Inspection reports of audit firms are typically issued by regulatory bodies that oversee the accounting and auditing profession within a country. In South Africa, the Independent Regulatory Board for Auditors (IRBA) is responsible for issuing these reports.
The 2023 Public Inspections Report on Audit Quality offers not just a mirror reflecting the current state of audit practices in South Africa but also a roadmap for navigating the intricate landscape of audit quality. With 1,672 audit firms and 3,649 individuals under its regulatory mandate, IRBA's mission extends beyond regulation, aiming to bolster confidence in a profession crucial for investors, creditors, and the general public.
The purpose of these inspection reports is to:
Assess the quality of audit work carried out by registered auditors and their compliance with applicable standards and regulations.
Ensure that audit firms maintain high levels of professional ethics and independence.
Protect the financial markets and public interest by ensuring the reliability of financial statements.
Identify areas where auditors can improve their practices and provide recommendations for enhancing audit quality.
Provide transparency to stakeholders about the effectiveness and quality of the audit profession.
Key findings
The key findings from the IRBA 2023 inspection report can be summarized as follows:
Leadership Responsibilities: Audit firms are improving audit quality by implementing new quality management (QM) standards and practices, but some firms still lack a culture that consistently produces high-quality assurance work, particularly in areas of independence and engagement performance.
Human Resources: There were instances of inadequate documentation for partner performance evaluations.
Engagement Performance: Several firms failed to consistently produce high-quality audits, with a significant number of high-risk engagements showing major deficiencies. Common issues included insufficient documented evidence to support audit conclusions and judgements.
Engagement Quality Control Review (EQCR): EQCRs often failed to identify significant deficiencies in audit quality, including material misstatements and lack of sufficient audit evidence.
Engagement Documentation: Firms lacked effective control over the timely final assembly and archiving of engagement files, and there were instances of modifications to engagement files without the required documentation.
Recurring Deficiencies: The report highlighted a continuous trend of recurring deficiencies, particularly regarding independence and engagement performance.
Remedial Actions and Root Causes: The report underscores the need for firms to identify true root causes of deficiencies to effectively rectify them. While some firms have begun remediation, the IRBA emphasizes that commitment to addressing deficiencies is crucial.
Information Technology (IT): Deficiencies in IT general controls and IT application controls were noted, with auditors failing to perform adequate testing or resolve identified IT deficiencies, impacting the audit approach.
Audit Quality at the Engagement Level: There was a failure to perform high-quality audit work at the engagement level, with concerns over the auditor's application of professional scepticism and judgement.
Inspection Themes and Trends: The report identifies specific themes and trends at both the firm and individual assurance engagement levels, emphasizing the need for improvement in areas like audit work on financial statement assertions (FSAs), planning, and financial statement presentation and disclosure.
Systemic issues within the auditing practices
The report clearly indicates systemic issues within the auditing practices, underlining the urgent need for audit firms to address these shortcomings to restore and maintain investor confidence and uphold the integrity of financial reporting.
The IRBA inspection report reveals a concerning frequency of audit deficiencies in South Africa, which may have implications for investor confidence. Notably:
Recurring deficiencies were found, including material misstatements and insufficient audit evidence.
In the inspected engagement files, 96% had findings with 258 instances of deficiencies and 39 findings leading to referral for investigation.
Common deficiencies include issues with revenue recognition, independence threats, insufficient audit work on compliance with laws and regulations, and flawed risk assessments, including fraud risk.
Deficiencies in information technology controls and usage were also a significant concern.
The report emphasizes the need for proactive remediation, improved use of technology, and better documentation and evaluation by audit firms.
The inspection results are alarming with significant deficiencies in high-quality audit work, including a lack of evidence supporting auditors’ conclusions, inadequate reviews of financial statements, and failure in maintaining confidentiality and integrity of engagement documentation.
Based on the provided excerpts from the IRBA inspection report, here is a short list of findings and their percentages, as well as the number of firms and findings where specified:
Engagement Performance Deficiencies:
A consistent failure to produce high-quality audits at several firms.
Significant lack of or insufficient audit evidence to support auditors’ conclusions, judgments, and opinions.
In some instances, the engagement partner's review occurred post audit report signing.
Notable findings related to the auditor's judgment, including the use of experts and application of professional skepticism regarding Going Concern reliance on information systems, etc.
Engagement Quality Control Review (EQCR):
EQCR failed to identify significant deficiencies in audit quality, including material misstatements and insufficient audit evidence, that were later identified by the IRBA.
Engagement Documentation:
Failures in maintaining the confidentiality, integrity, accessibility, and retrievability of engagement documentation.
Issues with timely final assembly and archiving of engagement files, with some being modified post IRBA selection for inspection.
Theme-Based Inspections Findings:
Independence issues, especially related to non-assurance services, where there were no assessments to identify self-review or advocacy threats.
Archiving of engagement files was not completed within required timelines.
Evaluation of uncorrected misstatements and reassessment of materiality showed material misstatements were not appropriately evaluated.
Number of Inspections and Findings:
88 inspections performed on Registered Auditors from 22 audit firms.
Additional 15 theme-based inspections performed at 8 audit firms.
Total findings: 258 at the engagement file level and 577 leading to investigation referrals.
Percentage of Deficiencies:
96% of engagement files inspected revealed significant deficiencies in audit quality.
Firm-Wide Inspections:
5 full firm-wide inspections were carried out, which occur once in a 3-year cycle for larger firms.
17 firm reports where reportable deficiencies at an individual engagement file level escalated to the firm level.
Overall Trends:
Recurring deficiencies at both firm-wide and engagement levels, especially concerning independence matters and engagement performance.
Most Problematic Areas:
Engagement performance.
Relevant ethical requirements.
Monitoring.
Leadership responsibilities.
Other Notable Areas:
Human Resources: No evidence of partner performance evaluation criteria.
IT Risks: Significant attention given to the deficiencies in IT controls and systems.
Good Practices: Some firms adopted good practices to address deficiencies and enhance audit quality, notably in independence and the use of technology-based tools.
Conclusion
The IRBA's report underscores the critical need for continuous improvement in audit quality across South Africa's auditing profession. While there have been some improvements, significant challenges remain, particularly in areas like independence, engagement performance, and the integration of technology in audit processes. The report calls for a collective effort from all stakeholders within the auditing ecosystem to address these challenges head-on, ensuring the integrity and reliability of financial reporting.
Enhance Your Expertise: The Essential CPD Webinar Series for Today's Accounting Professionals
What you will learn
By subscribing to the Accountant-in-Practice plus Tax series you will gain access to monthly webinars covering ethics, financials, reporting, audit and assurance, working papers, law, technology, management topics, and tax; which will enable you to:
Be aware of the latest legislative changes and what it means for your business, practice, and your clients;
Prepare compliant financial statements faster;
Issue reliable reports on financial statements;
Understand the laws and regulations that govern your profession;
Calculate and submit tax returns;
Perform tax advisory services;
Learn about performing Business Valuations; and
Develop enhanced business advisory skills.
The CPD events cover the following topics:
Accounting
Taxation
Financial Management
Ethics
Law
Compliance and Regulatory
Advisory
Professional Skills
Practice Management