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Audit Monitoring Report

2021-22 Audit Monitoring Report

ICAEW has recently published it’s 2021-2 Audit Monitoring Report, giving feedback on the 555 audit inspection review visits that its Quality Assurance Department (QAD) undertook in the year ended 31 March 2022.

The report provides a useful insight into the important tips and traps for firms when carrying out audits and can be downloaded from ICAEW’s website at audit-monitoring-report-2021.ashx (icaew.com).

The headline statistic from the report is that only 4% of the audits reviewed in 2021-2 required significant improvement, compared to 7% in 2020-1 and 8% in 2019-20. However only 76% of audits reviewed were considered good or generally acceptable, a figure that ICAEW wants to be higher.

The report provides some helpful statistics on the reviews performed, two case study examples (both of which deal with situations where firms fell foul of ICAEW’s Professional Standards Department) and highlights a number of examples of good practice that QAD inspectors found.

In terms of areas for improvement, it was a case of ‘the usual suspects’:

  • A lack of challenge and scepticism, in particular regarding going concern and asset valuations. Appraising a client’s assessment of going concern can be challenging where budgets and forecasts are not produced – but a documented discussion about business performance, plans and pinch points will often suffice.
  • A weak risk assessment, often culminating in a scattergun list of risks with no real attempt to develop tailored tests in response. We can but hope that the revision to ISA 315, effective for periods commencing 15 December 2021 will address failings in this area!
  • Breaches of the FRC’s Ethical Standard. The report refers to one case where the responsible individual (RI) and two fellow principals in a firm had entered into a business relationship with the director of an audit client, and two cases where the RI or another covered person was trustee of a trust with a material interest in the shares of the audit client.

The report also highlights the importance of whole firm procedures, with specific reference being made to CPD requirements for RIs and sub-contractors, and cold file reviews. ICAEW expects even the smallest firms to have an external cold file review at least once every three years where they have no-one who can carry out cold file reviews independently of the audit team.

Eligibility and control of audit firms is also highlighted as an issue. As mentioned during our October 2022 Practice Regulation Update, firms should be proactive in reaching out to their professional body whenever the practice structure has changed to avoid unforeseen consequences.

Looking forward to 2023, the report highlights that from 1 November 2023, ICAEW’s CPD policy will change. This will include a requirement for a minimum number of verifiable hours and a mandatory annual ethics CPD requirement for all ICAEW members.

Reference is also made in the report to ISQM 1, which must be implemented by 15 December 2022. The report states that in early 2023 ICAEW will be contacting a sample of audit firms to ask for further information about their implementation of ISQM 1. However, as we have commented previously, firms should not panic and necessarily expect a tip-top System of Quality Management (SoQM) at the first attempt. As our good friend John Selwood says, when it comes to first time implementation of ISQM 1, ‘perfect is the enemy of good’!

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