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Ian Pickering explains how the Practice Monitoring Department assesses compliance with auditing standards.

Assessing audit files

How does the Practice Monitoring Department (PMD) assess the level of compliance with auditing standards on audit files?

First of all it is recognised that on the majority of audit files there will be some deficiencies, often as a result of inadequate planning and recording of the auditor's work, but a conclusion has to be drawn as to whether those deficiencies render the file unsatisfactory. 

ISA 200 sets out the objectives and general principles governing the audit of financial statements. The auditor should obtain reasonable assurance that the financial statements are free from material misstatement through the accumulation of audit evidence (ISA 200.8). 

In pursuing the objective of ‘reasonable assurance’ auditors should consider the possibility that the financial statements may contain misstatements and plan and perform their work to detect them.

The PMD considers the deficiencies apparent in a firm's audit work and assesses whether or not those deficiencies are serious enough to undermine the audit opinion. Whether or not a particular deficiency is serious can depend on the context in which it is found and is perhaps best illustrated by examples.

  1. An audit client has material stock at the year end but does not have continuous stock records and the auditor fails to attend the client's stock count. 

    In addition, there are no alternative procedures the auditor can carry out to obtain reasonable assurance that the stock count was undertaken reliably and the results recorded accurately. 

    In this case, if the auditor issues an unqualified report then the Practice Monitoring Department would consider the lack of evidence on stock sufficiently serious that there is a risk of material misstatement in the financial statements.  As a result the file would be graded unsatisfactory.

  2. An audit client is in financial difficulty with recurring losses and is operating close to its available bank facilities.  There is a clear going concern issue. 

    If the auditor fails to consider this and document his considerations, as set out in ISA 570, then this will be regarded as a serious deficiency. 

    Conversely, if an audit client is in excellent financial health and there is no obvious indication of a going concern problem, an auditor’s failure to document considerations in respect of going concern is unlikely to be, on its own, sufficiently serious to make a file unsatisfactory.

A self diagnostic checklist is available on ACCA’s website which firms can use as a means to assess their own audit work. This checklist is based on the PMD method of reviewing audit files.

The outcome of a monitoring visit will usually be regarded as unsatisfactory overall if any of the firm’s audit files which are inspected are judged to be unsatisfactory. 

The standard of a firm’s audit work can vary from file to file and it is possible for firms to have a mixture of satisfactory and unsatisfactory files. However, if any of the audit files are found to be unsatisfactory this casts doubts on the firm’s own quality control procedures. 

It is usually the more complex assignments where a firm’s audit work is unsatisfactory. There have been cases where ACCA has received complaints from third parties on audits undertaken by firms which have demonstrated at monitoring visits that they have conducted some audits to a good standard.

For this reason the outcome of a monitoring visit is almost always concluded on the basis of the least compliant file. This is not applied rigidly and, if there are clear reasons to believe an unsatisfactory audit file is not representative of the firm’s current audit work, PMD may ignore it in reaching an overall conclusion. 

Examples of such reasons may include the unsatisfactory audit being completed before a major revision to a firm’s procedures or an audit having been controlled by a principal who has since left the firm.

Summary

The message to auditors who want to ensure that the overall conclusion reached at their next monitoring visit is satisfactory is straightforward. 

They need to identify the matters that could give rise to a risk of material misstatement in the financial statements and ensure that the audit file shows that the work in these areas fully complies with auditing standards.

The key is good audit planning and the only way to get it right every time is to have effective quality control procedures.

Ian Pickering - Senior Compliance Officer, Professional Standards

 

Last updated: 14 Feb 2012