FMA to step up audit review frequency

This article was current at the time of publication.

New Zealand’s Financial Markets Authority (FMA) says audit firms continued to improve the quality of their audits of FMC reporting entities and has refined its focus for reviews in the current year. 

The Audit Quality Monitoring Report 2023 reviewed 19 audit files by two large, one medium and one small audit firm covering 19 New Zealand’s Exchange (NZX) listed entities.

The regulator said quality had improved generally but noted it was “mixed and inconsistent between firms, and in some instances between audits within the same audit firm.”

More frequent reviews of audit firms

FMA Head of Audit, Financial Reporting and Climate Related Disclosures Jacco Moison says the regulator will this year move to a cycle of reviewing each audit firm every year, replacing the two-to- three-year review cycle for each firm.

Moison says FMA is mindful of the need not to increase regulatory compliance costs. The number of files reviewed each year will remain the same, between 20 and 25.

For the upcoming review cycle FMA will focus on how firms have implemented ISA (NZ) 315 Identifying and Assessing the Risks of Material Misstatement (ISA (NZ) 315), which came into force in December 2022.

Moison notes firms have updated their audit software and methodologies to accommodate the new standard.

The FMA report also notes the standard of documentation of audit evidence – a shortcoming highlighted in the 2022 report – has improved.

However, inconsistencies in quality remain an area of attention.

For 2023-24, FMA will perform specific reviews of all audit firms’ implementation of the new quality management standards, including PES 1 International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand) (PES 1), PES 3 Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements (PES 3) and PES 4 Engagement Quality Reviews (PES 4).

Five focus areas for audit firms

FMA wants audit firms to focus on five areas:

• testing information prepared by management for accuracy and completeness
• duties of an Engagement Quality Review (EQR) partner and the process to be followed in finalising the audit
• audit procedures and obtaining evidence in assessing the going concern assumption
• risk assessment procedures
• journal entry testing.

Auditors should assess information provided by management and directors, evaluating its accuracy and completeness, and whether it is sufficiently precise and detailed for audit purposes.

FMA says this should improve the assessment of data provided by management in the areas of accounting estimates and substantive analytical procedures, where classes of transactions or account balances are made up of large volumes of transactions and where two or more data characteristics have a correlation.

The report says that, where audit files failed to meet the minimum required standards, insufficient EQR was often a contributing factor.

Specifically, the audit report should not be signed and dated until the EQR is completed.

Keep an eye on ‘going concern’

FMA notes the going concern assumption is a fundamental accounting concept in preparing financial statements, and details two instances in which there was insufficient evidence to support going concern disclosures.

Among other recommendations FMA says auditors “should consult with their technical teams/professional practice groups in instances where going concern is a close call or leads to a modification of the opinion.”

The report also identifies several instances where auditors failed to comply with ISA (NZ) 315.

These mostly concerned poor procedure in assessing risk, and poor documentation of what procedures were employed.

FMA found auditors performed appropriate procedures to address management override of controls specifically relating to journal processing.

However, the regulator did identify the following issues relating to journal testing:

• issue with the risk assessment performed by the auditor to determine which journals are deemed risky 
• Issue with the selection of the test sample to be tested
• failure to perform procedures to ensure the completeness of the population of journals from the sample selection.

Report highlights ethics 

The report highlights ethics in the auditing profession, citing recent breaches of confidentiality by PwC Australia and “exam cheating” by various Big Four firms in many jurisdictions.

FMA says firms must go beyond reactive systems to report unethical behaviour, actively promoting ethical behaviour both in codes and in practice.

Its 2023-24 review of all firms’ implementation of the new quality management standards will include an assessment of whether the firm “demonstrates a commitment to quality through a culture that recognises and reinforces the importance of professional ethics, values and attitudes.”

It will also check whether the firm has policies and procedures in place to comply with the professional and ethical requirements as set out in PES 1.

“We will also verify, through review of the firm’s system and processes and a sample of audit engagements, whether the policies and procedures are appropriately executed.”

The regulator says it expects firms to report ethical breaches to the global firm and to the relevant regulator and professional body, and to be transparent with information about ethical breaches to staff and partners.