New Zealand auditors hot on procedure, some poor on execution

This article was current at the time of publication.

The quality of audit in New Zealand is “reasonably good”, but some auditors still need to tighten up on basics, notes the FMA’s (Financial Markets Authority) Audit Quality Monitoring Report 2024.

“Auditors have developed good procedures, but they’re not always executed well,” says Jacco Moison, FMA’s Head of Audit, Financial Reporting and Climate Related Disclosures.

In more economically challenging times, there’s more incentive to commit fraud, so people must be more alert to this risk, notes Moison, who says getting back to basics is key. “Some auditors don’t do basic procedures, such as checking data is accurate and complete, and checking balances of underlying information,” notes Moison.

Quality management standards

In this year’s (2023-2024) review of nine of the 12 domestic registered audit firms, the FMA noted that these firms have successfully transitioned to the new PES3 standard of systems for internal quality management.

The report found only limited areas that need improvement.

Next year’s (2024-25) review will focus on whether audit firms have “appropriately designed and performed procedures and testing for the effectiveness of their quality management systems”.

Audit findings

However, while FMA saw a decrease in the overall number of findings per audit file, there was a slight increase in the number of significant findings compared to last year.

This year’s report found four audit files in which there was “insufficient evidence available to make a reliable assessment of material misstatement,” and one in which there was “insufficient evidence, additional audit work required, impact to be assessed”.

Moison says that, while difficult audit areas such as acquisitions are well done, “somewhat paradoxically” some auditors failed to perform basic procedures.

One example is insurance company audits.

Where a claim has been made, Moison says FMA would expect the auditor to check that a policy was in place and examine invoices and the approval procedure. “There might be a process within the insurance company, but the auditor’s not necessarily checking.”

Assessing fraud risk

The report noted there were still shortcomings in the fraud risk assessment process relating to appropriate documentation of what risk factors were considered in selecting journal entries to be assessed.

Moison says the basic areas of fraud checking procedure, such as checking bank balances, are often done by junior team members and can fly under the radar.

Going concern

When it comes to going concern assessments, the report notes that professional scepticism is important when evaluating financial forecasts used to make such an assessment.

“The disclosures and assumptions made by management and directors should be supported by sufficient audit evidence,” notes Moison. 

In one instance in which the audit failed to obtain sufficient evidence to support a going concern assessment, the auditor’s report included a “material uncertainty” paragraph.

However, it failed to show how the auditor obtained sufficient evidence a third party was able to provide financial support if needed.

FMA could also not establish how the auditor reviewed key assumptions in the forward-looking cash flows, nor how the auditor verified if the disclosures in the financial statements met the requirements of accounting standards.

Moison says the auditor needs to check the going concern assessment applies for at least 12 months after the audit, even where there are, for example, only nine months of financial data available.

The auditor also needs to check the assumptions supporting budget or cash flow forecasts.

If auditors are confronted by a significant bulge in revenue, they should be asking what supports that and is it realistic, says Moison. He also says this scrutiny should also apply to any future capital raising claims. 

Other significant findings

FMA also highlighted two areas in which it identified common or more significant findings: revenue recognition, accounting estimates and the use of service organisations.

It noted “continuous improvement” in the audit of accounting estimates but highlighted some continuing shortcomings.

For example, the auditor didn’t assess the “relevance and reasonableness” of the underlying assumptions used by management experts in assessing the fair value of existing investment property, or the cost to complete a new property.

Revenue recognition and the use of service organisations was noted as an area in which FMA identified the most significant findings.

The report found that, in some examples the auditor's documentation indicate an unclear understanding of the revenue process and lack of testing of the reliability of third-party reports.