Celebrating 25 Years of Scoop
Special: Up To 25% Off Scoop Pro Learn More

Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search


Auditors Respond Well To Challenges Presented By COVID-19

Auditors have responded well to financial reporting challenges presented by the pandemic, according to the Financial Markets Authority (FMA) - Te Mana Tātai Hokohoko Audit Quality Monitoring Report for 2020/21.

Despite COVID-19 creating higher levels of economic uncertainty and preventing some auditors from performing on-site procedures, the FMA noted improvements in how auditors applied professional scepticism and supported accounting estimates with enhanced documentation. Auditors also used new technologies to replace or supplement audit procedures. These were positive developments that increased the overall quality of the audits that were reviewed this year.

The annual review, part of a three-year monitoring cycle of all licensed auditors, scrutinises selected audit files for listed companies and other entities that report under the Financial Markets Conduct (FMC) Act. The FMA targets a sample of higher risk audit files, while others were selected at random. This year’s sample size is consistent with previous years.

In this year’s sample of 21 files, 76% were found to be compliant, an increase on the previous two years’ samples (65% in 2019/20 and 67% in 2018/19). A non-compliant rating does not necessarily mean that financial statements fail to show a true and fair view or require restatement. As part of its monitoring, the FMA can ensure corrections are made when there are significant issues. This year, the FMA identified two financial statements that were materially misstated, both of these were subsequently re-issued or re-stated.

Advertisement - scroll to continue reading

Are you getting our free newsletter?

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.

Sarah Vrede, FMA Director of Capital Markets, said: “The statutory annual review is an important part of our ongoing programme of monitoring of audit quality. While we do not consider the sample of files we reviewed to be statistically significant, nor representative of the industry performance as a whole, our findings provide an indication of where audit firms can focus to improve their processes and audit quality. We anticipated COVID-19 would have a significant impact on the quality of financial statements, and found that auditors were able to respond well to pandemic related challenges - maintaining quality and timeliness. In fact, the pandemic resulted in auditors rethinking and exploring new ways of working, leading to greater efficiencies.”

Examples of changes in procedures included additional checklists, involvement of senior staff and experts during the audit process, the creation of focus groups to initially assess entities impacted by COVID-19, and fast-tracking technology utilisation.

Focus on finance companies

An area of focus in this year’s report is findings from the FMA’s reviews of finance company audits over the past five years. External auditors have previously been criticised for not providing timely warnings to investors about the going concern risks of finance companies.

We reviewed nine finance companies and found that auditors did not obtain sufficient evidence to support their opinion for two companies. The most common issue related to auditors relying too much on an entity’s own IT general controls, without necessarily testing these controls. IT general controls underpin data security and access, reporting, automated controls and other functionality to ensure these systems can be relied upon. Any weaknesses can impact the integrity of financial statements and audit quality.

Ms Vrede said: “Auditors need to improve in several areas specific to finance companies, such as the accuracy of member loan balances and related party transactions. We expect directors to pay additional attention to related party transactions and ensure these transactions are appropriately disclosed. Finance company directors are also responsible for overall financial reporting compliance and sufficient record-keeping.”

Audit firm culture

A further area of focus in the report is audit firm culture and its impact on audit quality. It is important that audit firms foster a culture of independence, where auditors are encouraged to exercise professional scepticism and challenge the judgement of an entity’s management. A culture of independence can be undermined by pressure to complete multiple audits on time and on budget.

The following concerns around culture were identified within two of the five firms we reviewed:

  • Business growth was at times prioritised ahead of public interest responsibilities
  • Entrepreneurial cultures could lead to excessive risk taking with few consequences
  • Some auditor mindsets were not sufficiently geared toward professional scepticism and challenge
  • Leadership sent mixed messages about key priorities, such as the importance of client satisfaction over audit quality

Ms Vrede said: “Culture is critical to the way an audit firm conducts its audits - audit quality cannot be improved through training or audit procedures alone. Leaders of audit firms should cultivate environments where auditors can share opinions, express concerns and make mistakes without focusing on blame.

“Directors and audit committees also have a key role in driving audit quality and in this report we outline a number of areas of focus that we encourage them to consider and action.”

Other areas of focus in the report:

  • Accounting estimates
  • Materiality and audit sampling
  • Root cause analysis


Download Audit Quality Monitoring Report 1 July 2020 – 30 June 2021

© Scoop Media

Advertisement - scroll to continue reading
Business Headlines | Sci-Tech Headlines


Join Our Free Newsletter

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.