There are serious weaknesses with how the six largest auditors identify and respond to fraud risk during their audits of listed companies, along with concerns over how they monitor listed entitities' compliance with fraud law and regulation, a report by the accounting regulator says.
The Financial Reporting Council has published its Audit Quality Thematic Review, which considered the relevant aspects of 26 audits and detailed examples of the weaknesses, including situations in which audit engagement partner were often not present at key meetings to discuss the susceptibility of a company's financial statements to material misstatement.
In some instances, the FRC also found that auditors showed little evidence that they considered incentives for management to manipulate other information disclosed in an annual report - beyond the financial statements - to achieve remuneration targets, in cases where management placed emphasis on this information.
The FRC also found that on several audits, fraud risk factors were identified in various planning work papers but were neither collated nor assessed for their impacts, while in other cases, auditors appeared to consider fraud risks and relevant laws but treated these a s a compliance exercise and presumed that such issues were unlikely to occur at the company they were auditing.
The themes for the review were chosen because they are matters of public interest where there are high expectations and common misunderstandings of the auditor's role.
The report highlights a number of areas where auditors should improve the quality and effectiveness of their audit procedures.
'Auditors are encouraged to increase their focus on identifying fraud risk factors when assessing the risks of the financial statements being materially misstated due to fraud. In particular, they should ensure their approach is tailored to the entity they are auditing.
'Auditors should also improve their identification and assessment of the laws and regulations affecting the specific audited entity, as well as exercising greater professional scepticism in relation to possible breaches that could affect the financial statements,' the report said.
To assist audit committees, the report also identifies a number of areas in which their oversight of the audit process relating to fraud risks and laws and regulations might be enhanced. Further, when tendering their audit, Audit Committees are encouraged to enquire about the nature and frequency of the training firms provide on these areas to audit staff.
The regulator said it would follow up on the progress of improvements in future inspections of individual audit firms.
Paul George, executive director, for Conduct said: 'The consideration of fraud risks and compliance with relevant laws and regulations, and the performance of related audit procedures, tends to be viewed as a compliance exercise rather than as an important and integral part of the audit. Improvements are needed to better focus attention on the potential impact on the financial statements and the need for appropriate professional scepticism to be exercised in these areas throughout the audit process.'
To view the report go HERE
