The report outlines six common weakness:
- Risk assessment
ISA 315 (revised 2020) introduced a range of changes, with a clearer emphasis in some areas, such as the understanding of IT systems and controls. Where there are complex IT systems, the ‘understanding’ may require more specialist expertise within the audit firm, which is not always recognised.
ICAEW also highlighted that where there is insufficient justification of judgements leading to ‘low risk’ assessments, quality assurance teams may have concern about the lack of underlying audit evidence in those areas.
- Fraud and error
Some audit firms have embraced technology to assist in their work on journal entries to address the risk of management override. However, the auditor still needs to carefully consider appropriate parameters in the software to identify ‘outliers’. ICAEW has seen some cases where firms use default settings that may be inappropriate for that particular audited entity.
- Estimates and judgements
Whether dealing with accounting for a long-term contract, or valuation of an intangible, the auditor must understand the substance of the product or asset behind the numbers, and how the numbers in the financial statements are influenced by changes in assumptions and other uncertainties. ICAEW warns that simply completing a checklist will offer limited assistance.
- Experts and service organisations
ICAEW concludes that good audit quality is seen when audit teams gain good understanding of third parties and service organisations, reviewing details of assumptions applied or controls in place at the third party, and hold discussions with the third party about their work
- Substantive analytical procedures
Substantive analytical procedures – predictive audit testing where assumptions are anchored in evidence-based criteria – require experience. ICAEW’s monitoring suggests that too frequently inexperienced staff will perform this work poorly.
- Sampling
ICAEW’s more significant concerns about sampling, centre around:
- very low, unjustified sample sizes;
- reductions in sample size taken for non-existent evidence from substantive analytical procedures and/or operating effectiveness of controls; and
- a sampling methodology applied where there is no chance of selection from a material sub-set of the population.
Alongside outlining potential weaknesses and possible root causes, the report contains a spotlight on smaller firms and an update on ISQM 1 implementation. The section on smaller firms includes case studies that reveal contrasting outcomes depending on how smaller firms engage with quality standards.
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