Recent years have seen significant challenges across many sectors, and the world of audit is no different. We have seen a vast range of new initiatives, technologies, regulatory changes, government intervention and world events which have impacted the audit industry.
Our audit service offering is continuously evolving, adapting to new processes and requirements, and ensuring quality remains at the forefront of what we do.
In this article, we explore some of the key challenges, changes and adaptations to audit composition as the landscape develops.
It would be difficult to avoid referring to Covid-19 within an audit update article. Whether it be operational challenges, or financial reporting requirements, it has had and continues to have a substantial impact on the way in which we work. Diversification of activities, managing staff and their wellbeing, cashflow and working capital worries, and enhanced disclosure requirements are all but a few of the audit challenges we have seen and supported our clients on.
This, against the backdrop of Brexit, the Ukraine War, and economic instability means our clients are working harder than ever to ensure the success and longevity of their interests. In reality the effect of Brexit was unknown, and we are now starting to see the resulting impact on the macro economy, and the challenges it is bringing, such as labour shortages, economic volatility and supply chain implications, amongst others.
These challenges come at a time when audit is firmly in the limelight but not for the right reasons. Scrutiny of the audit profession’s integrity and ability to provide a quality service has never been so high. So much so, that the government’s response has been significant, and we are now facing the start of the largest audit reforms of our time.
The government have confirmed they will revamp the UK’s corporate reporting and audit regime through a new regulator, giving greater accountability for very large businesses and more corporate transparency, ensuring that effective reporting and audit restores investor and public access and confidence to information in the public domain, which is crucial to encouraging investment and growth in the UK economy.
Whilst they have now confirmed that the focus will be on very large unlisted companies >750 employees and >£750 million annual turnover, there will certainly be some good practice and takeaways for smaller firms looking to enhance their corporate governance.
The International Audit and Assurance Standards Board (IAASB) approved key revisions to core International Standards on Auditing (ISAs) over the last couple of years, which have increased the requirements for auditors across a variety of standards. We saw the adoption of three ISAs last year, and a further two come into play for audits for entities with periods starting on or after 15 December 2022.
The audit impact has varied with each of these, but so far we have worked with our clients in ensuring requirements are met, and our audit work supports the audit opinion in the following areas:
- ISA 700 – ‘Forming an Opinion and Reporting on Financial Statements’ introduced a new requirement for the auditor to report and explain to what extent the audit was considered capable of detecting irregularities and you will now see that the report expands significantly in this area. The audit report is worth a read – to firstly understand the assessment and procedures used by auditors in their audit approach, but also to drive internal discussions around this area
- ISA 570 – ‘Going Concern’. There is now a specific requirement to obtain sufficient appropriate audit evidence regarding, and conclude on, whether a material uncertainty related to going concern exists. This has led to additional documentation of considerations in arriving at the going concern conclusion, albeit this may have been disguised by the additional Covid-19 and Brexit considerations which were prevalent during the first year of implementation. The concept of “stand back” was introduced, and a requirement for increased scrutiny of management assumptions and calculations in arriving at their going concern assessment, along with robust challenge of this assessment
- ISA 540 – ‘Auditing Accounting Estimates and Related Disclosures’ required the separate assessment of inherent and control risks, as well as a concept of a spectrum of inherent risk. The requirement to assess accounting estimates for complexity, subjectivity, and estimation uncertainty and integrate this into the risk assessment and audit approach led to higher risk estimates being tested vigorously, management’s judgement being assessed for adequateness, and post balance sheet review.
As these revisions come through, the additional work and documentation required of auditors increases, and whilst in some cases it reflects work previously undertaken, the additional work comes from more detailed documentation evidence required. You may have seen new audit requests or testing taking longer as a result of these changes.
It doesn’t stop there…
- ISA 315 – ‘Identifying and Assessing the Risks of Material Misstatement’ brings big changes, particularly in a new spectrum of risks, integration of the concepts of subjectivity, complexity, uncertainty, change and susceptibility to misstatement due to management bias or fraud into the risk assessment procedures, a more detailed assessment of the control environment, particularly around IT, and furthering the concept of “stand back” to the risk assessment process
- ISA 240 – ‘The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements’. This amendment is on the horizon and sees a revision to the objectives of the auditor, to reflect the requirement to obtain reasonable assurance that the financial statements are free from material misstatement due to fraud, a greater focus on professional scepticism, engagement team skill base and continuation of the “stand back” concept.
The role of the auditor continues to advance, and we work with our clients to ensure they are kept abreast of these changes, how it will impact the audit work (and most importantly, how it will impact them), provide our audit deliverables, and integrate into their internal systems and procedures. Additional work will enable the audit conclusion to be reached, but also extends the opportunities to add value through recommendations and controls assessment. As we look forward, the importance of a good working relationship will ensure the successful implementation for both parties. Taken together it is difficult to see how the impact of these revised auditing standards won’t have an added cost burden to businesses.
With all the challenges and changes which are now implemented, it is more important than ever that the structure of the audit takes into account audit efficiency and quality. As auditors, it is crucial that a clear audit methodology, early engagement with changes and continuous communication and engagement throughout the year occurs. Audit should not be an end of year process.
Technology also plays an important part in the audit process. Innovation in both client engagement and execution procedures means risks can be addressed without bias, large datasets can be interrogated, and auditors can focus on the important parts rather than administrative burdens.
Ways in which innovation can help include:
- Collaboration tools
- Data analytics, including review of datasets and risk evaluation
- Electronic confirmations
- Added value and useful insights into nominal transactions.
Audit quality is imperative to ensuring value for money and board assurance, but good quality doesn’t always mean a smooth audit. As you have seen, with the number of additional regulations and changes, audit is going to require more time investment from the internal finance team to ensure auditors have the documentation and supporting information they need to reach their audit opinion.
The key to a good audit is communication and collaboration. The auditor will ensure informed management are kept up to date with audit changes, work with their client to understand the impact of the changes and devise an audit plan and approach that suitably addresses risk.