In January 2019, ASIC has released their findings from the audit firm inspection program for period from 1 January 2017 to 30 June 2018 with the objectives to promote improvement and maintain quality of audit. ASIC inspect audit firms that audit listed and significant public interest entities. ASIC look at a limited number of files with a focus on higher risk audit areas.
Key findings from 30 June 2018 financial reports
Impairment of non-financial assets
ASIC continued to find instances when:
- Impairment indicators were not assessed appropriately, or no impairment testing assessment obtained from management where there were indicators of impairment;
- Cash flow forecast and key assumptions used in discounted cash flow models were not appropriate and reasonable;
For impairment assessments in mining assets:
- Impairment indicators not in line with AASB 136 and AASB 6, including where market capitalisation was less than net assets;
- Inappropriate provisions of AASB 6 and AASB 136 that apply to impairment assessments for exploration and evaluation assets versus development assets;
- Rights to tenements and existence of exploration licences were not confirmed.
Revenue and receivables
Findings identified in revenue and receivables included:
- Risks were not assessed appropriately, or substantive procedures did not respond to the assessed risks / assertions;
- Relationship used in substantive analytical procedure was not plausible or did not take into account key factors affecting the expectation;
- Data used to develop auditors’ expectation in substantive analytical procedures was not reliable or tested;
- Threshold for investigating differences in substantive analytical procedures too high and / or population not disaggregated;
- Rely on internal controls inappropriately;
- Sample sizes for tests of details were not set adequately;
- Errors from tests of details were not investigated or evaluated;
- Accounting policy for revenue recognition used and consistency with key contract terms were not checked;
- Group audit strategy, instructions to component auditors and evaluation of work of component auditors were inadequate;
- Accounting estimates relevant to the recognition of revenue were not test;
- Differences between recorded amount and the auditor’s expectation of those amounts that exceed the tolerable threshold in substantive analytical procedures were not investigated.
Findings in the audit of taxation balances included instances where:
- Recognition of unused tax losses as deferred tax assets, and the probability that taxable profits will be available to utilise tax loses in the future were not asses appropriately;
- Agreement where subsidiary has critical tax treatment affecting the group were not reviewed;
- Evaluation of work performed by management’s tax expert were missing;
- Evaluation of own tax expert’s work and conclusion were missing;
- No specific instruction to component auditor or review component auditors work papers in key risk areas.
Journal entry testing
Findings in the journal entry testing included instances where:
- Relevant controls were not identified, audit procedures over journals to address the risk of fraud arising from management to override of controls adequately were not performed;
- Completeness and accuracy of journal listing obtained were not tested;
- Journal entries were not tested to supporting documents;
- Journal entries were not tested throughout the reporting period;
- Internal control deficiencies were not identified over journal entry processing.
Enhanced audit reports
ASIC noted the followings in key audit matters:
• Key audit matters were described in general terms rather than being specific to circumstances;
• Audit procedures performed were not clearly described;
• Audit works performed were not consistent with what’s described in the audit report;
• Matters described not being disclosed in the financial report.
Although ASIC has seen improvement in the audit of certain areas such as asset valuation and revenue, these areas continue to record the highest level of findings from their review and should continue to be a focus for firms to make sustainable improvements.