Improving the audit process
Australia’s small and medium-sized practices have an opportunity to influence auditing standards for the better, says Australia’s chief audit standard setter.
Tim Austin and Roger Simnett FCPA | August 2019
Australia’s auditors are under pressure, particularly small and medium-sized practices (SMPs). There’s not only increased levels of regulation and oversight, but also constant questions raised about audit quality at a time when the business environment is in a state of flux with technology ringing the changes. The perceived value of audit is also a pressing issue. It is increasingly seen primarily as a compliance product. As a result, practitioners face constant fee squeezes.
While a number of the factors impacting the audit environment are outside the remit of standard setters, the Auditing and Assurance Standards Board (AUASB) does control the structure and content of the auditing standards. Over time there has been strong feedback from Australian SMPs, as well as SMPs in other jurisdictions where audits of small or less complex entities are also prevalent, that the auditing standards are becoming too detailed and complex, and the language used not always plain English.
A core concept of the auditing standards is that they can be applied to engagements of all sizes, so only one suite of standards is provided. Consequently, SMPs are increasingly finding that the standards’ complexity and prescriptiveness, to meet the needs of the most complex audits, is sometimes a barrier to understanding and applying the standards to audits of Less Complex Entities (LCEs).
Complexity and audit quality
Practitioners have told the AUASB that this is affecting their ability to read and understand the standards, which can result in them falling back on a “checklist-based” approach to auditing. This approach, together with SMPs’ concerns of non-compliance, is leading to over-documentation in order to meet the standard’s requirements. This means less focus on the auditor’s professional judgement with little or no commensurate increase in audit quality.
We have seen a number of countries begin to explore their own solutions to address these issues, some countries issuing a single auditing standard for LCEs, as well as professional bodies issuing guidance (for example, CPA Australia’s Small Entities Audit Manual and IFAC’s guide to using international standards on auditing in the audits of small and medium-sized entities).
However, it’s clear that a global solution is needed.
In response to this issue, the International Auditing and Assurance Standards Board (IAASB) has initiated the Audits of Less Complex Entities project to better understand the challenges and to identify possible solutions.
How does Australia influence this project?
The IAASB is asking for direct feedback from the global auditing community on the possible challenges and solutions. This evidence gathering is being done primarily through a discussion paper, Audits of less complex entities: Exploring possible options to address the challenges in applying the ISAs, which outlines the already known challenges.
Alongside this discussion paper is a short survey which gives the SMP community an opportunity to directly influence standard-setting and have a clear voice on a global platform.
Food for thought: the possible solutions
The IAASB has outlined a number of options. Responses to a particular challenge are not limited to one action and could be a combination of options or something not considered so far. The possible responses are:
Revising the current suite of standards
In order to clarify the auditor’s work, the application material could be revised to feature more examples of how an SMP applies the standards. A building-block approach could also be adopted, where the standards start at a base level and additional requirements are built in as complexity increases.
Develop a separate standard for audits of LCEs
A separate standard could be developed based on the ISAs using the same risk-based approach or another framework such as a substantive testing base.
Non-authoritative guidance can be developed for practitioners including focused implementation packs for each new ISA, or guidance for specific areas of the standards.
Further information about each of these options can be found in the discussion paper.
Have your say
It is important that Australian practitioners have their say to drive the direction of this project. Responses to the survey and the discussion paper close on Saturday 31 August.
For further information, visit the AUASB website or contact the AUASB at [email protected]
* Roger Simnett FCPA is chair of the Auditing and Assurance Standards Board (AUASB), Scientia Professor of Auditing, University of New South Wales Sydney and a member of the International Integrated Reporting Committee’s framework review panel.
Tim Austin is project manager at the AUASB.