BAC305 Bachelor Of Business Accounting: Improving Audit Quality

BAC305 Bachelor of Business Accounting

Questions:

Assignment topic:

Recently the Australian arm of one of the Big4 accounting firms, KPMG, was heavily fined by the Public Company Accounting Oversight Board after a review found widespread cheating by staff on training tests.

This indicated a problem with the culture of the firm, and many would assume other values and ethics had probably also been compromised. There have been ongoing reports of problems of this nature, in audit quality and culture of the Big4 Accounting and Auditing firms.

Consequently, the Australian Securities and Investments Commission (ASIC) have performed audit inspections. In their report issued in 2019, ASIC defines audit quality as follows (section 30): “For our regulatory purposes, audit quality refers to matters that contribute to the likelihood that the auditor will:

(a) achieve the fundamental objective of obtaining reasonable assurance that the financial report as a whole is free of material misstatement; and

(b) ensure material deficiencies detected are addressed or communicated through the audit report.” (ASIC 2019).

The report has also indicated the following (section 58):

“Some initiatives that appear to have improved audit quality: Initiatives undertaken by some firms that appear to have a positive impact on aspects of audit quality at those firms include:

(a) forming specialist focus groups and risk panels on impairment of non-financial assets, substantive analytical procedures and other areas to develop the necessary expertise, support and coaching for audit teams;

(b) increasing partner time spent on engagements, in the audit files, at the audited entities and with the audit team;

(c) developing a strong culture focused on audit quality with accountability at all levels of partners and staff;

(d) conducting effective analysis to identify the root causes of individual and thematic findings from internal and external file reviews and implementing initiatives to address those findings;

(e) proper project management of audits, including monitoring—at audit team and firm level—of progress against key engagement-specific milestones, and addressing issues early to minimise deadline pressures at the conclusion of the audit; and

(f) firm and peer quality reviews of completed audit files by independent reviewers that include a focus on difficult judgement areas; and

(g) greater education of directors and management of audited entities to improve financial reporting quality and support the audit process.” (ASIC, 2019).

Required:

Explain how the recent negative publicity regarding KPMG may have impacted shareholder and other stakeholder confidence.

There has also been concern over KPMG providing unmodified reports for a company, Carillion, and the company going insolvent soon thereafter.

There have been complaints that the auditors did not examine the accounts properly and failed to spot early signs of financial fault lines in the company. What reasons led to the audit firm giving an incorrect opinion and what could have been done to avoid this? Explain.

Based on your individual research, please support two of the the above findings by ASIC and suggest any other initiatives that could positively contribute to improving audit quality.