Audits of public companies by firms around the world continue to show high levels of significant deficiencies in areas such as internal control testing and fair value measurement, according to the International Forum of Independent Audit Regulators.
IFIAR members who conducted audit inspections found deficiencies in 47% of audits of 948 public companies by 122 audit firms, the organization said in its 2014 Survey of Inspection Findings. Forty-one percent of financial institution audits had deficiencies.
The highest number of audit deficiencies were in the areas of internal controls (205 deficiencies, or 24% of audits with at least one defiency), fair value measurement (178/20%), and revenue recognition (114/14%), all of which, IFIAR noted, are among the core building blocks of audited financial statements.
“We continue to see high levels of inspection deficiencies in vital areas of public company audits,” IFIAR chair Lewis H. Ferguson, a board member of the U.S. Public Company Accounting Oversight Board, told Accounting Today. “This is a problem for investors and stakeholders around the world.”
The report found that audit firms’ own quality control systems had the highest number of inspection findings in the areas of engagement performance, independence and ethics requirements, and human resources.
Audit inspectors “cited the failure to establish policies and procedures for engagement quality control reviews that provide an objective evaluation of the significant judgments made by the engagement team and conclusions reached,” the report notes.
An underlying cause of audit deficiencies is “insufficient exercise of professional skepticism during performance of the audit,” IFIAR said, recommending that audit firms pursue initiatives to improve audit quality and the consistency of audit execution across their national firms and international audit firm networks.
“This includes reviewing staffing structures to ensure that sufficient and appropriate expertise and experience is available for increasingly complex entities and audits that require significant judgments,” the report said.
Most of the survey results are consistent with IFIAR’s prior surveys, but the organization does not provide a year-over-year analysis of the quality of audit performance.