ASIC has today released a thematic report following its review of root cause analysis on negative audit quality findings conducted by the largest six audit firms. The report also includes better practice recommendations.
The review was conducted in advance of the new audit quality management standard ASQM 1 Quality Management for Firms that Perform Audits or Reviews of Financial Reports and Other Financial Information, or Other Assurance or Related Services Engagements coming into effect. ASQM 1 requires all audit firms to have systems of quality management designed and implemented by 15 December 2022.
ASIC Commissioner Sean Hughes said, ‘ASIC is encouraged that the largest six audit firms have demonstrated many good practices in their voluntarily conducted root cause analysis as part of their existing quality control systems.’
‘To ensure that the right remedial actions are introduced to improve audit quality, it is important that all audit firms conduct an objective, thorough and timely root cause analysis on negative audit quality findings to identify and address the real underlying root causes of any deficiencies’, said Mr Hughes.
Report 739 Root cause analysis: Audit firm thematic review (REP 739) identifies many existing good practices across the six firms, including the inclusion of a wide range of sources of audit files for root cause analysis, and maintaining independence of the root cause analysis teams. The report also includes better practice recommendations for all audit firms to consider in planning for the implementation of ASQM1.
‘Our reviews confirm the firms have in place root cause analysis programs that are fit for purpose but there is scope for continual improvement, as root cause analysis is also an iterative process’, said Mr Hughes.
ASIC’s review showed that the top root causes of negative audit quality findings, across the sample reviewed, was skill deficiency in individual auditors, followed by application of professional scepticism and auditor mindset.
ASIC encourages audit firms to consider potential underlying root causes more widely, including a focus on supervision and review and exploring further relevant remedial actions to improve audit quality.
Background
Root cause analysis is a method of identifying the underlying cause(s)of a problem or fault to prevent them from recurring and identifying good practice as part of continuous improvement.
The six firms included in this quality control review were BDO firms in Australia, Deloitte Touche Tohmatsu Australia, Ernst & Young Australia, Grant Thornton Australia Limited, KPMG Australia and PricewaterhouseCoopers Australia.
All six firms had voluntarily established programs of conducting root cause analysis on negative audit quality findings from internal and external monitoring of audit files, as part of their existing quality control systems, prior to ASQM1 being mandated.