13 / 18
1 3
Issue 27 July - September 2014
I NSPECT I ONS
Inspectors highlight points of audit deficiencies
Local and overseas shareholders and investors need to be
confident that the financial statements of the South African-
based organisations in which they are investing are a true
reflection of the state of their financial health. Moreover, other
stakeholders, such as employees, financiers and tax
authorities, also rely on organisations' financial statements.
Investors react to economic indicators and financial analysis
of companies and will not hesitate to shift their investments to
other companies or even countries based on negative
rumours. It is therefore crucial that investor confidence be
maintained through strong regulations to keep investments in
South Africa. Disclosure of audited historical financial
information and the future outlook of a business enable
investors to better predict the risk exposure and growth of their
investments.
The Independent Regulatory Board for Auditors (IRBA) plays
a vital role in this regard by conducting inspections of auditors'
files in which they have documented sufficient appropriate
evidence to support their opinion on the financial statements of
their clients, and implementing remedial action at the audit firm
should deficiencies be identified. In some 3% of cases, this
includes taking disciplinary action against the auditor.
Highest priority is given to the inspection of auditors' files on
systemic public interest entities. This is where public interest
would be at greatest risk as a result of an audit failure. For
example, if a bank is in financial trouble, it can result in rating
agencies downgrading other banks, which in turn deters
investment, thereby affecting the entire economy. Similarly, if a
bad practice of one public interest entity becomes common
practice across an entire sector, it could have a significant
impact on the economy in its entirety.
The inspection process includes monitoring the compliance of
auditors and auditing firms against international standards
and codes of conduct relating to ethics, independence,
objectivity and other professional principles, as mandated in
theAuditing ProfessionAct of 2005.
Auditors cannot practise in South Africa unless they have
attained the required competence that meets international
requirements and qualifies them to be licensed by the IRBAto
practise as a RegisteredAuditor (RA).
IRBA inspectors take a risk-based approach when inspecting
the audit evidence that supports the auditors' documented
conclusions regarding the financial statements they have
audited relating to areas that could have a significant impact
on their opinion.
Inspections focus on complex areas in which the auditor has
exercised his or her professional judgment, such as how a
company has determined the fair value of its assets. The
objective is to challenge the auditor's professional skepticism
and determine whether he or she has challenged
management's assumptions and conclusions in the financial
statements.
Points of unsatisfactory inspections include material
misstatements in the financial statements not being reported.
Reasons for this could include: the auditor not being skeptical
enough; the auditor not having the necessary competence to
challenge the client; the opinion lacking in independence due
to the auditor's bias towards the client or that management has
hidden the truth.
Misstatements could be due to fraud. If the company does not
have the checks and balances in place to detect this, the
auditor should expand the extent of the audit. If auditors do
detect fraud, they are required to report it to the IRBA as a
Reportable Irregularity, which the IRBA passes on to the
relevant authorities.
Other points of failure include the auditor not documenting
sufficient and appropriate audit evidence to support his or her
audit opinion. For example, a company’s revenue is a
significant risk area due to a presumed fraud risk, but there is
no evidence or insufficient evidence in support of the auditor's
opinion that the revenue is correctly recognised in the financial
statements.
Breaches of the codes of professional conduct is another point
of failure that may be identified during an inspection, an
example being an auditor having a direct or indirect financial
interest in the company he or she is auditing.