QAU Findings, the SMP Perspective and a Simplified Audit Approach
On 21 February 2014, the MIA organised an event, whose main objective was to understand the shortcomings identified by the Quality Assurance Unit (QAU) during its second cycle of monitoring visits to audit practices, particularly those carrying out audits of smaller entities. 130 people attended for the event, whose agenda included three main sessions.
During the first session, MIA President, Ms Maria Micallef engaged with QAU Head, Mr Marcel Coppini in a question and answer exchange that sought to uncover the more common SME audit pitfalls.
In one of the initial exchanges Ms Micallef asked Mr Coppini to explain what he meant by the comment ‘a frequently quoted dictum, unpopular because of patronizing connotations – an audit is an audit’. Mr Coppini said that the term “an audit is an audit” could be seen as far too patronizing by some smaller practitioners even though FEE had made it amply clear that no matter the size of the entity being audited, the basic audit principles must be respected. The overriding objective of a statutory audit is that of forming an opinion on the truth and fairness of the financial statements. International Standards on Auditing (ISAs) dictated how to arrive at that opinion – thereby the dictum “an audit is an audit”. Mr Coppini thought that the complexity rather than size should determine the audit effort involved. He regretted that not enough thinking was going into the planning and completion stages of SME audits. At this Ms Micallef enquired whether the dictum “an audit is an audit” meant that a one size would fit all, or whether the ISAs allowed for proportionality. Mr Coppini agreed that the clarified ISAs allowed for a degree of proportionate application but he did not think that this concept was always understood by practitioners and as a matter of fact, audit programmes were frequently overly tailored at the expense of overlooking the biggest risks.
Ms Micallef asked Mr Coppini to elaborate on his findings about SMPs risk assessment process. Mr Coppini was of the view that the biggest risk is that audit effort was put into those areas with little or no exposure whilst other bigger risks remained exposed, in other words practitioners were not being adequately sceptical. The MIA President asked about the evidence that the QAU expected to see to attest to the practitioner’s professional scepticism. Mr Coppini noted that professional scepticism was particularly relevant to the smaller practitioners in the context of micro-entities audits, where conclusions reached were not supported by documentation of the work done. The MIA President pointed out that IFAC indicated that it was not necessary for the auditor to document every minor matter considered, or every professional judgement made in an audit. Mr Coppini replied that one of the cardinal principles in auditing was to have appropriate and relevant audit evidence and documentation and that the golden rule to audit documentation is that it shall be sufficient to enable an experienced (third) auditor to understand the audit procedures performed, the audit evidence obtained and any significant judgment applied. He thought that audit documentation could be reduced for noncomplex entities but not that it would be discarded completely.
Ms Micallef turned to quality control and asked how quality control and ISQC 1 could be applied in the context of an SMP. The QAU Head believed that quality control procedures were key control measures. He revealed that this was an area which very often was not given the attention it deserved. Towards the end of the debate, the two discussed a number of other particular shortcomings that were identified by the audit regulator including materiality, related parties and related party transactions, going concern and completeness of income.
In the second session, SMP Committee Chairman, Mr William Spiteri Bailey moderated a panel discussion, whose objective was to present the auditors’ perspective to the shortcomings identified by the QAU. Panel members included Mr Mark Bugeja, Mr Hilary Galea Lauri, Mr David Pace, Mr Mark Scalpello and Mr Marcel Coppini. The panel considered the most important issues that were raised by the QAU’s Head.
As regards going concern, panel members thought that Mr Coppini’s view had remained unchanged since the QAU’s inception. By including an emphasis of matter paragraph on going concern auditors were ‘accused of washing their hands’. One panel member noted that in certain cases he felt the need to draw the users’ attention to this matter. Admittedly there could be some confusion amongst practitioners when reporting on going concern. Indeed some might still choose to qualify their report if a material uncertainty is being properly disclosed in the financials, as opposed to including an emphasis of matter paragraph.
On inventory testing the panel thought that the QAU seems to feel that a short cut approach is being taken by practitioners by not carrying out alternative procedures. However such was normally the case because smaller entities did not have an integrated computerised stock system which precluded such alternative procedures.
Some panel members agreed that sometimes practitioners may find documenting the obvious a waste of time, however this had to be done. They agreed with Mr Coppini that the audit file should contain documentation of the auditor’s reasoning. The panel thought that Mr Coppini was being too rigid on smaller audits, expecting extensive documentation also in these cases. They thought that reaching an adequate compromise is subjective and the warrant holder needs to be given some discretion as to the methods used and ways of documenting it.
While practitioners admitted that there might be instances where some risks were overlooked, they insisted that the previous year’s file and a friendly chat with management could give a very good indication of any risks. If none are perceived, practitioners did not think that auditors should try to find risks even when no alarms go off. This was being overly sceptical. In addition panellists thought that this could only be overcome if fees were allowed to increase to allow the audit partner to really focus on planning and risk assessment.
During this session the audience was given the opportunity to engage in an interactive session with the panellists to explore ways of how these shortcomings can be overcome. Questions from the floor included: The role of the QAU and whether it should be more of an educator and not a watch dog; the Regulatory burden being placed on SMPs, including pressures from the Accountancy Board, the FIAU
and now the MFSA.
In the third and final session Mr Simon Flynn and Ms Lucienne Pace Ross, Partners at PricewaterhouseCoopers discussed how ISAs can be applied in the context of SME audits and linked this to the shortcomings identified by the QAU on SME audits.
The Institute will be publishing a suit of articles in the Accountant that will highlight common audit problems encountered by practitioners and that will look at ways of improving the efficiency of the audit process. In addition, the Institute will also be holding a series of thematic workshops that will address the main pitfalls that have been highlighted by the QAU.