Audit firms told to delve deep into management explanations

Quality Review Board (QRB), a government established body, has come up with several measures that audit firms in the country would do well to follow to improve audit quality and restore lost glory of the audit profession.

Audit firms have been advised not to be over reliant or readily accept the explanations of managements without challenging matters such as underlying assumptions or seek out evidence to corroborate estimates or treatments.

In its audit quality review report for 2019-20, QRB has also advised audit firms to maintain control over external confirmation requests while using external confirmation procedures (for eg bank balances). With technology gaining primacy in the way business is conducted in the recent decades, there are several challenges of audit in a digital environment.

The latest QRB report on audit quality review assumes significance as it comes on the heels of some of the reportedly big audit failures such as IL&FS and DHFL that shook the financial system in the recent years

During financial year 2019-20, QRB completed 87 reviews of audit quality of 69 entities in India. Of these 87 completed reviews, QRB issued advisories to concerned audit firms for further improvement in 71 cases and three cases were recommended to the Council of Institute of Chartered Accountants of India (ICAI) for referring them to the Disciplinary Committee of the CA Institute for necessary action.

Key takeaways

The key takeaways for audit firms covers measures on Standard on Quality Control; audit documentation; Risk assessment and response to assessed risk; audit evidence; audit conclusions and reporting.

As part of the measures on Audit Evidence, the QRB report also wants audit firms to evaluate the adequacy of the work of the internal auditor.

Commenting on these advisories of the QRB in the audit review report for 2019-20, Ashok Haldia, former CA Institute Secretary, said that QRB has reiterated what the auditing standards required all along. QRB has possibly exhorted the auditors to do what they are expected to do even otherwise and do it more diligently, he said.

The issue, however, needs measures for capacity building of auditors particularly through use of data analytics and other IT tools. It would also require to address fundamental issue of independence of auditors and reasonableness of audit fees for enabling quality audits. Unfortunately, these have not been adequately addressed despite being debated for long, Haldia added.

Amarjit Chopra, Past President ICAI, said the advisories of QRB are a reiteration of what has been stated in the auditing standards. It is in fitness of things and in accordance with existing standards of auditing that auditors need to test the credibility and efficacy of management assumptions and presumptions and their representations, Chopra said.