FMA Audit Quality Monitoring Report

FMA Audit Quality Monitoring Report

Audit quality has come under recent scrutiny with the most noticeable being in the United Kingdom and Australia.

The inquiries mainly focus on independence and structure of audit firms, the level of competition in the market, the scope of audit procedures, the accountability of audit committees and the auditor’s oversight and the power of regulators (such as the FMA for New Zealand).

With this in mind, we have scrutinised the Financial Markets Authority’s audit quality monitoring report and have summarised what you need to know to improve the overall quality of your relationship with your auditor.

The report focused on six key areas:  Directors’ responsibility for audit quality, auditors’ independence, related party transactions, auditors’ response to fraud risk, accounting estimates and auditing credit unions. We have excluded elaborating on credit unions, but the remaining focus areas can be applied to your business:

Directors’ responsibility
Ultimately it is the directors’ responsibility to prepare financial statements in terms of the accounting standards set by the External Reporting Board (XRB). The systems, processes and controls in use by your business need to be tailored to enable reliable reporting. From our experience, this not only improves the financial reports produced for audit purposes, but also provides invaluable tools for your board and management to identify potential weaknesses in the business and enables them to mitigate unnecessary losses and to improve the bottom line.

Auditors independence
Although there are currently no regulated requirements for auditor rotation outside the scope of the FMA’s regulations; independence is still an important aspect of our engagements. The confidence of the users of financial statements in the audit report is directly linked to their perception of the auditor’s independence.
The main point highlighted is when auditors step into a non-assurance consulting role, which is quite a common occurrence in smaller firms (financial statement preparation or tax advice). There are certain cases where the auditor could provide some assistance, however this discussion should happen when you approach the auditor and discuss the scope of your expectations.

Related party transactions
Disclosure of related party transactions and balances helps improve the transparency and comparability of the financial statements to the user. If there are suppliers in the business for example, that apply services at cost or extended credit terms, this could affect the business if a director related to the supplier decides to resign from their role.

Auditors response to fraud risk
With the regulation of AML/CFT compliance in recent years, fraud is a much talked about topic. When fraud is identified in the business it breaks the confidence in the reliability of data, the trust in staff and perhaps even the effectiveness of the board’s management of the business.  Policies, procedures and monitoring of controls by management helps to ensure there are processes in place to detect fraud and identify areas in the business that are susceptible to fraud, so proper safeguards can be put in place.

Accounting estimates
An estimate is subject to judgement and can often lead to controversial conversations. Your role as governance is to ensure that there is logic to the estimates you applied. Thresholds and milestones used to determine your companies’ estimates should be well documented and backed by market norms and trends. Using an independent management expert or hiring a staff member with extensive experience and expertise in the specific area of your business subject to estimates, would also be well worth considering.

You can read the full report here.

If you have any questions, please contact your Moore Markhams Audit advisor.