IFIAR: 40 Percent of Audits Flawed

Chris Gaetano
Published Date:
Mar 12, 2018

The International Forum of Independent Audit Regulators, a body of audit industry regulators such as the U.S.'s Public Company Accounting Oversight Board, released a survey of inspection findings from its members saying that, worldwide, about 40 percent of audit engagements contained at least one problematic finding. This is out of the 918 audits conducted by 120 firms in 2017.

The two areas with the greatest number of findings were accounting estimates and internal control testing. For accounting estimates, most of the findings related to the failure to assess the reasonableness of assumptions, including consideration of contrary or inconsistent evidence. For internal control testing, the most common type of finding was the failure to obtain sufficient persuasive evidence to support reliance on manual internal controls, followed by the failure to sufficiently test controls over data reports produced by management. 

While IFIAR initially anticipated that revenue recognition would be another major source of findings, the survey found this was not the case. The type of revenue recognition finding most frequently cited relates to the failure to appropriately assess and respond to the risk of fraud, but levels overall revenue recognition findings were actually lower than other areas. 

The report noted that, despite the global nature of the survey, the average rate of inspections with findings varied considerable across jurisdictions. For instance, jurisdictions that inspect relatively few audits per year had a higher rate of findings than those that conducted more: those that inspection 20 or fewer audits had a 62 percent rate, while those that did 21-40 had a 46 percent rate, and those that did 41 or more had a 30 percent rate. Other things affecting the rate include the degree to which a particular regulator takes risk into account when select inspection targets, the experience of the regulator in question, and the sample size and characteristics. 

It also noted that, while 40 percent is still unacceptably high, it does represent an improvement over previous years. The 2016 survey found that 42 percent of audits inspected had at least one finding, while the 2014 survey found a 47 percent rate. Despite these improvements, though, it remains far from the goal IFIAR had set for itself of a 29 percent or less rate by the year 2019. 

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