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Smaller audit firms urged to improve risk analysis

"Some are overstretching themselves by taking on too many clients," said Acra's Kenneth Yap


AUDIT firms were urged to further improve the quality of their audits, after the industry regulator's inspections turned up mixed results: improvements in some areas, and recurring deficiencies in others.

The annual report by the Accounting and Corporate Regulatory Authority's (Acra) Practice Monitoring Programme, released Tuesday, noted overall general improvement in the audits of listed companies.

Larger audit firms were also found to have placed a greater emphasis on audit quality, and involved more audit partners in the process. Their internal controls were better compared to before.

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However, some smaller audit firms auditing non-listed companies were found to have recurring audit deficiencies in areas such as revenue recognition, fair value measurements and construction contracts (which are different in that their revenue is recognised as the contract progresses).

One of the root causes of the deficiencies is the incorrect identification of audit risks at the onset - such that the risks identified did not show an understanding of the client's business or key changes during the year of audit, Acra said.

And this was due to the low involvement of the audit partners in the audit review process, as well as insufficient technical knowledge. Acra thus advised audit firms against using a "checklist" approach to auditing.

Still on construction contracts, Acra said public accountants tended to confine their inquiries to finance staff who may not have updates to the progress of contracts, unlike say project managers.

In its inspections of the Big Four firms - Deloitte, EY, KPMG and PwC - Acra said it is heartened that the leadership of these firms have placed a bigger emphasis on audit quality when determining the partners' performance. Partners have also spent more time on their audits over the last three years.

However, junior auditors in the Big Four firms gave feedback that they received less actual coaching than they had expected during the audit fieldwork. Acra said partners and managers need to close this gap by ensuring that they are on-site at the audit fieldwork.

Professor Tan Cheng Han, chairman of the Public Accountants Oversight Committee (PAOC), said Acra will explore stepping up its enforcement actions, including public reporting of inspection outcomes.

"It is untenable that the same audit deficiencies are recurring in the same segment of the industry time and again. It is apparent that some public accountants do not take audit quality sufficiently seriously."

Kenneth Yap, chief executive of Acra, drew attention to the need of improvements from smaller audit firms with non-listed companies as clients.

"Some are overstretching themselves by taking on too many clients, thereby spending less time and effort on the audit process. They should set realistic workload benchmarks and ensure that they have sufficient staff-to-client ratios to maintain the quality of their audits."