From 1 July, the Financial Markets Authority (FMA) will
perform its audit quality reviews in-house, using FMA staff and
Previously the work has been contracted to the New Zealand
Institute of Chartered Accountants. The FMA will maintain the same
auditor regulation focus as has applied in the past and will aim
for the same three year review cycle.
Stronger audits for the auditors an FMA priority
As we have previously
reported, the FMA made lifting auditor standards a priority
after its 2014-2015 audit quality annual review found that the
majority of audit firms were falling short in some aspects of their
It is now building up its enforcement capability by advertising
for auditors who have recently left the industry and are interested
in becoming reviewers for the FMA.
The move is timely as the first "key audit matter"
reports are now being published, ahead of the new formats becoming
mandatory for NZX issuers with reporting periods ending after 15
Focus areas for audit quality reviews
Auditor independence – particularly in relation to firms
providing significant non-audit services to FMC reporting entities.
Have they placed appropriate controls in place to protect their
independence? Have all aspects of the non-audit services been
reported to the board, in the financial statements and in the
Audit quality control systems and supervision –
especially where the FMA audit review picks up matters not detected
in the firm's own quality review procedures.
Professional scepticism – is there evidence of this in
relation to: significant judgements on accounting and fair value
estimates, reliability of data and representations provided by
management or directors, impairment calculations, recoverability of
assets and changes in accounting treatments.
Audit evidence – particularly in relation to going
concern, revenue recognition and the completeness and accuracy of
Does the auditor understand the FMC entity's business model
sufficiently that all key risk areas are included in the audit
Has the auditor taken adequate steps to assess the risk of
fraud? This aspect has become top of mind for some audit
committees, following recent reported instances of long-term frauds
perpetrated by some previously trusted listed issuer
Has the auditor assessed the competence and objectivity of any
experts relied on in the audit?
Audit fees – where these are very low or do not reflect
the complexity of the business, the FMA will assess whether the
work has been completed to an appropriate standard.
Other FMA priorities – "key audit matters"
The other key priority outlined in the FMA's
oversight plan will be to monitor the new assurance
standard for "key audit matter" reports, required for
all New Zealand listed issuers with a reporting period ending on or
after 15 December 2016 (although it can be used earlier).
For other FMC reporting entities, considered to have a higher
level of public accountability, the effective date will be for
periods ending from 31 December 2018.
'Key audit matters', are those that, in the
auditor's professional judgement, were most significant in the
audit of the financial statements for the current period. The
auditor will be required to report why each matter was considered
to be significant, and how the matter was addressed in the
Some issuers, notably NZX Limited itself (which has already
published its first "key audit matter" report a year
ahead of the mandatory deadline), are starting to turn their minds
to the new requirements. A number are considering 'dry run'
reports (kept private to directors) for this year's financial
FMA is also working with EU officials to get full recognition of
New Zealand auditors within the EU (they currently have a
transitional recognition until a final equivalence decision is
Chapman Tripp comment
The audit profession has moved within the last ten years from
light-handed self-regulation to one of the most heavily regulated
New Zealand professions - particularly for individual auditors that
must be licensed by FMA, and audit firms that must be registered,
to audit FMC reporting entities.
The key audit matter regime raises a number of complex legal
issues that we will comment on in a future Brief Counsel.
But it will be fascinating to watch investors, issuers, auditors,
and the FMA respond to the new requirements.
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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