6 December 2015

Financial Markets Authority to audit firms – some work still to do

The majority of firms are still falling short in some aspects of their performance.
New Zealand Finance and Banking
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The Financial Markets Authority (FMA) audit quality annual review for the June 2014 to 2015 year finds that there is significant work still to be done.

While the number of firms performing at a good standard has risen, the majority are still falling short in some aspects of their performance.

Key findings

FMA reviewed 12 registered audit firms, representing half of the licensed auditors in New Zealand. This involved 38 audit files, 13 for listed companies and 25 for other FMC reporting entities. Of these 38 files:

  • 18% were categorised as good, with limited improvements required (up from 5% last year)
  • 37% required improvement (down from 59% last year), and
  • 45% required significant improvements (up from 36% last year).

FMA has identified six broad themes for attention. Most are directed at audit firms but some also apply to audit committees or directors of FMC reporting entities.

Auditor independence

FMA expects audit firms to improve their assessment of independence threats, the safeguards they have in place to mitigate these threats, and the audit work performed to ensure the mitigation is effective. This work has to be clearly documented on the audit files.

Audit committees, or directors of FMC reporting entities, also have a role in emphasising to their auditors how important this is and in challenging them to demonstrate the effectiveness of the safeguards they have in place, especially when non-audit fees are high relative to the audit fee.

Monitoring of audit quality

FMA found that quality control procedures, and the monitoring of those procedures, could be improved to ensure policies and processes are relevant, adequate, and operating effectively. FMA also noted that where internal reviews had been conducted, they were not always followed by effective remediation plans to address the findings.

Audit committees and directors of FMC reporting entities need to ensure they have their own systems and procedures in place to address complex accounting issues or business transactions rather than relying solely on their auditor to address such matters.

Professional scepticism

Lack of sufficient professional scepticism continues to be a concern, especially in areas where significant judgement is required by both the preparer of the financial statements and the auditor. This is reflected in a tendency among auditor firms to:

  • place undue reliance on IT-generated reports, valuations or other reports, without appropriately testing the reliability of the data
  • not seek any independent audit evidence to that prepared and provided by management or related parties of the business, and
  • not consider fraud risk (including financial reporting fraud) and management override in the audit.

FMA expects auditors to evaluate the quality of audit evidence they receive in key areas of the audit. Where insufficient evidence is provided by the business, the auditor must seek to obtain the necessary data from other sources. Where this has not been possible, FMA expects to see documentation on how this has affected the audit opinion.

Testing expert valuations

In most of the audit files reviewed, the scrutiny by auditors of expert valuations was sub-optimal, particularly in regard to evaluating and interrogating the quality of the expert's work.

Where businesses have significant valuations that require significant industry expertise, FMA expects audit firms to engage their own expert to assess the relevance and reasonableness of the key assumptions applied by external experts in their analysis. If experts are not available in New Zealand, the auditor should use an overseas expert.

Responsibility relating to fraud

FMA continues to observe audit deficiencies in relation to auditing procedures for fraud and management override risk.

FMA expects the engagement partner to lead fraud risk discussions in the audit team.

Similarly, audit committees should discuss fraud risks factors with their auditor, and the controls the business has in place to mitigate the risk of material misstatement in the financial statements due to fraud.


FMA found that some audit firms were not complying with current auditing standards on materiality or were using a different materiality standard for testing the balance sheet and profit-and-loss account. Further, when an alternative benchmark to profit before tax was applied, that decision – and the reasons for it – were not well documented.

Other areas for improvement

In addition to the above issues, FMA also expects to see further improvements in some of the areas previously reported on, including going concern assumptions, sampling methodologies, analytical procedures, and documentation of related-party transactions.

Future focus

In the 2015/2016 year, FMA's focus will be on:

  • building on the results of previous quality reviews. Where audit firms have been subject to quality review, they will be required to report to the FMA on how they have addressed any issues identified. Where the FMA believes responses by the audit firm are not appropriate, it may issue directions to the audit firm to make required changes, and
  • implementation of the new audit reporting standard (which will require auditors to communicate key audit matters and to include the name of the engagement partner on audit reports). To ease the transition, FMA recommends audit committees and directors engage early with their auditors on the new requirements and, where possible, perform a "test run", before the new standard comes into effect.

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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