Background 
Last year, the Australian Securities and Investment Commission (ASIC) inspected the Big Four (Deloitte, Ernst & Young, KPMG and PriceWaterhouseCoopers) and reported back on independence. This year, the inspection covered auditor independence and audit quality and was carried out on the Big Four again, as well as six mid-tier firms (BDO, Horwath and PKF in Sydney, Grant Thornton in Perth, Pitcher Partners in Melbourne and RSM Bird Cameron).  
 
This article summarises the key findings of this year’s report. 
 
Overall observations and findings

• 'The Firms have generally responded positively to the new Australian legislative requirements for auditor independence and audit quality.'
• Many firms have committed resources and, where required, developed existing policies and systems. However ASIC does raise concerns about the level of resources and documentation that other firms have in place
• ASIC found considerable variation between firms
• Some firms have been slow in planning and implementing a transition to the new regime
• There is a need to further improve the quality of audit work being done by both the Big Four and the mid-tier firms. Many audit quality findings relate to incomplete documentation of work

• 'We are encouraged by the improvements made by the Big Four Firms since our first report in 2005 and the commitment to independence and quality demonstrated by their leadership...inspections indicate...significant progress has been made'
• 'We recognise, however, that the Big Four Firms have had limited time since the completion of our first year inspections to implement all of our observations and findings...it would not be reasonable to expect actions taken by the Big Four Firms on our first inspection report to have had significant effect on [this year’s] audits.'
• Inspections suggested that some audit quality improvements were still required. While these '...could be characterised as further enhancements to an already fundamentally sound process...' areas for improvement include:
  • Compliance with their independence policies
  • Documentation and approval of non-audit services
  • Completeness of audit documentation

• 'We are encouraged by the policies and systems developed by mid-tier firms in some areas of independence and quality'
• Some concerns were identified. Most are consistent with recent reviews conducted by other international regulators of mid-tier firms within their jurisdictions. Concerns included:
• Four firms need to further develop independence policies and systems to ensure they fully comply with CLERP 9 requirements
• 'Five firms do not have adequate documentation supporting decisions to provide non-audit services to audit clients. In two cases, documentation was inadequate to support the firms’ views that their policies…were complied with'
• 'In all firms, partner performance reviews are either not conducted or not documented, and/or the remuneration of audit partners is linked purely to financial results without explicitly considering audit independence and audit quality'
• 'Two firms have conducted very limited testing of compliance with audit independence policies and systems and four have not commenced any testing program
• 'The application of audit methodologies ranges from two firms using audit manuals fully mapped to auditing standards and supported by tailored global proprietary software, to two firms having no audit manuals (although limited guidance is provided in audit templates)
• 'Most firms need to improve compliance with Auditing Standards AUS 512 Analytical Procedures, AUS 210 The Auditors responsibility to Consider Fraud in an audit of a Financial Report and AUS 514 Audit Sampling and Other Selective Testing Procedures.'

• The Institute: Return to the e-bulletin article Audit: ASIC audit inspection report published
• The Institute: Read about what areas will be inspected by ASIC next year
• ASIC: full report (pdf document)