While audit work might not be seen as the most glamorous aspect of the business world, it’s nevertheless extremely important. Without accurate and reliable audits, investor confidence falls and companies can struggle to raise capital. Unfortunately, poor-quality work is worryingly common in this sector.
In the UK, for example, 25% of audits were classed by the Financial Reporting Council (FRC) as being below an acceptable standard in 2019; a figure the organization was hoping to get down to 10%. Meanwhile, in the US, the Public Company Accounting Oversight Board inspected broker-dealer auditors and found auditing deficiencies at 91% of them.
In order to make sure an audit is high-quality enough to be up to the standards of these bodies - and therefore accurate enough to put investors at ease - businesses need to update their tactics. Here are a few of the ways companies can maintain their audit quality:
Check for the root causes
Root Cause Analysis (RCA) has become increasingly popular in the audit world, despite being a fairly simple tactic. According to the Institute of Chartered Accountants in England and Wales: “In simple terms, it is a matter of asking ‘why?’, possibly several times.”
The idea behind the strategy is to attempt to identify the underlying causes behind audit findings. This is something audit regulators are usually looking for, with the expectation that auditors will use these root causes to determine remediation activities.
The challenge when it comes to auditing is to decide when to use RCA and when to hold back. If you analyze every single finding, your audits will end up taking you far too much time and won’t be cost-effective.
Improve the front end
The ‘Other Information’ (OI) section of an audit report can often be overlooked. As much as it might seem like a place to put miscellaneous details, it still needs to be backed up with evidence to support the statements made. It’s often called the ‘Front End’ of the report for a reason; it’s likely to be the first thing investors look at, therefore it needs to be backed up with solid information.
The FCR has made this a focus of its advice to auditors recently, stating: “OI, if it is materially mis-stated, can undermine the credibility of the audited financial statements or may inappropriately influence the decisions of users of the Annual Report.” This should therefore be a key aspect of your next audits.
Utilize new technology
There’s plenty of technology out there that can significantly improve your audits. It’s thought that auditing firms are collectively spending around $5 billion each year on new tech, and it’s easy to see why this can be a great investment. A Forbes Insights/KPMG survey found that 94% of corporate finance executives think new technologies improve audit quality.
There are a number of different options for a company looking to improve its audits. One, for example, is the use of AI to sort data. One survey found that 63% of companies are dealing with more than 50 petabytes of data, over half of which is unstructured. Using AI to sort through this can be a significant time-saver and ensure nothing falls through the cracks.