IFIAR: International Forum of Independent Audit Regulators IESBA

IFIAR: International Forum of Independent Audit Regulators IESBA

IFIAR: International Forum of Independent Audit Regulators IESBA Meeting June 28, 2016 Brian Hunt, IFIAR Vice Chair New York, 28 June 2016 Agenda IFIAR Governance Structure 2016 Key Work Streams 2015 Inspections Survey Discussion with IESBA 2 IFIAR Governance Structure Evolving Governance New Governance Model Permanent Secretariat MMOU Assessments 3

IFIAR Working Groups Global Audit Quality Working Group Enforcement Working Group Standards Coordination Working Group International Cooperation Working Group Inspection Workshop Working Group Investor and Other Stakeholder Working Group 4 2016 Key Work Streams Improve Global Audit Quality Engage with Big Six Engage with Standard Setters Engage with Investors/Audit Committees 5 Big Six International leadership re: audit, risk, quality Global CEO 1:1s Commitment to 25 per cent reduction in findings Inspections Survey baseline for measurement = 39 per cent of audits feature at least one deficiency

6 Standard Setters Assess standard setting projects Dialogue with IAASB and IESBA Comment letters 7 Our Input Assess most common/frequent findings for areas to improve ISA 600, ISA 540, ISA 315/ISA 330, ISQC1 / ISA 220, professional skepticism, data analytics and standards ISA 320, ISA 620, ISA 330 and ISA 500 and 520 not currently on IAASBs work plan 8 Our Input Is the standard setting process flexible enough to address urgent emerging issues? Are they clear about auditor requirements? Do they drive consistency of execution and skepticism?

Do they consider the public interest? Do they consider inspection findings/themes? Is the pace of change appropriate? 9 Investors & Audit Committees Investors and Other Stakeholders WG launches Advisory Group Thought leadership on enhanced audit committee role 10 2015 Inspection Findings Survey Fourth annual Survey Inspection findings reported between July 2014 -June 2015 11 How The Survey Works Members provide Big Six inspections findings PIE, SIFI audits Firm quality control systems

Explore inspection themes Compare nature/extent of findings Identify trends in audit quality over time 12 2015 Results 376 (43 per cent) of 872 inspected audit engagements had deficiencies (2014: 47 per cent) 49 (51 per cent) of 96 inspected major financial institutions had deficiencies (2014: 41 per cent) 29 Members reported findings at PIEs 14 Members reported findings at SIFIs 33 Members reported findings re quality control systems 13 Survey: Findings from Listed PIE Audit Inspections (incl. listed SIFIs) Inspection Theme Internal Control Testing Fair Value Measurement Risk Assessment Revenue Recognition Inventory

Adequacy of Financial Statement Presentation and Disclosure Group Audits Substantive Analytical Procedures Adequacy of Review and Supervision 14 Number of Findings (a single PIE may have multiple findings for the same theme) 173 158 131 116 86 85 70 50 49 # of Listed PIE Audits Inspected

% of Listed # of Listed PIE PIE Audits Audits with at Inspected Least One with at Least Finding One Finding 710 661 832 688 365 160 118 114 105 71 23% 18% 14% 15% 19%

570 383 384 434 68 55 44 35 12% 14% 11% 8% Survey: Findings from Listed PIE Audit Inspections (incl Listed SIFIs) (contd) Inspection Theme Fraud Procedures Audit of Allowance for Loan Losses and Loan Impairments Engagement Quality Control Review Use of Experts and Specialists Related Party Transactions Audit Report Audit Committee Communication

Going Concern TOTAL # of FINDINGS 15 Number of Findings (a single PIE may have multiple findings for the same theme) % of Listed PIE # of Listed PIE Audits Audits with at Inspected with Least One Finding at Least One Finding # of Listed PIE Audits Inspected 46 574 43 7%

45 39 35 17 15 10 5 1.130 165 417 326 300 461 592 321 37 32 29 16 15 10 5 22% 8%

9% 5% 3% 2% 2% Survey: SIFI Findings # of SIFI Audits % of SIFI Audits with at Least One Inspected with at Finding Least One Finding Number of Findings # of SIFI Audits Inspected Internal Control Testing 37 85 34 40%

Audit of Allowance for Loan Losses and Impairments 31 53 27 51% Valuation of Investments and Securities 22 70 19 27% Use of Experts and Specialists 22 31 8

26% Risk Assessment 22 84 18 21% Insufficient Challenge and Testing of Management's Judgments and Assessments 20 43 18 42% Testing of Customer Deposits and Loans 7 22

5 23% Audit Methodology including Programs and Tools 7 27 5 19% Group Audits 6 20 5 25% Adequacy of Financial Statement Presentation and Disclosures

6 33 6 18% Substantive Analytical Procedures 2 28 2 7% Fraud Procedures 2 29 2 7%

Audit Committee Communication 1 40 1 3% Audit Report 0 32 0 0% Inspection Theme TOTAL # of FINDINGS 16 185

2015 Survey: Quality Control Findings Total Number of Findings Inspection Theme Audit Firms with at Least One Quality Control Finding # % Engagement Performance 222 53 59% Independence and Ethical Requirements 73 34 40%

Human Resources 77 31 36% Monitoring 63 27 33% Client Risk Assessment, Acceptance, and Continuance 52 27 30% 21 11

12% Leadership Responsibilities for Quality within the Firm TOTAL # of FINDINGS 17 508 Key Insights Improvement, but pace too slow Persistent, high levels of findings in key areas Total findings in quality control decreased Half say root cause analysis is performed; say mandated by regulator/other external body 23 per cent say overall improvement of audit quality; 54 per cent no change; 4 per cent overall decline 18 Q&A 19

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