The Accounting and Corporate Regulatory Authority (ACRA) published its 18th Audit Regulatory Report in November 2024, which provides comprehensive insights into the state of audit quality in Singapore. The report focuses on key findings from ACRA’s inspections of Accounting Entities (AEs) and Public Accountants (PAs), identifying recurring and emerging issues in audits and recommending steps to improve audit practices. ACRA aims to promote consistent audit quality by focusing on robust Systems of Quality Management (SoQM) and adopting new auditing approaches to address evolving business risks.

Key Observations from Quality Control Inspections

ACRA conducted quality control inspections to assess the design, implementation, and effectiveness of the Systems of Quality Management (SoQM) at Accounting Entities. These inspections revealed key deficiencies:

1. Leadership Responsibilities and Accountability
   • In some firms, there was a lack of clear assignment of roles and responsibilities for managing audit quality.
   • Senior management in certain AEs did not actively monitor the effectiveness of their SoQM, resulting in oversight lapses.
2. Relevant Ethical Requirements
   • A recurring issue was insufficient documentation and monitoring of compliance with ethical standards, particularly regarding independence.
   • Some firms lacked formal processes to identify and manage conflicts of interest.
3. Client Acceptance and Continuance
   • Deficiencies were noted in the evaluation of potential clients’ integrity and financial standing.
   • Several firms did not adequately reassess client relationships when there were changes in key circumstances, increasing the risk of continuing engagements with high-risk clients.
4. Engagement Performance
   • Common issues included insufficient supervision and review of audit engagements by more experienced personnel.
   • In some cases, engagement leaders did not effectively address significant risks identified during the planning phase.

Detailed Engagement Inspection Findings

ACRA’s engagement inspections aimed to assess the quality of individual audit engagements. The findings highlighted several recurring and emerging issues:

Recurring Issues

1. Accounting Estimates
   • Public Accountants faced significant challenges in auditing accounting estimates, particularly in assessing management’s assumptions and the data used for fair value measurements.
   • Inspections revealed cases where auditors did not sufficiently test the accuracy and completeness of data used in key estimates.
   • There were instances of inadequate documentation to support the rationale behind accepting management’s judgments.
2. Auditor’s Report
   • Several deficiencies were identified in the preparation of auditors’ reports:
     • Auditors did not always adequately explain key audit matters (KAMs), leading to a lack of transparency in audit reports.
     • There were instances where auditors did not clearly articulate the basis for their opinion, particularly in cases involving complex financial instruments.
3. Group Audits
   • Complexities in auditing group financial statements remain a persistent challenge:
     • Group engagement teams did not maintain sufficient communication with component auditors.
     • In several cases, group auditors relied on component auditors’ work without adequate review or documentation.
     • There were issues related to the evaluation of group consolidation adjustments, which were not always appropriately tested.

Emerging Issues

1. Fraud Risk Assessment
   • ACRA noted an increase in the importance of fraud risk assessments, particularly following high-profile corporate fraud cases.
   • Inspectors found that auditors did not always consider fraud risk factors comprehensively during the planning phase.
   • In some engagements, fraud detection procedures were not effectively tailored to the specific risks of the entity being audited.
2. Business Combinations
   • Auditors faced new challenges in auditing mergers and acquisitions:
     • Valuation of acquired assets and liabilities was not always rigorously tested.
     • There were lapses in the recognition and disclosure of goodwill and contingent liabilities.
     • Some audit teams did not adequately assess the fair value of consideration transferred in business combinations.

Regulatory Developments

Effective 1 July 2023, ACRA expanded its inspection framework to include quality control reviews of AEs.

Key regulatory changes include:

1. Expanded Inspection Powers
   • ACRA’s powers were enhanced to allow for more thorough quality control inspections across the audit profession.
   • The new framework aims to ensure that AEs implement and maintain effective SoQM in compliance with the International Standard on Quality Management (ISQM) 1.
2. Introduction of New Guidance Materials
   • ACRA released guidance materials to help firms understand their obligations under the new quality management standards.
   • These materials provide practical steps for improving quality management processes.
3. Focus on Remediation
   • ACRA emphasized the importance of timely and effective remediation of deficiencies identified during inspections.
   • Firms are expected to demonstrate sustained improvements in their SoQM.

Sustainability Reporting and Assurance

ACRA highlighted the growing importance of sustainability reporting and assurance services as businesses face increasing regulatory and stakeholder pressures.

Key insights include:

1. Rising Demand for Sustainability Assurance
   • ACRA anticipates a surge in demand for independent assurance of sustainability reports, particularly as regulatory requirements evolve.
   • Auditors are encouraged to equip themselves with the necessary knowledge and skills to address this emerging area.
2. Capacity Building for Sustainability Reporting
   • Firms are advised to invest in training and resources to build their capacity for sustainability assurance engagements.
   • The report stresses the need for auditors to stay updated on best practices in sustainability reporting.

Recommendations for the Audit Profession

ACRA’s report provided several actionable recommendations to help improve audit quality:

1. Enhance Fraud Risk Procedures
   • Auditors should tailor their fraud detection procedures to the specific risks of each engagement.
   • Firms should strengthen their fraud risk assessment processes, particularly in industries prone to fraud.
2. Strengthen Quality Control Systems
   • AEs should invest in their SoQM to ensure compliance with ISQM 1 and other relevant standards.
   • Quality control systems should include robust processes for monitoring, documentation, and remediation.
3. Improve Group Audit Communications
   • Group engagement teams must establish clear communication protocols with component auditors.
   • Firms should implement procedures to ensure the adequacy of reviews of component auditors’ work.
4. Prepare for Emerging Risks
   • Auditors should proactively address emerging risks, such as those related to business combinations and sustainability reporting.
   • Continuous learning and adaptation are essential to stay relevant in a dynamic audit landscape.

KNAV Comments

ACRA’s 18th Audit Regulatory Report underscores the need for continuous improvement in audit quality. While recurring issues persist, emerging risks present new challenges for the profession. By implementing ACRA’s recommendations, the audit profession can enhance public confidence in financial reporting and contribute to a resilient financial ecosystem. Reports function as mirrors reflecting the areas that can be worked upon to see improvement. The audit profession must leverage these insights to enhance audit practices and address evolving risks effectively.

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